Expand Locally, Spend Nationally: Why Jumpstarting Local Economies through Health Care Expansions Hampers Federal Deficit Reduction Efforts

News Release
Aug. 16, 2011

FURTHER INFORMATION, CONTACT:
Alwyn Cassil (202) 264-3484 or acassil@hschange.org

WASHINGTON , DC—Understanding why health care spending growth is a problem from a national perspective, while simultaneously an attractive way to promote economic growth from a local perspective, is key to identifying ways to finance health care that better align local interests with those of the nation, according to a commentary published today by the Center for Studying Health System Change (HSC).

Increasing spending on health care is not necessarily a problem—advances in medical capabilities have clearly produced tremendous benefits. But the U.S. health system is clearly not at the frontier of efficiency raises the possibility that additional spending has less value than the resources sacrificed to pay for it, according to the Commentary written by HSC Senior Researcher Chapin White, Ph.D., and HSC President Paul B. Ginsburg, Ph.D., and funded by the Robert Wood Johnson Foundation.

For an economically distressed community, expanding the health care sector can be appealing on several levels: health care is relatively recession-proof; jobs in health care are relatively high paying;  and demographic and technological trends make it likely that the industry will continue to expand for the foreseeable future.

Another factor that makes health care expansion an attractive way to restore prosperity to a local community is that a significant portion—roughly 60 percent to 70 percent—of the spending for additional services will come from outside the community because of the way health care is financed, according to the authors.

“If all of the costs of increased health spending were financed by local residents, the attractiveness of strategies to expand the health care sector would be diminished,” the authors state. “But given the way health spending is financed in the United States, much of the burden of increased spending on health care will, in fact, be borne outside of the community.”

In essence, expanding health care services locally results in higher spending nationally, particularly through Medicare and Medicaid but also because of revenue losses through the favorable tax treatment of employer-sponsored health insurance. In turn, higher health care spending contributes to higher federal deficits. 

“So communities have incentives to expand health care capacity to generate local economic benefit, but when many do this, the nation as a whole falls behind as health care spending continues to grow at a much faster pace than the economy,” the authors state.

“Probably the most effective strategy for the nation would be to address the open-ended nature of health care financing. The unlimited nature of the tax exclusion for employment based coverage means that the federal and state governments are silent partners to various aspects of health care that increase costs,” the authors conclude.

Possible ways to align local and national interests include:

• limiting the tax exclusion for employer-sponsored insurance sooner—before 2018—and on a much broader scale than was done in the Patient Protection and Affordable Care Act;
• creating incentives to motivate localities to focus on Medicaid cost containment because the federal-state financing of Medicaid diffuses incentives for localities to limit the costs of the program;
• making structural changes to Medicare benefits and beneficiary premiums to engage beneficiaries in the cost of their care; and
• reforming provider payment to reduce the role of fee for service and to put providers at financial risk for more of the costs of patient care to limit the local financial gains from boosting the volume of care through local capacity expansions.

The Commentary—Working at Cross Purposes: Health Care Expansions May Jumpstart Local Economies but Fuel Nation’s Fiscal Woes—is available online at www.hschange.org/CONTENT/1228/.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is affiliated with Mathematica Policy Research.