Study: States, Businesses Will Pay Heavy Cost for Reform

Published December 30, 2009

As states across the country await the outcome of President Obama’s push for dramatic and wide-reaching health care reforms, a new study indicates the consequences could be dire for some states and businesses,

The Illinois Policy Institute has released a new collection of research, “Adding Insult to Injury,” on the likely impact of the health care reforms currently under consideration in Congress on job growth and the economy in Illinois and across the country. The study, prepared by economic consulting firm Laffer Associates and completed at the end of November 2009, quantifies in stark terms the expected job losses from the implementation of proposed health care reforms.

The study estimates the proposed reforms will cause job losses of 169,000 in Illinois and additional costs of $4,418 (net present value for the entire period) for each resident, and will shrink the state’s economy by 5.1 percent over the entire period between 2012 and 2019. The projected job loss of for the nation as a whole is 3.9 million jobs, with $3,900 in costs for each person, and an economy that shrinks by 4.9 percent by 2019.

Driving Costs Higher

According to Laffer’s research, health care has contributed to an increasing share of rising government expenditures which in turn crowd out private investment and slow economic growth.

“The primary cost driver in the current health care market is the large and growing government health care wedge—an economic separation of effort from reward, or consumers (patients) from producers (health care providers), caused by government policies,” the study concludes. “The primary government policy causing the wedge is the ever-increasing role of the govern­ment in funding health care, a factor that cor­responds directly with the diminishing role of the private sector.”

While health care accounted for 26 percent of the 16.6 percent of the increase in government expenditures between 1965 and 1983, the share increased to 51 percent of the 4.5 percent increase in government expenditure between 2000 and 2007. As consumers paid less out of pocket for health care, consumption skyrocketed and health care costs increased.

“In 1960, the private sector funded over three quarters of the national health care expenditures. Individuals paid from their own pockets nearly half of these costs,” the study notes. “Today, the private sector funds slightly more than half of these expenditures. Individual patients covered just over $1 of every $10 spent on health care.”

Small Businesses at Risk

Small companies are especially vulnerable to rising costs of health care. The National Federation of Independent Business (NFIB) initially supported U.S. Senate versions of health care legislation, hoping to benefit from federal laws, as laid down by the Employee Retirement Income Security Act, which would apply if small companies became members of the National Exchange.

“State laws have many more mandates, as many as fifty or more, which raise costs while federal laws don’t have them,” said Kim Clarke Maisch, state director of NFIB in Illinois. “Large corporations self-insure, and their costs are not affected by mandates. Increasingly, small companies have taken recourse to Health Savings Accounts (HSAs) to reduce employee health costs, which are lower even after they pay for the deductibles.”

HSAs Would Be Gutted

Unfortunately for small businesses, the proposed health care reform bills gut HSAs and will increase the cost of each employee’s benefits package dramatically. Most small businesses will have to purchase state health plans and provide for coverage of preexisting conditions, which led NFIB vice president Susan Eckerly to issue a strongly worded statement in November against the health care plan.

“Small businesses have a unique place in this debate because of the exceptional challenges they face. They experience the most volatile premium increases, are the most cost-shifted market, see the most tax increases, and have the least competitive marketplace,” Eckerly said. “For all these reasons they especially need reform, but these reforms can’t add to their cost of doing business. The impact from these new taxes, a rich benefit package that is more costly than what they can afford today, a new government entitlement program, and a hard employer mandate equals disaster for small business.”

Large companies are also concerned, according to Laura Minzer, executive director of the health care council at the Illinois Chamber of Commerce.

“Currently, large companies have in their health insurance plans the flexibility to tailor their benefits to provide incentives for wellness and reduce the costs of chronic and preventable diseases like Type II diabetes,” said Minzer. “The proposed health care bills will reduce options by adding market distortions such as excise duties on high-deductible plans and specifications for the benefits that health plans must cover.”

Legislators on Notice

Kristina Rasmussen, executive vice president of the Illinois Policy Institute, believes the study illustrates why legislators should think twice before supporting a vast and complex bill likely to have many unintended consequences.

“The state of Illinois has a high rate of unemployment; the state’s finances are dire even before they will have to absorb huge additional costs of coverage of the health reform bills,” Rasmussen said. “The incumbent representatives who decide to support this legislation should be aware they are vulnerable to voter anger.”

Kishore Jethanandani ([email protected]) writes from San Francisco.

Online Resources:

Illinois Policy Institute: “Adding Insult to Injury”: