How Will the Affordable Care Act Affect ?

Timely Analysis of Immediate Health Policy Issues March 2011 John Holahan and Bowen Garrett

Introduction subsidies in the exchanges would have a different modeling approach and the opposite effect on spending and considering spending from all sources, Opponents of health reform have . Third, the new law will the Center on Medicare and Medicaid made strong claims about the effect not affect most firms, either because Services (CMS) actuaries estimated of the Affordable Care Act (ACA) on they already provide the increase in national expenditures jobs. Supporters of legislation to repeal meeting the new federal standards, attributable to reform to be $311 billion the ACA, the so-called “Repealing or they are exempt from the new over 10 years—0.17 percent of GDP over the Destroying Health Care Law requirements (firms with fewer than the same period.5 Act,” argue that the law will increase 50 workers). This paper draws heavily unemployment in an already fragile on an earlier paper that looked at the Offsetting Effects economy.1 The argument is that the impact of health reform on the economy This does not mean that there will requirement to provide health insurance and employment but updates that not be important effects on individual or improve benefits will increase the effort.3 The basic conclusion is that the sectors of the economy. The expansion costs of labor to employers. In cases ACA will not have a noticeable effect of health insurance coverage through where wages or other benefits can on net levels of employment. new Medicaid coverage and income- be reduced as an offset, firms can related subsidies will increase federal absorb the increased cost of providing Spending and Financing spending on health care ($938 billion health insurance and there should be Provisions Are Very Small over 10 years, mostly from 2014 through no employment effects. But if wages Relative to the Size of the 2019). This will result in increased cannot be cut because of collective demand for labor in the health sector, bargaining agreements or the fact that U.S. Economy including increasing use of medical wages are already close to minimum It is almost impossible for the ACA to equipment, new technologies and wage levels, the demand for labor, and have a significant effect on the overall pharmaceuticals and could lead to wage thus employment, would likely fall. economy or on unemployment simply and salary increases in the health sector. Those making the job destroying claims because the effect of net new federal At the same time, spending reductions often cite a study released before the spending on health care (over and above in Medicare and other government details of the reform legislation were reductions on spending on Medicare programs will partially finance health known, which found a loss of as many and other government programs) is very reform ($511 billion).6 These reductions as 1.6 million jobs.2 This view implies small relative to the size of the economy. will have the opposite effect, reducing that repealing the ACA will increase Over the six-year period, 2014–2019, the demand for labor and the purchase employment. net federal spending due to the ACA is of services and equipment in the health This argument falls short for several estimated by the Congressional Budget sector. The net effect, however, will be reasons. First, the overall economic (CBO) to be $439 billion.4 The positive—higher net spending on health effects of the law are simply too small projected gross domestic product care services and more employment in relative to the overall size of the (GDP) over the same period is about the health sector. economy to have much of an effect on $116 trillion; thus new spending would On the other hand, the net new employment. Second, there are many amount to about 0.38 percent of GDP. spending will be financed through offsetting effects. The tax provisions Over the entire 2010–2019 period, new various taxes on insurers, medical in the law will reduce the demand federal spending on health care (net of device and pharmaceutical for labor in many sectors and the reductions in current payments) would manufacturers and the earned and Medicare cuts by themselves would be roughly the same as above while unearned income of individuals with reduce employment in the health GDP would be $178 trillion. Over this incomes over $200,000 ($250,000 for sector, but the expansion of coverage longer period, new federal spending couples). The increased taxes on health through Medicaid and income-related would be 0.25 percent of GDP. Using care providers and insurers could mean higher prices for drugs, medical devices business (with fewer than 50 workers) would experience little change in and insurance premiums, which could will be exempt from these penalties. A coverage and a small drop in premium lower the demand and employment in frequently cited report from the National contributions (0.5 percent).12 Medium- those sectors. But increased revenues Federation of Independent Business size firms that offer employer-sponsored will more than offset these effects due (NFIB) produced prior to the drafting insurance (ESI) would be unaffected to more people having health insurance of reform legislation assumed that (94 percent of employers with 100 to and thus using more pharmaceuticals businesses with fewer than 50 workers 999 employees offered health insurance and medical devices.7 would be subject to the penalty.8 Though to their workers in 2009).13 But there it does not reflect the legislation actually are some medium-size firms that do not The increased payroll taxes on those enacted, many continue to cite the offer coverage and, in aggregate, they with incomes above $200,000 will have a small effect on demand for goods report’s estimate of 1.6 million fewer would pay $11.8 billion in assessments 9 and services because only a very small workers under reform. The report’s own due to full-time employees obtaining share of the population will be affected, estimates suggest exempting firms with subsidized coverage through the and higher income people are the least fewer than 20 workers would reduce the exchange. Large firms would see an likely to change their consumption figure by 467,000. Exempting firms with increase in coverage of about 2.2 behavior as a consequence of a new fewer than 50 workers would probably percent, but premiums would fall tax. The same is true for the effect the reduce the figure by another 150,000 or slightly because they would, on average, tax on unearned income would have so more. Furthermore, the figure referred have healthier covered lives. Large firms on investment decisions. The estimated to gross job losses—elsewhere the would pay $3.8 billion in assessments. revenue from the taxes on payroll and report estimated that more than 800,000 As a result of higher take-up and unearned income was only $210 billion. jobs would be gained in the health assessments on some firms, the health Again, this is over an eight-year period care sector as a result of the coverage insurance related costs for larger firms in which cumulative GDP is $148 trillion expansions. A proper interpretation would increase by about 1.0 percent. of the NFIB estimates in light of the (in other words, the tax revenue would The savings of 8.7 percent for small legislation actually passed would indicate amount to 0.2 percent of GDP). firms means that if anything, they would relatively little net job loss. Overall, the economic impacts of have lower costs of labor and should be coverage expansions, reductions in A recent paper by Garrett and Buettgens more willing to expand employment. current Medicare and other government estimates that premium contributions by Moreover, it would become more spending and new taxes are largely small firms (fewer than 100 employees) attractive to start a small firm, given offsetting. There are more offsets and would fall by 8.2 percent under the access to health insurance and ability new revenues than new spending and, ACA with virtually no change in the to purchase health insurance through thus, a small reduction in the deficit number of covered workers.10 This an exchange, as well as the opportunity ($143 billion) in the first 10 years occurs because such firms have the for some to obtain employer subsidies. according to the CBO. Beyond the option of purchasing coverage in the The incentives for entrepreneurship first 10 years, CBO projects the effects new Small Business Health Options should increase, not decrease.14 This of reform to be deficit reducing. The Program (SHOP) exchanges, where is particularly true for those wishing overall effect on GDP will be extremely administrative costs will be lower than to move from employment in firms to small. Given that the health sector is in current markets, and premiums will self-employment; the exchanges and one of the more intensive labor sectors fall as a result. In addition, firms with insurance market reforms will make that in the U.S. economy, health care reform fewer than 50 workers receive $4.5 option feasible for many who otherwise could result in a small aggregate billion in employer subsidies in the would have been tied to employers as increase in demand for labor. There are form of tax credits (2010 dollars).11 A their sole source of health insurance. small share of firms with more than many other forces, such as monetary For firms of 100 or more, coverage 80 workers would pay $2.0 billion in and fiscal policy, that will have a much expands slightly—about 0.7 percent for greater effect on economic activity than assessments if their full-time employees medium-size firms and 2.2 percent for health reform. receive subsidized coverage through the large firms. Moreover, as noted above, exchange. On balance, taking premiums medium-size and large firms pay $15.6 Impacts on Business and assessments into account, small billion in assessments. Firms that do Will Be Minimal businesses would save 8.7 percent not offer coverage to their workers and compared with their current premium Some have argued that penalties in the choose instead to pay the assessment contributions. law for not offering coverage to workers if some obtain subsidized exchange who end up receiving government Garrett and Buettgens also found coverage would face somewhat subsidies will hurt small business. This that medium-size firms, those with increased labor costs and therefore have argument ignores the fact that small between 100 and 1,000 employees, lower labor demand, a negative effect

