Op-eds

Healthcare Reform Is the Second US Stimulus Package

by Adam S. Posen, Peterson Institute for International Economics

Op-ed in Eurointelligence
January 22, 2010

© Eurointelligence

 


Healthcare reform legislation—meaning extension of health insurance to millions of uncovered Americans—will pass the US Congress in some form soon, despite the Democrats' loss of a Senate seat. Even if partial at best, this is a long overdue catch-up of American social justice in an essential area with the rest of the civilized world. It will be a huge triumph and hugely expensive. The loss of the Democratic super-majority makes it all the more likely that some insurance expansion will pass without being paid for upfront with cost savings and tax increases. What gets overlooked is that it will also have the effect of being the second US fiscal stimulus package following the global crisis, with substantial effects on the rest of the world as a result.

In economic terms, healthcare reform should be thought of as giving a prepaid debit card for spending on medical services to 30 million people. These people already had access to emergency services—an American citizen who was unemployed or working informally, and therefore did not have insurance coverage, would still be taken in at a hospital if suffering, say, a car crash or workplace injury. What the uninsured did not have was access to longer-term medical evaluation and treatment for their families. For these people, chronic conditions were not dealt with, pharmaceutical prescriptions for heart disease and the like were not available, and prophylactic examinations were out of the question.

As a result, there is huge pent-up demand for medical services soon to be insured. Imagine the parent whose child has some lingering breathing problem or awkward limb who now has access to treatment for their child. Imagine the middle-aged overweight poor person who has heard on TV about all kinds of treatments needed for symptoms from which she suffers—some from public service announcements, some from drug companies' ads—and now can get a proper examination for diabetes, high-blood pressure, and a host of more obscure ailments. Now imagine those people times 30 million.

When there have been sudden increases in the franchise of people's access to health care in the past—in the United Kingdom when the National Health Service was created after the war; in Massachusetts over the last few years when it offered universal insurance state-wide—the aggregate statistics show a step pattern. Demand leaps up for a couple of years, until the queue of people who had been unable to access health care is worked through. It then drops down to a level above the pre-enfranchisement demand, proportional to the increase in covered population.

Macroeconomically, this is a temporary fiscal stimulus, and a sizable one. People who by definition have not been paying into an insurance scheme previously get to spend dollars on medical services. This will be funded by US government borrowing. Claims that the current healthcare package are revenue neutral should not be taken at face value, mostly because such claims understate the likely increase in healthcare demand and thus expenditure. When the legislation passes, people will not be getting a set amount of medical spending, let alone an amount limited to the small extent of tax increases included in the legislation—they will be getting a new entitlement to medical care, limited only to the amount of their needs.

How large an economic impact will there be? Estimates vary, but if one assumes that the uninsured population is, on average, at least as unhealthy as average Americans, and medical services prices will not go down, the minimum must be 11 percent of current spending on health care (30 million is one-ninth of the 260 million currently insured). Healthcare spending is about 17 percent of GDP. So that would imply 1.9 percent of GDP in fiscal stimulus a year, until the tax and insurance premia are raised sufficiently to actually cover the spending.

This estimate is based on a very conservative assumption of a linear increase in demand, because the previously uninsured are disproportionately poorer people who have had health issues neglected, hence there will be pent-up demand. Yes, some of the American uninsured are young people who have chosen not to spend on insurance, and are healthy, but their opting out is why the population I consider relevant is 30 million not 40 million (the actual number uninsured). It is not implausible to think that over the next two to three years, as this population's previously existing medical conditions and deprivations are worked through, that demand could be as much as double that. While Congress will include in the legislation some tax increases and cost controls, it will probably take a couple of years before additional cost containment and revenue collections are passed that would cover the full amount. Even a Republican influence on the legislation is unlikely to make a difference to the net budgetary impact in the short term.

As a temporary fiscal stimulus, the extension of medical insurance in the United States turns out to be pretty well designed. It will be spent essentially totally domestically in terms of its first-round effects. It will encourage reallocation of investment and employment from overgrown sectors like autos and financial services into health care, which will have sustained growth in demand (even after the initial queues are worked through). It will go directly into people's pockets making them feel richer—although the majority of those without health insurance up until now are also those without much, if any, savings so this effect will be limited. And it will be reflationary, driving up prices, because the supply of medical professionals and infrastructure is going to be slow to expand, and the richer who are already insured will pay more privately to avoid delays in getting their accustomed treatment.

All of this is good short term, bad long term for the world economy. Short term, it means that domestic demand growth in the United States will be substantially supported by government action over the next couple of years. This will sustain a recovery that otherwise might have proven temporary. Long term, however, this will only add to the global imbalances, with the United States increasingly a deficit nation, because national savings will decline further. As with all good fiscal stimulus measures, it is timely, temporary, and targeted—the key is getting it paid for without having the temporary deficit turn permanent. But have no doubt; the US will be giving itself and the world a second stimulus package by another name.



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