Negative Economic Impact of the Patient Protection and Accountable Care Act The Patient Protection and Affordable Care Act (PPACA) also referred to as ObamaCare, federal healthcare law, Affordable Care Act, or ACA, is a United States federal Statute signed into law on March 23, 2010, by President Barack Obama. In combination with the Healthcare and Education Reconciliation Act, it represents the most significant regulatory overhaul of the U.S. healthcare system since the passage of Medicare and Medicaid in 1965 (Patient Protection and Affordable Care Act).
The PPACA is intended to increase the number of health insured Americans and reduce the overall costs of healthcare.
The PPACA will revamp the current health insurance system by extending health insurance coverage to nearly 32 million currently uninsured Americans; 18 million through Medicaid expansion to individuals with incomes under the 133 percent federal poverty line (FPL), and 18 million through government exchange subsidies to individuals with incomes up to 400 percent of the FPL. Citizens and legal residents in families with income between 100 and 400 percent of poverty who purchase coverage through a health insurance exchange are eligible for a tax credit to reduce the cost of coverage.
To subsidize the additional 32 million individuals covered, the new law introduces 18 new taxes and penalties on individuals, employers, and businesses (Campbell).
Though the PPACAs intent is to lower healthcare costs, it will increase the federal deficit, increase state deficits, hinder employment, job creation and innovation, increase health insurance costs, and delay economic growth. These negative economic issues are far-reaching and long lasting.
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Increase the Federal Deficit
One of the goals for the PPACA was to reduce the federal deficit by a small amount in the first ten years and by trillions of dollars thereafter. Contrary to this key objective, the combination of mandates and taxes will not reduce the federal deficit, but will likely increase it. The PPACA is estimated to increase the federal deficit by $75 billion, per year, resulting in the nation’s publicly held debt to grow to $753 billion higher at the end of 2020 (Campbell).
Once the government begins to pay health insurance for individuals through subsidies and bring people into the government insurance program in the later half of the decade, this growing debt will balloon. The CBO’s updated 2011 estimates found that the PPACA will increase federal outlays by roughly $604 billion between 2012 and 2021 (Blahous).
The excessive debt will drive out productive investments and lead to an estimated 670,000 lost job opportunities annually. The imposed tax hikes are anticipated to cost taxpayers $503 billion over 10 years and more in the future to subsidize government spending on new entitlements (Dubay).
The standing budget analysis is very limited, as it does not account for how the policy’s combination of spending and increased taxes alters the macroeconomic performance of the economy. The heavy initial costs of the policy hinder economic growth with higher inflation and interest rates, overwhelming the benefits the law hoped to gain in later years.
Within the PPACA, legislation double counts $53 billion in Social Security payments, counts $70 billion in premium payments for long-term care insurance programs as revenues, and ignores up to $115 billion in discretionary costs associated with the PPACA (Howard).
After discounting the double counting of Social Security payments, long-tern care premium payments as revenue, and takes discretionary costs into account, the true financial deficit of the PPACA during its first ten years is over $562 billion, and $1.15 trillion thereafter (Howard).
Increases the State’s Deficit
Not only does the PPACA have a serious negative impact on the federal deficit, but also on state’s budgets, several of which are already suffering multibillion-dollar budget deficits. Medicaid spending currently consumes about 20 percent of state’s budgets, crowding out spending on everything else from education to infrastructure (Howard).
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States will be held responsible for roughly 11 million uninsured Americans who are eligible for Medicaid but have never enrolled. In 2014, many of these individuals will sign up for coverage under the pre-PPACA rate, which varies by state, and is far more complex.
The mandated spending makes an already bad fiscal situation worse, as states are projected to face $21 billion in new Medicaid costs from 2014 – 2019, not including up to $12 billion in new administrative costs (Howard).
While this reduces the $442 billion in new Medicaid costs for the federal government, many state budgets are already facing huge deficits and cannot afford any new outlays. In fact, they need to cut spending to balance their budgets. The increased rolls of people on Medicaid will continue to put financial pressures on state’s budgets, leading to further economically destructive tax increases, budget cuts, and state employee layoffs.