Timely Analysis of Immediate Health Policy Issues 2 on employment. However the total for firms being able to save money from were to induce certain workers to amount in assessments is very small in dropping ESI coverage except perhaps leave their jobs during a period of high comparison to wages and salaries in the in firms where most workers have low unemployment, such as we have today, United States (0.2 percent of the $6.4 wages as well as low family incomes, others looking for work would quickly trillion wage base)15 so any negative and these types of firms are the least fill the vacancies. impact on jobs must also be small. likely to offer ESI today.17 Cost-Containment Firms induced to start offering coverage In sum, while employment in firms Provisions in the ACA Will to avoid an assessment could lower subject to employer assessments wages or other benefits to offset the could decrease, very few firms will be Boost the Economy and new costs if their workers value the new affected, and the total dollar amounts Employment Over Time benefits and are not minimum wage of assessments will be small relative There are many cost-containment workers.16 To the extent that firms do to the costs of labor. Furthermore, the measures in the ACA, and other offset new health costs in this way, the amount of new employer spending in proposals could build on those measures firms will not be affected. Individuals the aggregate will actually be reduced if adopted. Cost containment would would have lower wages and demand as a consequence of the ACA; thus, have somewhat opposite effects than for various goods and services would fall. any impact of the law on employment the effects of coverage expansion. To the On the other hand, more money would should be minimal. extent the cost-containment efforts are be spent on health care, which should successful, they will reduce the growth offset any effects on employment. The Employment Effects of the ACA Are Mainly Due to in health care costs. This will reduce the Firms that start offering coverage but demand for labor as well as incomes in cannot pass new health-related costs Worker Choices, Not Jobs the health care sector, but it will increase back to the workers through lower Being Destroyed the discretionary income that individuals wages or other benefits or forward and families have to spend elsewhere. The Congressional Budget Office has them onto consumers in form of higher Thus, if these efforts are successful, there estimated that the ACA could reduce the prices, may respond by employing will be additional spending outside the amount of labor used in the economy on fewer workers. This may also result in health sector that will increase demand the order of half of a percent, “primarily less output by the firm. If there is less for labor in other sectors. by reducing the amount of labor that output, individuals who would have workers choose to supply.”18 Some Successful cost containment will have purchased these services will most have taken this half-percent figure and other economic effects as well. It will likely spend their money elsewhere, multiplied it by the number of workers reduce the growth in spending on thus affecting employment elsewhere. to estimate the number of jobs taken Medicare and, after the initial expansion, Most larger firms offer coverage already out of the economy by ACA, but this is Medicaid. This will reduce the taxes and and are likely to continue offering after an incorrect application of the CBO’s borrowing the federal government has reform. The ACA should have little findings. The expansion of Medicaid to undertake to finance these programs. or no effect on employment in these and the provision of subsidies in the The Council of Economic Advisers firms. Though some in the business exchanges will give workers options (CEA) has argued that containing community are projecting large declines for retaining insurance coverage costs of the two large programs would in employer-sponsored coverage after even if they were to work part-time reduce the federal budget deficit, reform, Urban Institute analyses, or stop working. By providing new increase national savings, keep interest like those of the CBO, suggest that opportunities to obtain health care rates lower, and increase economic large declines are unlikely. Although outside of employment, the ACA could growth.19 The CBO and the Joint Tax individual coverage through exchanges lead some workers to reduce their work Committee both project the excise tax will provide a new alternative to ESI and hours or leave their job to pursue other on high-cost insurance plans to reduce would be subsidized for those below interests. The relatively small reduction the rate of growth of annual health 400 percent of the federal poverty in labor supply does not represent jobs care costs by 0.5 percentage points level, employers are unlikely to save lost as a result of ACA, but decisions per year once implemented.20 Other money by dropping ESI and paying the made by those no longer locked into provisions in the ACA may also reduce penalty. This is because firms would employment situations as a consequence costs, including bundling payments, need to compensate the workers of their need for health insurance. Plus, accountable care , medical from whom they remove a current any reduction in labor supply the ACA homes and care coordination for dual benefit, particularly higher income causes would occur over an extended eligibles. Curtailing the growth in health workers, who would lose the valuable period of time as the exchanges come care costs will mean lower costs for tax advantage of ESI. As Garrett and online and new options and incentives businesses and individuals. The CEA has Buettgens argue, there is little scope become clear to workers. If the ACA estimated that reducing the growth in

Timely Analysis of Immediate Health Policy Issues 3 health care costs by 1 percentage point Conclusion private dollars to be spent in non-health per year would result in a 4.0 percent areas of the economy. higher GDP by 2030,21 due to a higher The ACA is unlikely to have major Concern over the impact of the ACA on national savings rate, more capital aggregate effects on the U.S. economy small businesses is misplaced. All small formation and higher output. Faster and on employment primarily because businesses with fewer than 50 workers growth in GDP would mean more the changes in spending and taxes are will be exempt from any assessments. jobs, lower unemployment, and higher very small relative to the size of the Most larger firms already provide health family incomes. economy. Moreover, most of the effects offset each other. This of course implies insurance to their workers and so are Other Effects that repeal would also have little effect unlikely to face assessments under on the macroeconomy. The increased the new law. Small businesses should Health reform will affect the overall spending because of the ACA will benefit from the availability of lower economy in other ways. First, health increase demand for health services and cost plans and the efforts to increase reform would reduce job lock, that is, demand for labor in the health sector. competition and contain costs within the tendency for individuals to stay Cuts in Medicare and various cost- exchanges. The Garrett and Buettgens in a given job to retain their health containment provisions, if successful, analysis showed little change in insurance. Because health reform will will have opposite effects. The new coverage among small firms and lower allow for considerably more flexibility, taxes on insurers, medical devices and costs because of reduced premiums in the movement from job to job will pharmaceutical manufacturers could exchanges and employer subsidies. A make the labor market more have adverse effects on those industries, small minority of medium-size and large efficient and will increase economic except for the fact that coverage firms do not provide ESI today and will productivity. Repeal of health reform expansion should provide new revenues either start providing coverage or pay will have the opposite effect. well in excess of new tax obligations. assessments, leading to higher costs, Second, to the extent that health Cost-containment efforts, if successful, although many will be able to offset reform improves health in the long will have somewhat opposite effects, these costs through lowering other run, as is expected, it should increase reducing the growth in spending on benefits or slowing wage growth. Some labor supply by reducing disability and Medicare and Medicaid, which will firms will also see higher take-up among workers’ absenteeism, improve learning reduce the taxes or borrowing the employees who now do not accept and increase workers’ productivity. federal government has to undertake. employer offers. These effects, however, These effects will take considerable Cost-containment that reduces the will be small, and there will generally time to materialize and will probably federal budget deficit would result be offsetting effects. Whether slightly have a small positive impact on the in faster economic growth, more positive or slightly negative, the ACA economy. Once again, repeal would employment and higher family incomes. should not have a significant impact on have the opposite effect. Cost-containment would also free up overall employment.

