Lexington, KY - Some relatively good news emerged recently about the economy, though it is still too early to declare "victory" over the recession and anticipate rapid recovery. The economy is, at best, doddering along, and it remains to be seen whether economic activity will really pick up. However, that surely beats the substantial declines we have seen in past months. There still are many uncertainties hanging over us that can derail a recovery including looming deficits, inflationary fears - and what may become of the healthcare sector.
The somewhat good news is that GDP fell last quarter, but by less than expected. Analysts were anticipating a 1.8 percent drop in GDP, but instead the decline was 1.0 percent - still going down, but by less than thought and by well less than previous quarters. Even better news is that the unemployment rate for July was 9.4 percent, which is a decline from the 9.5 percent in June. This is still a high unemployment rate, but it is good that we have seen a reduction. It's still too early to tell whether this is a permanent reversal in the previous upward trend, though. Forecasters warn that it may move back up. One reason for the lower rate in July is the reduction of the number of people who actively sought work because they are evidently discouraged about job prospects. They are not officially counted as unemployed, yet in reality are part of the unemployment problem. Also, the number of long-term unemployed continued to rise in July. But, with these cautionary notes, there are signs the recession has bottomed out.
Another good indication is the stock market. The Dow Jones Industrial Average moved above 9,000 last month and has continued to show encouraging signs. While some market analysts suggest technical reasons for this upturn, others point to a specific economic fundamental for the improvement: signs that the proposed healthcare reform will not be enacted. It is not silly to think that major changes in the healthcare sector can have a sizable effect on the stock market. In particular, current proposals before Congress on healthcare call for massive change in the market for the delivery of healthcare and of health insurance. Given that healthcare-related spending accounts for roughly 17 percent of GDP, any major reform will have a large effect on the economy and consequently will have a large effect on the stock market, too.
Present proposals requiring individual and/or employer insurance; mandating certain types of policies; establishing a subsidized government option; setting pricing and coverage for policies; and raising taxes to pay for it all would entail big changes in consumer and firm behavior. There would be substantial changes in who buys what type of insurance products, in the sort of healthcare services provided and the cost to firms and consumers. This would affect the earnings streams of many firms, thus influencing their stock prices and the stock market. The uncertainty alone about how healthcare reform will shake out is likely to stifle the stock market. However, others argue (myself included) that the effect of the current healthcare reform proposals before Congress goes beyond the uncertainty about them . . . they would have overall negative effects, and the prospect of non-passage is a boost to the economy.
One issue with present proposals is cost. The government plan requires tax money to support it. The Congressional Budget Office has estimated this cost to be way more that its proponents had hoped for. Thus, the plan requires tax hikes, either on individuals or fees and assessments on firms. So we'll pay for whatever insurance we end up with either through premiums or through taxes. There are no free lunches. And the healthcare taxes on employers may discourage employment and stifle economic growth.
Another issue is choice. With a government subsidized plan made available, it will make it difficult for private options to remain viable. More employers will find it more economical to cease offering a healthcare plan, putting their workers into the government option. Fewer private options mean less choice for the health insurance/healthcare consumer. Also, the government option will come with a minimum level of mandated coverage. Some consumers will not want this much coverage. In the interests of "cost control," the government plan will come with limits on what treatments are allowed. Some consumers will want more coverage than this. Proposals call for the government plan to establish reimbursement rates for physicians and services near Medicare rates. These are low enough that many physicians do not wish to take on more Medicare patients. Thus, enrollees in a government plan are likely to have limited choices for doctors.
The prospect of higher taxes, higher employment costs, and the potential for less choice puts a damper on consumer and business confidence about the future. So it's quite rational that this would stymie the stock market and the likelihood of it not happening helps boost the market.
An even better boost would be healthcare reform that is not so disruptive and costly. There are ideas out there that encourage more coverage at lower prices without the massive disruption and cost of the present proposals. A simple but important step is to equalize the tax treatment of individual- and employer-provided health plans. This would invigorate and deepen the market for individual insurance, providing consumers with more choice of plans that they can keep even with a job loss. Another simple step is to cease policies that limit competition between health insurance companies and among healthcare providers. These two steps alone would induce coverage of many more people without massive government intervention and cost.
John Garen is department chair and Gatton Endowed Professor of Economics at the University of Kentucky.