Hinders Employment, Job Creation, and Innovation
The PPACA imposes a 2.3% medical device tax, $2.3 billion annual tax on the pharmaceutical industry, and $2,000, per employee, tax penalty on employers with 50 or more workers who do not provide their employee’s insurance coverage or “adequate” insurance coverage. Stock shares fell in the medical device sector on June 28, 2012, the day the U.S. Supreme Court upheld the majority of the new healthcare law. In accordance with the new law, medical device manufacturers are subjected to pay a 2.3% sales tax on medical device sales. Scheduled to go into effect in January 2013, the excise tax on medical devices is a blow to innovation, will cost the industry more than $28 billion by 2019, destroy 14,000 to 47,1000 jobs, and increase the cost of medical devices (Graham).
Several major manufacturers have already been affected and are preparing for the new healthcare tax.
Welch Allyn plans to lay off 275 employees, 10% of their workface, over the next three years. Stryker plans on countering the medical device tax by cutting five percent of their global workforce, an estimated 1,170 positions. Zimmer Corp cites the tax for 450 job cuts and a $50 million charge against earnings. Cook Medical has nixed plans to open a manufacturing factory in the United States, moving business overseas to Ireland. Medtronic anticipates a $175 million annual charge against earnings, forcing the company to cut 1,000 jobs between 2012 and 2013. Boston Scientific is removing between 1,200 and 1,400 jobs, while shifting investments and workers overseas to China. In addition to the companies just mentioned, the following companies are also facing future layoffs at the hands of Obamacare. Smith & Nephew: 700 employees, Abbott Labs: 700 employees, Coviden: 595 employees, Kinetic Concepts: 427 employees, St. Jude Medical: 300 employees, and Hill Rom: 200 employees.
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The medical device industry is the sixth leading exporter in the United States (Top US Exports).
The impact of this tax will likely reduce exports, thereby exacerbating the trade deficit and damage the medical device industry. Obamacare will hit pharmaceutical companies with more than $20 billion in new taxes over the next ten years. Some companies cannot bear a massive tax bill and risk failure of multimillion-dollar research. The American economy benefits remarkably from the vast amounts that pharmaceutical companies invest into research and development. New drug therapies help increase the economy, because research and development expenses directly create jobs, and successful drugs enrich people’s health and can free up caretakers for more productive pursuits.
For example, the cost of caring for those with Alzheimer’s and other forms of dementia will reach $200 billion this year and $1 trillion by 2050 (Pipes).
A new treatment that could delay the onset of Alzheimer’s by five years would decrease the prevalence of the disease by 43 percent and save $447 billion by 2050 (Pipes).
Beginning in 2014, employers with more than 49 employees will pay a non-deductible penalty of $2,000 for each employee beyond the first 30 employees if they do not offer minimum creditable health coverage. If an employer fails to provide affordable coverage, and at least one employee receives insurance through a state-based exchange, the penalty rises to $3,000 per employee (Howard).
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The law mandate is estimated to cost businesses an additional $96 billion between 2012 and 2019 (Howard).
One economist notes that the $2,000 penalty will amount to costs averaging 15% of wages in the restaurant industry and nearly 10% of wages in the retail sector, providing an incentive to hire part-time, lower wage employees (Willnite).
Many businesses will move toward hiring part-time instead of full-time employees to mitigate the health-care overhaul’s requirement. “32% of retail and hospitality company respondents told Mercer consulting firm that they were likely to reduce the number of employees working 30 hours a week or more” (Jargon).
The CBO predicts that the law will reduce the number of jobs in the U.S. by one half of one percent, equating to about 700,000 additional Americans being unemployed. Employers with fewer than 50 employees that do not provide health insurance are disincentivized to grow beyond the “cap” and incur a penalty, further reducing unemployment and growth. One small business owner of an IHOP franchise in New Jersey anticipates penalties up to $220,000 for his 140 uninsured workers, forcing him to raise prices or lay off workers.