Timely Analysis of Immediate Health Policy Issues 4 remains constant as a share of expenditures “Percent of Private-Sector Establishments Notes by insured persons, we estimate about $300 that Offer Health Insurance by Firm Size and 1 Michael J. Chow and Bruce D. Phillips, “Small in additional prescription drug spending by Selected Characteristics: United States, 2008” Business Effects of a National Employer each of those who would gain insurance (Rockville, MD: Agency for Healthcare Research Healthcare Mandate,” Washington, DC: National coverage under reform in 2014. Assuming the and Quality, 2009), http://www.meps.ahrq. Federation of Independent Business, 2009; John same growth rate for personal health care gov/mepsweb/data_stats/summ_tables/insr/ Boehner, Eric Cantor, Dave Camp, John Kline, spending as currently projected in the National national/series_1/2009/tia2.pdf. Health Accounts, and using CBO estimates of Paul Ryan, and Fred Upton, “Obamacare: A 14 Budget-Busting, Job-Killing Health Care Law,” the reduction in the number of uninsured, Council of Economic Advisors, “The Economic January 6, 2011; Beacon Hill Institute, “Killing we would predict that the prescription drug Effects of Health Care Reform on Small Jobs through National Health Care Reform,” spending would increase by about $65 billion Businesses and Their Employees” (Washington, March 2010, http://www.atr.org/userfiles/ between 2014 and 2019. The Joint Committee DC: Council of Economic Advisors, 2009). BHI%20Health%20Care%20Reform%20as%20 on Taxation estimates that revenues from 15 Congressional Budget Office, “The Budget and Job%20Killer(7).pdf. assessments on drug manufacturers and Economic Outlook: An Update” (Washington, importers would be $27 billion between 2011 2 DC: Congressional Budget Office, 2010). Michael J. Chow and Bruce D. Phillips, “Small and 2019. We made similar calculations for Business Effects of a National Employer insurers and medical device manufacturers 16 Lawrence Summers, “Some Simple Economics Healthcare Mandate” (Washington, DC: National and reached similar conclusions, though the of Mandated Benefits,”American Economic Federation of Independent Business, 2009). differences for the latter were much smaller. Review 79, no. 2 (1989): 177–83. 3 John Holahan, “Will Health Care Reform Hurt 8 Chow and Phillips, “Small Business Effects.” 17 See discussion section of Garrett and Buettgens, the Economy and Increase Unemployment?” “Employer-Sponsored Insurance.” (Washington, DC: The Urban Institute, 2010). 9 Also on this point, see FactCheck.org, “A Job- Killing Health Care Law?” January 7, 2011. 18 Congressional Budget Office, the Executive 4 Congressional Budget Office, “Letter to the http://www.factcheck.org/2011/01/a-job- Office of the President, “The Budget and Honorable Nancy Pelosi Providing Estimates killing-law/. of the Spending and Revenue Effects of the Economic Outlook: An Update,” Box 2-1 Reconciliation Proposal” (Washington, DC: 10 Bowen Garrett and Matthew Buettgens, (Washington, DC: Congressional Budget Congressional Budget Office, March 20, 2010). “Employer-Sponsored Insurance under Health Office, 2010). 19 5 Reform: Reports of its Demise are Premature” Council of Economic Advisers, the Executive Centers for Medicare and Medicaid Services, (Washington, DC: The Urban Institute, 2011). Office of the Actuary, “Estimated Financial Office of the President, “The Economic Case for Effects of the Patient Protection and Affordable 11 The Garrett-Buettgens analysis is based on a Health Care Reform” (Washington, DC: Council Care Act” (Baltimore, MD: Centers for Medicare microsimulation model that estimated the of Economic Advisers, 2009). and Medicaid Services, 2010). effect of the ACA as if it were fully implemented 20 Council of Economic Advisers, the Executive in 2010. 6 Congressional Budget Office, “Letter to the Office of the President, “The Economic Case for Honorable Nancy Pelosi,” 2010. 12 Garrett and Buettgens, “Employer-Sponsored Health Care Reform: Update” (Washington, DC: Insurance.” Council of Economic Advisers, 2009). 7 We derived an estimate of the growth in prescription drug spending due to increases in 13 Agency for Healthcare Research and Quality, 21 Council of Economic Advisers, “The Economic coverage as follows: Assuming drug spending Center for Financing, Access, and Cost Trends, Case for Health Care Reform: Update.”

About the Authors and Acknowledgements John Holahan, Ph.D., is director in the Health Policy Center of the Urban Institute. Bowen Garrett, Ph.D., is an affiliated scholar at the Urban Institute and chief economist at McKinsey and Company’s Center for U.S. Health System Reform. The authors are very appreciative of the comments and advice provided by Linda Blumberg, Stephen Zuckerman and Robert Kocher. About the Urban Institute The Urban Institute is a nonprofit, nonpartisan policy research and educational that examines the social, economic and governance problems facing the nation. For more information, visit www.urban.org.

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