Also see our Economic Commentary which supplements the Laufenberg Economic Quarterly and primarily focuses on more recent economic developments.

This page is designed to offer you my perspective on economic fundamentals, ranging from business cycles to yield curves. It will provide more detailed economic analysis than is generally available in the Quarterly. For the most part, the essays provided here will attempt to discuss timely fundamental issues related to the forecast but are expected to have a longer shelf life than the content on either the Quarterly or Commentary pages. I hope that over time you will consider the information on this page as a source of reference when debating economic issues in the future.

Daniel E. Laufenberg, Ph.D.

Health Care Legislation: Essay No. 4 Affordable Care Act - A Few Things to Watch

[Feb. 5, 2014. This is the fourth in a series of four essays discussing various aspects of the health care legislation enacted recently. The first discusses the expanded benefits and their impact on the future cost of health care, both in terms of price and quantity. The second essay will discuss the revenue provisions in the legislation and their impact on economic activity. The third essay will discuss the impact of the new legislation on federal deficits and debt, and what it implies for the long-run health of the economy. The final essay will try to summary the various features of the legislation and assess their net impact on the economy in the short-term, as well as in the longer-term.]

This is the final instalment of the four-part series on the Affordable Care Act (ACA) that I started writing in April 2010. Whether the federal government can construct a website that does everything the ACA was expected to do is not the key issue, even though it seems to be the most discussed issue at the moment. With enough time and money, the website problems can and most likely will be fixed, or at least will perform no worse than other such government websites.

A more important issue I believe is the economic consequences of enacting the ACA in the first place. The primary reason given most often by proponents of the legislation was that the ACA attempts to reform the healthcare system by providing more Americans with quality, affordable health care and by curbing the growth in healthcare spending in the United States. These are very honorable and equitable goals. Whether the ACA will meet expectations is still to be seen. After all, there are several issues involved, not the least of which is the definition of "quality, affordable" health care. It seems to mean different things to different people. Some might argue that the word "quality" should be emphasized, such that every citizen gets whatever health care they want or that is available, regardless of the cost. Others might emphasize the word "affordable", suggesting that the system provide basic health care only and at a reasonable cost. Providing everything to everyone is not a realistic or sustainable option; there just are not enough resources available to do so. In other words, having the government provide a healthcare safety net is acceptable to many but the generosity of such a system is debated. The sick always want a more generous system than the healthy, which creates issues of crowding out, adverse selection and moral hazard, each of which have been discussed extensively in the healthcare economic literature. But as mentioned above, the debate at the moment seems centered more around operational rather than fundamental issues.

The website diversion notwithstanding, a key argument for providing quality, affordable health care was that it would provide a healthier population. The economic importance of this is that a healthier population (all else equal) implies a more productive labor force or more hours worked, both of which would contribute to the economy's potential output. After all, a healthier work force is less likely to miss work due to illness. Unfortunately, all else will not be equal. In particular, the segment of the population that would benefit most from improved access to health care are also the segment most likely to be working only to have access to employer provided health care, use the emergency room as their primary healthcare provider, or ignore health issues before they become severe. In short, they are more likely to use emergency care than preventative care.

Of course, we want a healthy population, but we also want them to take some responsibility in achieving this goal. In the process of providing health care, policymakers must be careful to maintain some incentive to work, make sure the benefits justify the costs, and to encourage individuals to follow a healthier life style. For these reasons, there are a few things to watch as the ACA is fully implemented.

The first thing to watch is what happens to labor force participation and unemployment under the ACA. This may apply especially to lower income households, which are more likely to not have access to health insurance through their employer. As far as I know, there is no empirical evidence that having health insurance would cause such households to exit the labor force. However, there is empirical evidence to suggest that labor force participation or labor supply increases when public health insurance coverage abruptly is lost. In a National Bureau of Economic Research working paper, the authors explore the labor force dynamics in 2005 when approximately 170,000 Tennessee residents lost access to TennCare, the state's Medicaid system.1 Using both across-state and withinstate variation in exposure to the disenrollment, they estimated large increases in employment concentrated among individuals working at least 20 hours per week and receiving private, employer-provided health insurance.

