Lies of the Deficit Hysteria

Applebee’s Obamacare Rant Reveals the Lies of the Deficit Hysteria
By William K. Black
November 14, 2012

Zane Tankel, a wealthy owner of over 40 Applebee franchises has attracted media attention by denouncing Obamacare and claiming that it will impose such burdensome expenses on him that he will need to fire workers, limit the hours of existing workers so that they are part-time and do not qualify for health insurance coverage, and cancel plans to open new restaurants.  The media reaction has understandably focused on the public rage at such a wealthy man throwing his workers under the bus.  I write to make a different point.  Tankel illustrates some of the reasons why the Congressional Budget Office’s (CBO) projections of a purported U.S. financial crisis arising from the safety net are baseless.

Tankel’s complaint is Obamacare’s “employer mandate.”  Small businesses are exempt, but businesses like those Tankel owns are required to provide health insurance for their full-time workers.

“Somebody has to pay,” said Apple-Metro Chairman Zane Tankel on Fox Business Network. The Applebee’s chief added that it is unclear what Obamacare taxes, costs and fines will total, but said his restaurants will do whatever is necessary to stay in business.

Businesses criticizing Obamacare have made two contradictory arguments about the impact of the employer mandate.  The CEO of Papa John’s has become infamous by arguing that the price of the pizzas he sells will go up by 14 cents.

“That’s what you do, is you pass on costs,’’ John Schnatter, founder and CEO of Papa John’s, told students at Edison State College in Naples, Fla. “Unfortunately, I don’t think people know what they’re going to pay for this.”

Other CEOs claim that they cannot pass on the costs and will therefore suffer crippling drops in profits.

“Meanwhile, many franchise owners beyond Applebee’s argue that the costs of Obamacare are just too high to stay in business. ‘I can’t tell you how many franchises say they would like to be able to provide coverage, but once they start analyzing the costs, say this isn’t going to work,’ said Judith Thorman, senior vice president for government relations and public policy with the International Franchise Association, a trade group that has opposed the health care law. ‘They’re looking at a tough business climate and this tremendous cost. It’s hard for them to deal with this law, however they decide to deal with it.’”

“Somebody has to pay” is precisely the point.  Under the current U.S. system health care expenses for most Americans are paid for through private health insurance, typically from the employer.  Employers are able to deduct the costs of health insurance as a business expense and employees are not taxed on the implicit income they receive in the form of the health care (nominally) paid for by the employer.  There is, therefore, a substantial federal subsidy for employer health insurance programs.

Despite that subsidy, the cost of private health insurance is enormous and rising rapidly.  The media has focused overwhelmingly on the projected increases in health care costs of health components of the safety net (Medicare and Medicaid), but those programs are not unique.  The problem we face is health care costs – not Medicare and Medicaid.

“It is helpful to consider Medicare and Medicaid in the context of overall national health expenditures, since many of the factors affecting expenditure growth are common to all forms of health insurance. Chart 1 shows total health expenditures in the U.S. as a percentage of gross domestic product (GDP) from 1960 through 2010, the latest year for which we have complete historical data. The portions of total spending attributable to Medicare and Medicaid are also shown.

Health spending in the U.S. has generally increased at a significantly faster pace than the economy, rising from 5.2 percent of GDP in 1960 to 17.9 percent in 2010. The upward trend has fluctuated somewhat, depending on the business cycle (which affects GDP growth) and on faster or slower periods of health cost growth.

From their enactment in 1965, Medicare and Medicaid costs have also grown faster in most years than the economy. Medicare expenditures represented 0.6 percent of GDP in 1967 and 3.6 percent in 2010. The corresponding percentages for Medicaid are 0.4 percent, increasing to 2.8 percent. The “all other” category in chart 1 is composed primarily of expenditures by private health insurance and individuals’ direct out-of-pocket payments for health services.”

The Financial Outlook for Medicare, Medicaid, and Total National Health Expenditures
Testimony before the House Committee on the Budget (February 28, 2012) by
Richard S. Foster, FSA, MAAA, Chief Actuary, Centers for Medicare & Medicaid Services

Out-of-pocket expenses have fallen substantially, so the increase in the “all other” category is due to a very rapid increase in private insurance costs.  The “all other” category rose from slightly above 5% of GDP in 1960 to over 13% of GDP in 2010 (representing twice the federal expense of Medicare and Medicaid combined).  The “all other” cost category is rising at roughly the same rate as the safety net and the direct out-of-pocket subcategory has fallen sharply, which means that the private health insurance cost subcategory is larger than the combined Medicare and Medicaid costs and has been rising considerably faster than the Medicare and Medicaid.

