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Office of the Press Secretary

For Immediate Release October 6, 1993

Economic Effects of Health Care Reform


                              Robert Reich
                           Secretary of Labor


                          Laura D'Andrea Tyson
                  Chair, Council of Economic Advisers

                            October 6, 1993

I. Many features of the plan work to lower employer costs, increase job opportunities, and improve economic efficiency.

  1. The Health Security plan lowers business spending on health insurance and thus frees up money for increased wages and salaries or for additional hiring.
  2. The slower growth rate of health care costs means that aggregate business spending falls over time.

While the business sector as a whole will initially pay more for health insurance because of the expansion to universal coverage, the reduction in health care cost growth lowers premiums over time. By the end of the decade, businesses in aggregate will pay less for health care than they otherwise would have, even with the increase in coverage (Chart 1).

Each of these outcomes has a stimulative effect on the economy and will increase employment. Economic research has not reached clear conclusions about how to apportion these effects. Almost all models suggest that wage increases are a likely response, but they differ about whether all of the savings will result in wage increases, or whether some of the savings will be allocated to additional investment or new hiring.

B. Small businesses benefit from other features of the plan as well.

Up to 30% of people report that they are afraid to leave their current job due to the risk of losing health insurance. Research by Brigitte Madrian at Harvard has found that mobility rates for married men are depressed by 25 percent because of job lock. This effect impedes the ability of workers to move to jobs where they are more productive.

Reducing job lock may also affect employment. Firms may be more willing to hire qualified workers with pre-existing con- ditions when they cannot be charged more for them. On the other hand, some workers may decide to leave the labor force if affordable health care is no longer tied to staying at a particular job. Evidence suggests that about 350-600,000 people will decide to retire early following health care reform. The increase in voluntary retirement is likely to increase employment opportunities for younger workers.

2. Lower costs for small businesses and the self-employed may make it easier for people to form new companies.

The difficulty of self-employed workers and small businesses today in purchasing health insurance creates large disincentives for individuals to leave covered jobs to start up new businesses. Reform may thus stimulate new business formation, particularly for small businesses. There is little economic research on this subject to date.

3. Eliminating the link between welfare and health insurance will reduce "welfare lock".

One of the barriers to leaving welfare is the loss of Medicaid benefits. Having universal insurance coverage will end this fear. A typical mother on welfare, for example, will get to keep about 10 to 15 percent more of any additional earnings as a result of health care reform.

Several studies estimate that eliminating welfare lock could have substantial employment effects among the welfare population. Robert Moffitt at Brown University and Barbara Wolfe at the University of Wisconsin suggest that as many as 1 million of the 4 million welfare recipients would take jobs if there were continuous health care benefits. Aaron Yelowitz of MIT also finds that more Medicaid recipients would work if they could keep more of their income and still receive health insurance.

II. Existing studies fail to analyze accurately the Health Security plan.

There are two commonly cited studies of the economic impacts of the President's health care reform proposal: "The Impact of a Health Insurance Mandate on Labor Costs and Employment", by June and Dave O'Neill for the Employment Policies Institute; and "The Employment Impact of Proposed Health Care Reform on Small Business", by The CONSAD Research Corporation. These studies do not adequately analyze the economic effects of the President's health care reform proposal:

  1. The studies make several fundamental errors in characterizing the Health Security plan.

The lack of discounts -- coupled with the questionable assump- tion that firms cannot shift any costs to workers earning less than $25,000 per year --- lead directly to the massively overstated claims of job loss.

In the O'Neill study, employers are assumed to pay the full premium for all workers who work more than 20 hours per week. In the Health Security plan, however, employers pay a much smaller, pro-rated premium for part-time workers.

The O'Neill study assumes that employers pay $5,310 per worker with a family and $2,160 per single worker. Estimates for the Health Security plan are that employers will pay about $2,500 per worker with a family, and about $1,500 per single worker. The cost that employers pay for a family policy is adjusted to take into account that many families will have two adults in the labor force. In these cases, both employers will contribute to the cost of health insurance.

B. The assumption about how firms change their employment in response to cost changes is three to six times higher than most conventional estimates.

The O'Neill study assumes that firms will lay off 3% of their workforce if compensation rises by 10%.

There is no denying that some firms will pay more after reform than they did prior to reform. The vast majority of Americans, however, will benefit from the reduction in health insurance costs, the portability of coverage, the lower administrative costs, the reduction in job lock, the lower costs for small businesses and the self-employed, and the reduction in welfare lock. Any study which ignores these effects cannot be a complete analysis of the employment effects of health care reform.

III. There are many factors in the health care reform that will tend to increase employment. There are some factors that will tend to decrease employment. And there are several factors that will change the composition of employment. Overall, the net effect on employment is likely to be small. Over time, the beneficial effects on employment are likely to strengthen.

  1. Existing models do not allow us to quantify the net effect on employment. Estimating these effects would require precise answers to a wide range of questions, including:

There are no existing models that can address all of the relevant issues. The range of uncertainty is too great to use precise numbers. For this reason, we will not present specific estimates of the employment effects of the Health Security plan.


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