This study suggests a significant degree of "employment lock"Śworkers employed primarily to secure private health insurance coverage. If this is the case, then the ACA, which similarly affects adults not traditionally eligible for public health insurance, may cause large reductions in the labor supply of low-income adults. In 2011, approximately 8.9 million Americans with incomes below 139 percent of the poverty line were covered by employer-provided health insurance. Exactly how this segment alters their employment in response to the extension of Medicaid under the implementation of the ACA will be of interest.

Of course, this depends on how generous the health coverage will be. If many households do decide to exit the labor force because they now have access to health care, then I worry about their children and the message it sends to them. In my opinion, it would be much more constructive for the U.S. economy in the long-run if the system was designed to encourage work by providing health benefits that were more generous to those who work than to those who do not. I understand that such a system would be far more complicated than the one-size-fits-all system now in place under the ACA, but it puts some of the responsibility of providing health care on the individual. This would not deny the unemployed health care but it limits the generosity of the care available to them.

In this regard, there is considerable evidence in the health economics literature that the reason we spend so much on health care in the U.S. is not that our population is getting older but rather that we have increasingly become more generous dispensing health benefits.2 Indeed, there are other economies with older populations than ours and they spend less per capita than we do.

The second thing to watch is what happens to total healthcare spending under the ACA. Recall that one of the objectives of the ACA was to curb the growth of such spending. Unfortunately, the law was not designed to save money. It was designed to broaden health insurance coverage. But according to President Obama, broadening health insurance coverage would reduce inefficiencies in the system, which in turn would lead to lower costs. The example most often given by proponents of the ACA in this regard was that the uninsured used the emergency room for health care rather than the doctor's office and that expanding health insurance coverage to them would change this. And since emergency care is more expensive, it would in turn lower costs.

In a paper recently published in Science, the authors reported results from a study of the lottery applicants in Oregon's Medicaid program that provided empirical evidence that Medicaid recipients are 40 percent more likely to use emergency room care than the uninsured.3 This is at odds with the claim by proponents of the ACA that providing health insurance coverage to the uninsured would reduce the use of emergency care. "When you cover the uninsured, emergency room use goes up by a large magnitude," says Amy Finkelstein, the Ford Professor of Economics at MIT and a principal investigator of the study, along with Katherine Baicker, a professor at the Harvard School of Public Health. The paper also documents that having Medicaid consistently increases visits to the emergency room across a range of demographic groups, types of visits, and medical conditions, including types of conditions that may be most readily treatable in primary-care situations. Although one always needs to be careful generalizing to other settings, these results suggest that it may be inappropriate to claim that the extension of health insurance to the previously uninsured would reduce their use of emergency care, at least in the near term.

But this is the latest paper to emerge from an ongoing study, led by Finkelstein and Baicker, of the lottery applicants in Oregon's Medicaid system. In a 2011 paper published in the Quarterly Journal of Economics, they showed that Medicaid coverage increases doctor visits, prescription drug use, and hospital admissions; reduces out-ofpocket expenses or unpaid medical debt; and increases self-reported good health. In a 2013 paper published in the New England Journal of Medicine, they showed that Medicaid coverage reduces the incidence of depression but does not produce measured improvements in physical health.

This brings us to the third thing to watch and that is whether expanding healthcare insurance coverage to the previously uninsured will improve the physical health of the labor force. After all, the economic benefits of the ACA will come primarily from healthier employees. For the most part, the previously uninsured are likely to use more health services, but the question is whether this increase in the use of health services will actually translate into improved health. Indeed, having access to quality health care may reduce the financial incentive for people to live healthier. We spend more per capita on health care than any other country, yet we are not the healthiest of countries. One reason for this may be that if we have access to quality, affordable health care without limits, we feel less pressure or responsibility to live healthy.

Recall that one of the results from the Oregon study was that after two years the randomly selected enrollees in Medicaid were more likely than to say they were healthy than the cohort that was not selected, even though there was no measured improvement in physical health between the two groups.4 The implication is that the individuals targeted by the ACA are unlikely to experience any measured improvement in health. However, extending Medicaid did increase the use of health care services, raise rates of diabetes detection and management, lower rates of depression, and reduce financial strain. As such, the enrollees in Medicaid, because of less stress, may enjoy better health in the longer run.

