Dana P. Goldman and Neeraj Sood
A little-known proposition amid the highly charged health care debate is that properly controlling health care spending could generate economic growth equal to 1 percent of gross domestic product.
It may not be obvious that cutting health care spending would stimulate the economy. After all, delivering health care also means jobs. If we spend less on health care, doesn't that mean fewer jobs for health workers? And if cutting health care spending leads to worse health, wouldn’t more people take more sick days or leave the work force entirely? One might believe that any attempt to trim spending on health care would trigger more unemployment and lower productivity.
The fact, however, is that much of our health care spending is wasteful. The U.S. spends more on health care than any other industrialized nation, yet our population fares worse than many others. Unnecessary surgical procedures are a good example of how the U.S. overinvests in often-ineffective treatment at the expense of prevention. This spending adds nothing to our economic output – let alone the damage it does to our health.
The goal of health reform should be to slash health care spending that does not improve health outcomes. President Obama's advisors estimate the potential savings to the private sector at $140 billion annually. Our research suggests that such savings are ambitious, but attainable. In a $14 trillion economy, this amounts to about 1 percent of economic output.
But who would benefit from the money we don’t spend on health care we don’t need? It could end up in three places: insurance coffers, employers’ wallets, or workers’ pockets. Let’s consider each.
If companies and individuals spend less on health care, insurers will naturally try to keep most of the savings, simply by maintaining the health insurance premiums their customers now pay. Insurance companies and their shareholders would reap higher profits. That would stimulate the economy, but the effect would be minimal.
Fortunately, such a scenario is unlikely, as the health insurance market is very competitive. Insurers who did not reduce premiums when health care costs fell would risk losing market share to their competitors.
It is more likely that employers, who pay a large fraction of health care costs, would benefit the most from cutting wasteful health care spending.
Business leaders frequently complain that skyrocketing health care costs erode their competitiveness and lead them to move jobs overseas. Lower health care costs would make it cheaper for employers to hire workers at home.
Our estimates indicate that it’s equivalent to giving employers a tax break of $1,285 annually for each full-time job they keep in the United States. Past experience suggests that this tax break will create about 1.1 million new U.S. jobs, and the economy overall would grow by $120 billion.
The final scenario has employers passing on the savings from lower insurance premiums to their workers. Research from a variety of policy contexts—including worker compensation, maternity benefits, and Social Security—suggests that this is the most likely outcome.
Cutting health care costs will put money back in workers’ paychecks – in effect, the equivalent of a permanent tax cut. Some of this money would be saved. But the majority would flow back to the economy as increased spending. The economic stimulus would be similar to making the Bush tax cuts permanent – about a $100 billion increase in GDP.
In the end, though, no matter where the savings go, the entire economy will prosper from cutting wasteful health care spending. It would spare patients from unnecessary and potentially risky medical procedures.
And it would do what bailout efforts never can: provide tax breaks to businesses and workers without increasing government spending.
Editor's Note: Dana Goldman is director of health economics and Neeraj Sood is a senior health economist at the RAND Corporation, a nonprofit, nonpartisan research institution. Both are also on the faculty at the University of Southern California.
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