“Ultimately, either businesses will close or consumers will pay more” (Dubay).
Dana Holding Corp warned their employees of potential layoffs, citing $24 million over the next six years in additional U.S. healthcare expenses. The company has already begun laying off white collar employees. The CBO predicts three million people will lose employer based coverage as a result of the PPACA, noting firms that tend to drop coverage are smaller employers and employers who employ low wage workers. Other sources have estimated as many as 43 million low wage employees may be dropped into the state exchanges. This would significantly increase taxpayer obligations and further increase the cost of the program. To compensate for the new tax expenses, companies can reduce profits, reduce administrative costs, reduce labor costs (fewer jobs or lower wages), or raise their premiums. The global capital market is highly competitive and many companies already have prevailing incentives to reduce administrative costs.
Therefore, they are more likely to raise premiums or reduce labor costs, or a combination of both. Mercer, an employee benefits consulting firm, revealed in a November 2012 research study that in addition to considering lower-cost plans, two-thirds of companies polled said they would also raise health care costs for workers through higher co-pays and deductibles, regardless of whether the employee is a CEO or a line worker at a factory (Murphy).
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This is a job destroying law that will negatively affect nearly everyone.
The cost of the tax increase will result in lower wages, hire unemployment, lower hours worked per employee, cut jobs, lower profits, lower shareholder returns, less innovation, and higher prices for consumers. The new tax mandate will create access barriers to healthcare and services, further increasing costs. Companies will proceed very cautiously before committing themselves to new investments and employment decisions. The effect this has on economic growth, innovation, and job creation is significantly counterproductive toward the goal of increase growth in this anemic economy.
Increased Health Insurance Costs
The PPACA imposes a number of new requirements on health insurance companies, including being barred from setting premiums based on medical history, limitation to varying premiums based on age, extending dependent coverage for adult children until the age of 26, and eliminating the lifetime cap on health insurance coverage. The effects on the provisions and taxes will likely be passed onto employers and individuals in the form of higher insurance premiums, especially for younger adults, thereby subsidizing older Americans. The law allows premium costs to vary by a ratio of three to one, based on age.
Heritage research specifies “The natural variation by age in medical costs is about five to one, meaning that the oldest group of non-Medicare adults normally consumes about five times as much medical care as the youngest group.” Under Obamacare, young adults will pay exaggeratedly high premiums, and older adults will pay unnaturally low premiums. Young adults in the exchange, who are under the age of 30, will see an eight percent increase in their premiums (Radnofsky).
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The ban on establishing premiums based on medical history also increases premiums for individuals who are healthy. Individuals with chronic disease have healthcare expenses three times greater than those without chronic disease. The Kaiser Family Foundation study found that due to the health law’s restrictions on how much prices can vary by age, having older, sicker people participating in the insurance exchanges could drive up premiums for everyone in those exchanges by three percent, or $141 for each enrollee in 2014.
Delay Economic Growth
The law charges insurance companies and imposes a 40 percent excise tax on individuals with high-premium insurance plans. The excise tax applies to insurance plan premiums exceeding $8,500 for individuals and $23,000 for families, for the cost of combining health savings accounts, medical, prescription drugs, dental, vision, etc. There is a higher threshold for early retirees and high-risk professionals of $9,850 for singles and $26,000 for a family. Until 2019, these thresholds will be indexed to the general price inflation, plus one percent. In CBO’s latest projections, the plan is expected to cost taxpayers $87 billion between 2011 and 2019. The PPACA enforces a new 3.8% investment income tax and an additional 0.9% Medicare payroll tax on individuals with annual income exceeding $200,000 and on families and small businesses with annual income exceeding $250,000.
Similar to the previous law’s Medicare payroll tax, the revenue from the additional 0.9 percent tax will be allocated to the Medicare HI Trust Fund. The tax increase is expected to cost this group of individuals $210 billion between 2012 and 2019 (Howard).