There is little doubt that more people will have access to health insurance under the ACA, but whether it will be as many as hoped is still to be determined. According to estimates by CBO and JCT, the ACA will reduce the number of nonelderly people without health insurance coverage by 30 million to 35 million by 2016, leaving roughly 27 million nonelderly residents uninsured, with unauthorized immigrants accounting for about onethird of the uninsured. Indeed, the share of legal nonelderly residents with insurance is projected to rise from 82 percent in 2012 to 93 percent by 2022. According to the current estimates, approximately 24 million people will receive coverage through the new insurance exchanges, and roughly 17 million will enroll in Medicaid and the Children's Health Insurance Program. Also, about 5 million fewer people will have coverage through an employer compared with the number under prior law.5

For the most part, enrollment so far has fallen short of expectations, with the younger and healthier candidates deciding not to participate. As a result, the less healthy represent a larger than anticipated share of participants, raising the likelihood that the added revenues will fall short of the added costs as well. Obviously, this will raise the net overall costs of the ACA program from plan. This still leaves the question of whether extending health insurance, even if it is not as widespread as originally planned, will improve health.

A fourth thing to watch will be the overall costs of ACA, the degree of cost sharing, adverse selection and crowding out. For now the decision by policymakers is to offer health care through the private sector rather than an outright government owned and operated healthcare system. This decision is difficult with regard to medical care because medical quality is not fully observable. Hence, private sector efficiency may come at the expense of quality as increasing medical costs face budget realities. Policymakers worldwide speak of more efficiently delivering essential health care but disagree on what counts as essential and on the optimal mix of private and government components of service.

Sharing the cost of health care will be important to the overall success of the program. More generous insurance reduces the utility cost of illness but also leads to overconsumption of care when sick. Optimal insurance balances the marginal costs of risk bearing and moral hazard. In the U.S., government policy has historically tilted towards more generous insurance by excluding employer payments for health insurance from income taxation (employees do not include health insurance premiums paid by their employer as income earned on their tax returns).6 The welfare loss from this subsidy has been a theme of much research.

Next, governments face issues of competition and selection. Sick people prefer more generous insurance than do healthy people. If insurers know who is sick and who is healthy, they will charge the sick more than the healthy. This differential pricing is a welfare loss, since it denies sick people the benefits of ex ante pooling of risk type. Even if insurers cannot separate sick from healthy, there are still losses: high costs of generous plans discourage people from enrolling in those plans. Generous plans also have incentives to reduce their generosity, to induce sick people to enroll elsewhere. Adverse selection is empirically very important to the costs of health care programs and so far public policies have not been able to offset it.

Finally, longstanding norms support at least basic medical care for everyone in society. But the generosity of health programs for the poor runs up against the possibility of crowding out private insurance coverage. Analysis from Medicaid program expansions show that crowding out does occur. The likely offset to this, if private insurance is to remain part of the system, is to allow private insurers to raise premiums as needed, which in turn will increase the overall cost of health care to everyone, not just the sick or the wealthy. The question will then be whether the coverage expansions are worth the added cost, given the health benefits they bring. At the moment, most think they are because the true cost of sustaining the system under the ACA has not yet been experienced.

This concern notwithstanding, there may be a silver lining to the longer-term costs of the ACA and that is the introduction of technology to make health care delivery more efficient and affordable. Health care is one area in desperate need of productivity gains. The medical profession has tried several things to improve productivity of doctors, such as the nurse practitioner, computerizing medical reports, and in some cases eliminating duplication of lab tests. I am not alone on this score. Others have noted that addressing allocative inefficiency is central to controlling healthcare costs.

Many of you have heard my claim that the technology already exists to make the delivery of health care more efficient. But it will take time for this technology to be fully integrated into the healthcare industry because patients will be reluctant to accept the changes needed. But I think it has begun. For example, establishing medical data bases is a prerequisite in my view to a technological revolution in healthcare delivery. After all, a medical diagnosis requires information. How often have you gone to a doctor and not been asked to describe the symptoms of what ails you? The technology is there to develop a device that can gather such information and compare the readings with our health records. This information will allow our devices to analyze our symptoms and trigger the appropriate response. For example, our DNA will provide the pharmacist with the information needed to tailor a prescription specifically for us, such as the dosage or even the specific drug that may work best. Or the device could automatically schedule a doctor's appointment if our condition warranted it. It could tell us to take two aspirin and go to bed. In fact, it could even call for an ambulance if deemed necessary and the GPS in the device would provide the ambulance service with our location. And all of this eventually could be no more expensive than most people's monthly cell phone bill. In effect, it could replace the general practitioner but not the medical specialist. If surgery would be needed, for example, we still may want hospital insurance or something like it to help cover the expense.