As Tankel emphasized, “somebody has to pay” for health care.  Pete Peterson and Representative Paul Ryan are trying to generate a “moral panic” about future budget deficits causing a crisis.  The factor that drives this moral panic is, overwhelmingly, the rapid increase in Medicare and Medicaid expenses which the CBO projections assume will continue for decades.

Projecting that U.S. health care costs will continue to increase at roughly twice the average growth rate of GDP guarantees that federal budget expenditures will be driven by health care costs.  Chart 7 of Foster’s testimony explains that what he terms the “alternative” projection is what he favors as most accurate.  Under this scenario, Medicare would rise to approximately 10.5% of GDP by 2080.  Chart 8 projects Medicaid expenses only out to 2020 – increasing to nearly 4% of GDP.  By 2080, this implies that combined federal Medicare and Medicaid expenditures would exceed 20% of GDP – roughly 100% of the federal budget.  That is absurd, a point made forcefully by Federal Reserve economists in an article entitled:  AN EXAMINATION OF HEALTH-SPENDING GROWTH IN THE UNITED STATES:

PAST TRENDS AND FUTURE PROSPECTS (by Glenn Follette and Louise Sheiner).

“All other” health care expenses would, under similar approaches to projections, rise to over 40% of GDP by 2080.  The overwhelming bulk of these expenses would be private health insurance and state contributions to Medicaid.  The first question that should arise, therefore, is which constraint would actually bite first and doom the projections.  The imminent constraint is not the federal budget.  The U.S. is neither a household nor a business firm.   We have a sovereign currency that we allow to freely float and we borrow in our own currency.  The U.S. federal government, therefore, is nothing like a nation that has joined the euro and given up its sovereign currency.  Like Japan, the U.S. can create money, or if it chooses to issue debt it can do so at minimal interest rates even with a debt to GDP ratio over twice as large as the current U.S. ratio.

Businesses have to compete.  Many must already compete globally and the future will increase the number of firms that must maintain global competitiveness.  Foreign firms often provide no health care benefits to their workers.  U.S. businesses also have to compete against small U.S. businesses that are not subject to the employer mandate of Obamacare.  Decades before the U.S. federal government experiences ran into any real budgetary “crisis” the increase in health care costs that the CBO is projecting would bankrupt businesses that offered health insurance.  “Somebody has to pay” – and if health care costs increase indefinitely at twice the growth of GDP no business can long survive paying such costs.  The only question is how soon they will become uncompetitive and fail – and the Tankels (Applebee) and Schnatters (Papa John) of the world are claiming that we have already rendered them uncompetitive by requiring them to provide health insurance to a pool of very young workers in good health (i.e., a far cheaper pool to insure than would be the case for most professions and industries).  Note that neither of their businesses faces global competition.  Many U.S. industries and professions will face much more severe competitive disadvantages than restaurants do if health care expenses increase as the CBO projects.

The mass loss of U.S. competitiveness that would occur if the CBO health care expense projections proved true would mean that the CBO budget projections would be wildly over-optimistic.   One of the grave but more subtle flaws in the CBO projections is that they are not “stock flow consistent.”  For example, under the CBO’s projected increase in health care expenses U.S. firms would soon fail by the tens of thousands as they were rendered uncompetitive.  The U.S. would fall into a Great Depression, the budget deficit would explode, and Medicare expenses would skyrocket as tens of millions of Americans lost their jobs and became impoverished.  Health care expenses measured as a percentage of GDP would surge as expenses increased and GDP fell sharply.  The CBO projections, however, are internally inconsistent on multiple dimensions as James K. Galbraith, L. Randall Wray, and Warren Mosler explained in their Congressional testimony and paper entitled:  THE CASE AGAINST INTERGENERATIONAL ACCOUNTING: The Accounting Campaign Against Social Security and Medicare.

Another example of internal inconsistency would become obvious if we increased the length of the CBO projection.  Eventually, health care costs would exceed 100% of GDP under the CBO’s methodology.  That is, of course, impossible because health care costs are part of GDP.  The assumptions about the growth of health care expenses and GDP are not consistent.

My hope is that this article makes clear that the problem is not the federal budget and it certainly isn’t Medicare and Medicaid (or Social Security).  The critical constraint is the private sector.  American businesses cannot compete globally if our health care costs are placed on employers and we allow those expenses to increase indefinitely at twice our GDP.  America’s reliance on a private insurance model of providing health care produces inferior health outcomes at roughly twice the expense (relative to GDP) of some developed European nations.

The paradox is that the bad news is the good news.  Because the real crisis will be felt in the private sector and will force that sector to recognize that health care costs can and must be contained if they wish to survive there are better prospects that businesses will decide not to continue down a suicidal path.  The private sector has the political power and marketing skills to implement a strategy that recognizes that “somebody has to pay” and proceeds to adopt proven policies that provide universal health care paid for by the government at a far lower cost than the wasteful U.S. model based on private health insurance.