High tax rates carry economic penalties. They cause taxpayers to base decisions more on tax considerations and less on economic merit. Additionally, high taxes can shrink the size of the tax base, raising less revenue than the causal bystander might assume. A study by Ernst and Young has concluded higher tax rates will result in a significant increase in the average marginal tax rates on businesses, wages, and investment income, as well as the marginal effective tax rate on new business investment (Prante).
The study finds that these higher marginal tax rates result in a smaller economy, fewer jobs, less investment, and lower wages. Specifically, the study found that the higher tax rates will have a substantial adverse economic affect in the long-run that includes lowering output, employment, investment, the capital stock, and after tax income. Higher tax rates on wages reduce work effort and labor force participation (Prante).
The higher tax rates on capital gains and dividends increase the cost of equity capital, which discourages savings and investment, and reduces capital available for companies to grow. In effect, capital investment falls, which reduces labor productivity and means lower output and living standards in the long run (Prante).
These economic destructive policies will impede an already weak economy.
Conclusion
PPACA’s taxes, penalties, and fees on investors and businesses will decrease the amount of investment in the economy. The law is packed full of taxes on individuals, employers, medical device companies, insurance companies, and pharmaceutical companies. Almost all of these costs will be passed along to employers and individuals in the form of higher insurance premiums, reduced wages and employment, and reduced investment in products and services. In turn, this reduced investment will lead to a decline in productivity. Higher taxes on investments also put upward pressure on interest rates as investors seek to achieve their after-tax desired rate of return. Lower wages reduce the amount of taxable income that could otherwise have been achieved.
This will increase the deficit and grow the total debt, putting upward pressure on interest rates and push out some savings that could have gone to new productive business investments. Due to higher interest rates, more American tax dollars will go toward paying the interest on the federal debt rather than paying down principle. Simulations using dynamic analysis estimate that the government would spend an average of $23 billion more per year on interest rate payments between 2010 and 2020 that it would without the PPACA (Campbell).
The enactment of the PPACA has and will continue to substantially worsen a dire federal fiscal and economic outlook, accomplishing the opposite of its intention. The actual economic cost in money and jobs will not fully be known for years, but the outlook is dismal at best.
Works Cited
Blahous, Charles. “The Fiscal Consequences of the Affordable Health Care Act.” Mercatus Center at George Mason University, n.d. Web. 20 Nov. 2012. <http://mercatus.org/sites/default/files/publication/The-Fiscal-Consequences-of-the-Affordable-Care-Act_1.pdf>. Dubay, Curtis S. “Obamacare and New Taxes: Destroying Jobs and the Economy.” Tax Increases in the Patient Protection and Affordable Care Act. The Heritage Foundation, 20 Jan. 2011. Web. 30 Nov. 2012. <http://www.heritage.org/research/reports/2011/01/obamacare-and-new-taxes-destroying-jobs-and-the-economy>. Graham, John R. “Obamacare’s Medical-Device Tax Kills Patients, Not Just Jobs.”Forbes. Forbes Magazine, 06 June 2012. Web. 03 Dec. 2012. <http://www.forbes.com/sites/aroy/2012/06/06/obamacares-medical-device-tax-kills-patients-not-just-jobs/>. Howard, Paul. “The Impact of the Affordable Care Act on the Economy, Employers, and the Workforce.” Center for Medical Progress at the Manhattan Institute, 9 Feb. 2011. Web. 21 Nov. 2012. <http://www.manhattan-institute.org/pdf/testimony_02092011PH.pdf>. Jargon, Julie, Louise Radnofsky, and ALexandra Berzon. “Health Care Law Spurs a Shift to Part Time Workers.” Wall Street Journal. N.p., 4 Nov. 2012. Web. 2012. <http://online.wsj.com/article/SB10001424052970204707104578094941709047834.html?mod=djemHL_t>. Murphy, Patricia. “‘Cadillac Tax’ in Health Plan Would Hit Middle Class Hard.” Politics Daily. The Capitolist, n.d. Web. 30 Nov. 2012. <http://www.politicsdaily.com/2009/12/17/cadillac-tax-in-health-plan-would-hit-middle-class-hard/>. “Patient Protection and Affordable Care Act.”
