The Core of the Health Care Debate

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Health care reform dominates the headlines this week, and every American has a stake in what happens.

Critics say that health care reform sets the stage for eventually assuming 15%-17% of the U.S. economy (depending on the data used — the U.S. Health and Human Services Department has health care costs at 16.2% of GDP in 2010). Advocates say that the government won’t take over health care for U.S. consumers — but will set up guidelines on what private insurers can and cannot do, while mandating coverage for all U.S. citizens.

These are political arguments, and no doubt they’re beginning to rub raw against both factions. But what about the economic impact of health care reform?

Rising Costs, Rising Debt

Health care reform doesn’t come cheap, something that people on both sides of the aisle have acknowledged. But let’s take a deeper look at the numbers and what they might mean for the future of our country and its economy.

According to Deloitte.com, health care spending rose to 17.3% of GDP at the end of 2009 — up from 16.2% in 2008. While the overall economy shrank 1.1% in 2009, costs increased 5.7% overall, 8.7% in government programs and 2.8% for private businesses. The federal budget assumes health costs will increase at 6.1% annually with GDP growth forecast at 4.4% annually through the end of the decade. That means health care costs are growing faster than our overall economy.

So what does this mean for the overall economy? Well, since the government may be forced to borrow money to pay for health care, the Fed may have to raise interest rates in order to pay back overseas lenders. That could weaken our dollar and put the U.S. economy in further jeopardy. Plus, as bond rates rise, so too will mortgage rates, leading to higher housing costs.

But will it really get this bad? Well, according to one conservative think tank, yes. The Heritage Foundation’s J.D. Foster, a senior economics fellow at the institute, elaborates on the negative impact health care reform will have on the U.S. economy:

“The Obama Administration has advanced a broad slate of policies sharing the consistent side effect that they would weaken the economy soon and indefinitely.

For example, the health care reforms working through Congress would mean more government spending, more taxes, and quite possibly higher budget deficits. This is a prescription for a weaker economy. For workers and families, such reform would mean fewer choices and higher health care prices, but it would also mean fewer jobs and lower wages. Exchange markets have a different vantage. They see the U.S. economy quickly becoming a less attractive place to invest, and so as the odds of the public option's passage increases, the dollar sinks further.”

On the other hand, the left-leaning Center for American Progress says that this is just fear-mongering:

“Opponents are often downright misleading, claiming that the legislation is unaffordable, while ignoring official Congressional Budget Office documentation that the bill more than pays for itself — and actually reduces the deficit. Similarly, cost containment advocates place such particular emphasis on one aspect of the bill — the new tax on the most costly health insurance plans — that they’ve given short shrift to the legislation’s underlying emphasis on improving efficiency in the health care system.”

But Can We Afford to Wait?

Despite a looming debt scenario, there’s a good argument that inaction is a recipe for disaster for the average American.

According to a report from the Urban Institute (under what it deems a “worst case scenario”), if health care reform is not enacted, U.S. households “will face dramatically higher health care costs. Individual and family spending on premiums and out-of-pocket health care costs will increase significantly. Spending will jump 34 percent by 2015 and 79 percent by 2020.” Currently, WhiteHouse.gov reports that health care spending already chews up about 5.9% of U.S. household income. And, at $2.3 trillion, or $7,681 per person in 2008, U.S. health care costs are the highest in the world.

Left unchecked, health care costs remain serious threat to the financial well-being of Americans, and there isn’t a politician in Washington who says otherwise.

So, What’s the Answer?

Well, it’s important to remember that government officials aren’t above playing some high-stakes accounting games to make their numbers look better.

A good look at the health care numbers from the U.S. Congressional Budget Office reveals that the taxes needed to pay for the near $1 trillion (depending on which numbers you go by) health care package on the table kick in immediately — in 2010. But the benefits are delayed until 2014. After that, the gap between what Uncle Sam needs to borrow to pay for government-sponsored health care widens. By 2020, more revenues will be needed to prop up mandated federal health care, and that money will most likely have to come from borrowing more money from overseas investors or via higher taxes on U.S. business and citizens.

This passage, from a March 12 Fortune piece entitled Health Care: Going From Broken to Broke, lays out the looming debt scenario if this version of health care “freeform” is enacted:

"President Obama is claiming that his health-care plan will substantially lower future deficits. … For proof, he cites the CBO report from March 11 forecasting that the Senate bill — the basis of the president's proposal — will pare the deficit by $118 billion over the next decade.

That forecast, however, doesn't mean that what the CBO counts as lower deficits will lead to less debt, as taxpayers might expect. In fact, it appears that it would require the Treasury to borrow almost 40 cents of every dollar in new spending the bill requires."

A Path to Higher Costs?

In a nutshell, that means more taxpayer dollars going to satisfy our Pacific Rim bondholders, and less to the American public in the form of higher taxes. That’s not good for the long-term health of the U.S. economy and every bank on Wall Street knows it.

Right now, the “official” cost of health care reform is $875 billion over 10 years. But critics say that if you strip out the accounting gimmicks, that number is closer to $1.3 trillion and probably more in what Congress-watchers call “unidentified costs.”  In a Feb. 24 letter to House Speaker Nancy Pelosi, House Appropriations Ranking Republican Jerry Lewis cites examples of such unidentified costs:

As an example, the CBO’s estimated totals did not include identified discretionary costs of at least $117 billion in 29 programs in the House health care bill, and $130 billion for 43 programs in the Senate bill. However, while this large amount of uncounted spending is unsettling, it is the unidentified costs that are even more worrisome.

Included in both the House and Senate bills are language authorizing the creation of entirely new or substantially expanded programs that will spend “such sums as may be necessary.” A total of 26 different programs in the House version of the bill and 36 in the Senate contain these unidentified costs. Congress, via the Appropriations Committee, will be expected to provide this unspecified and unknown level of discretionary dollars over the next decade to pay for these programs — in addition to the $117 to $130 billion for identified discretionary costs.

The White House isn’t buying what Rep. Lewis is selling. According to WhiteHouse.gov, health care reform will cut costs, primarily by:

  • "(Making) insurance more affordable by providing the largest middle class tax cut for health care in history, reducing premium costs for tens of millions of families and small business owners who are priced out of coverage today. This helps over 31 million Americans afford health care who do not get it today — and makes coverage more affordable for many more.
  • (Setting) up a new competitive health insurance market giving tens of millions of Americans the exact same insurance choices that members of Congress will have.
  • (Bringing) greater accountability to health care by laying out common sense rules of the road to keep premiums down and prevent insurance industry abuses and denial of care.
  • (Putting the U.S.)  budget and economy on a more stable path by reducing the deficit by $100 billion over the next ten years — and about $1 trillion over the second decade — by cutting government overspending and reining in waste, fraud and abuse."

Having looked at health care reform by both sides now, as the song goes, we can draw two conclusions:

  • Health care reform is needed.
  • Nobody in Washington can agree on how to pay for it.

Anyone who has ever put something expensive on a credit card without knowing how to pay for it can tell you that this spells trouble. It’s trouble for the U.S. economy, and for regular Americans struggling to pay the bills (health care bills in particular).

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