Obamacare is Reducing Economic Growth, Not Growth in Health Spending

obmcr-ecnmyOne major criticism of U.S. health care is that we spend more money on health care than any other country. If health spending consumes resources that are needed elsewhere, this could be a problem. The U.S. now spends about 17 percent of its Gross Domestic Product (GDP) on health care. Canada, where government has a monopoly on essential health services, keeps spending down to about 10 percent of GDP. The conclusion, apparently, is that more government reduces health spending.

This is Obamacare’s governing principle. On the face of it, it seems to be working: The rate of growth of health spending is flat. Indeed, it may remain around 17 percent of GDP this year, and for even a few more years.

However, there is no evidence that Obamacare’s increased regulation of health care is causing this moderation. Despite its promises (or threats), Obamacare is not taking a hatchet to health spending. For example, Obamacare was supposed to have a “death panel” – the Independent Payment Advisory Board (IPAB). IPAB was to cut Medicare spending starting in 2014. IPAB’s members are appointed by the President and confirmed by the Senate. However, IPAB is so politically poisonous that the President has declined to nominate even one member, so IPAB is dormant.

It is the recession, which began in December 2007, and the extremely slow recovery, which is keeping health spending down. Health spending as a share of GDP is mostly explained by incomes. As people’s incomes rise, they spend an increasing share on health care. Whether they spend this increasing share directly, through insurers, or through government is secondary.

Because Americans are richer than people in other countries, they spend more on health care. Because the economy has been basically flat since 2007, health spending has been similarly flat.

However, it would take a much bigger shock to the U.S. economy to fundamentally change the character of health spending. Harvard University’s David Cutler and Dan Ly have concluded that physicians’ incomes are a major factor driving up U.S. health spending. Most health spending is on labor. Because incomes of highly skilled people are much higher in the U.S. than in other countries, this has an impact on physicians’ incomes.

The average U.S. specialist earned an income of $230,000 (2010) versus an average $129,000 in twelve other developed countries. Cutler and Ly define “high earners” as those in the 95th to 99th percentile of the earnings distribution in a country. U.S. specialists earn 37 percent more than the average of these U.S. high earners. However, their international peers earn 45 percent more than their high-earning, non-physician, peers.

So, relative to other high-earning U.S. professions, American physicians are a bargain! If the U.S. government declared a policy change that would drive specialists’ income down from $230,000 to $129,000 – a drop of 44 percent – most would retire early, and never be replaced as medical-school admissions shrank.

Like the IPAB, this would be politically impossible. So, Obamacare cannot flatten health spending directly. But it is flattening the economy. Many surveys of businesses show that they have cut back hiring, or are less likely to move workers from part-time to full-time, because of Obamacare’s complex and confusing regulations of employer-based benefits.

As long as we have a labor market that rewards highly skilled workers very well, we can expect health spending to take up a bigger share of GDP in the U.S. than in other countries. We should not view that as a problem.

In other words: Grow the pie and stop worrying about the size of the pieces. The way to grow the pie is to repeal Obamacare and replace it with a system focused on the needs of patients, not government.

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