Of course, a lot of things need to change for this to happen, but such changes may be more acceptable as the current system becomes increasingly expensive. Moreover, this type of innovation will be ageless; that is, not just for old people, which will likely make it more acceptable as well. In fact, part of the marketing of this product could be to make it a must for the younger generation, who are more tech savoy anyway. The older folks will follow. By the way, this may be less intrusive to many than having an oven that tells us we are not eating healthy or eating too much, or a household scales that keeps track of our weight gain or loss and reminds us of it each time we step on, which are just some of the innovations that are actually being considered as viable commercial products.

For the most part, the conclusions of the earlier three instalments on the ACA remain intact. Under the ACA, I still would expect that healthcare benefits will be expanded, total expenditures on health care will go higher, taxes and premiums on average will rise, and federal budgets will remain stressed. The implication is that spending on health care will account for an even larger share of total consumer spending under ACA than it would otherwise. More importantly, it is very likely that the out-of-pocket expenditures on health care by individuals as a percent of total expenditures as measured in the consumer price index will increase as well. In 2012, the direct out-of-pocket expenditures on health care were estimated at about 7.2 percent of all out-of-pocket expenditures, whereas the total expenditures on health care by consumers, regardless of who paid the bill, was estimated at 19.9 percent of all consumer expenditures. My expectation is that both percentages will rise over time under the ACA. Something will have to giveŚcoverage, quality or price, or some combination of all three. I will be watching! square

Daniel E. Laufenberg, Ph.D.


1 Craig Garthwaite, Tal Gross, and Matthew J. Notowidigdo, "Public Health Insurance, Labor Supply, and Employment Lock", National Bureau of Economic Research, Working Paper No. 19220, July 2013.

2 Christian Hagist and Laurence Kotlikoff, "Who's Going Broke? Comparing Growth in Healthcare Costs in Ten OECD Countries", National Bureau of Economic Research, Working Paper No. 11833, December 2005.

3 Sarah L Taubman, Heidi L. Allen, Bill J. Wright, Katherine Baicker, and Amy N. Finkelstein, "Medicaid Increases 'Emergency-Department' Use: Evidence from Oregon's Health Insurance Experiment", Science, January 2014, 263-268, Published online January 2, 2014. The study takes advantage of regon's recent
use of a lottery to assign access to Medicaid, the government-backed health-care plan for low-income Americans, to certain uninsured adults. The research examines emergency room records for roughly 25,000 people over 18 months.

4 Katherine Baicker, Sarah L. Taubman, Heidi L. Allen, Mira Bernstein, Jonathan H. Gruber, Joseph P. Newhouse, Eric C. Schneider, Bill J. Wright, Alan M. Zaslavsky, and Amy N. Finkelstein, "The Oregon
Experiment—Effects of Medicaid on Clinical Outcomes", New England Journal of Medicine, May 2, 2013,
pp. 1713-1722.

5 Congressional Budget Office, Updated Estimates for the Insurance Coverage Provisions of the Affordable Care Act, March 2012.

6 David M. Cutler, "Health Care and the Public Sector, National Bureau of Economic Research, Working Paper No. 8802, February 2002.

The views expressed here reflect the views of Daniel Laufenberg as of the date referenced. These views may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.

Special Report: Health Care Legislation
Essay No.1 - Costs
Essay No.2 - Revenue
arrow Essay No.3 - Budget Deficits
Essay No.4 - Things to Watch

Current Persepctive

2012 Economic Perspectives

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March 8 , 2012

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-- February 7, 2012

2011 Economic Perspectives

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-- December 6, 2011

Recession fear, not fact
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Core inflation: a policy guide more than a policy target
-- May, 2011

Help not wanted?
-- Feb, 2011

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