The Truth About Health Care Reform and the Economy

Separating economic fact from economic myth

Editor's Note: Reason columnist and Mercatus Center economist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.

Myth 1: Health care reform will reduce the deficit.

Fact 1: Health care reform will increase the deficit.

The Patient Protection and Affordable Care Act includes many provisions that have nothing to do with health care: the CLASS act, a student loan overhaul, and many new taxes. These provisions don't change the health care system. They just raise money to pay for the new law. Strip them away and the law's actual health care provisions don't lower the deficit—they increase it!

The chart below uses data from Congressional Budget Office (CBO) to clarify the fiscal consequences of health care reform.  

As you can see, from 2012 to 2021, the Congressional Budget Office estimates that the health care act will reduce deficits by $210 billion (note that this estimate differs from the widely cited $143 billion figure used during the lead-up to the passage of the act). During this same time period, however, the actual health care reform provisions of the law will increase deficits by $464 billion.

Of course, one should not evaluate the health care legislation on its fiscal impacts alone. In theory we should get some fiscal benefits. But the key question is how they net out. Still, no matter what you think about the benefits of the health care legislation, it is incorrect to claim that health care reform will save money. It won't.

Myth 2: The U.S. health care system is a free-market system.

Fact 2: Roughly half of all U.S. health care is currently paid for by the government.

Even in the absence of the health care reform law, government programs including Medicare and Medicaid already fund almost half of American health care. Roughly a third of the remaining expenditures are funded by private insurers—mainly through subsidized and highly regulated employee plans. Not exactly a free market.

As this chart shows, state and federal entities make up over half of the health insurance market. Of course, the Patient Protection and Affordable Care Act will only increase the share of government involvement in the health care market.

Myth 3: Medicare spending increases life expectancy for seniors. Reductions in Medicare spending will therefore reduce their life expectancy.

Fact 3: Increases in life expectancy for seniors are due to increased access to health care, not to Medicare.

While Medicare spending has certainly decreased seniors' out of pocket health care expenses (by 1970, Medicare reduced out of pocket expenses by an estimated 40 percent relative to pre-Medicare levels), the program's effect on mortality is much less clear.

This chart compares mortality rates by age during the periods immediately before and after Medicare's implementation. As you can see, there is little difference in the observed mortality of men and women during these time periods. This observation is supported by the economic literature.

Economists who examine the effects of Medicare on mortality have found little evidence of a causal relationship, especially in recent years. For example, MIT's Amy Finkelstein and Wellesley's Robin McKnight used several empirical approaches and found no evidence that Medicare played a role in the substantial declines in elderly mortality that followed its implementation. Instead, they write, their evidence suggests that,

the explanation lies in the fact that, prior to Medicare, lack of legal access—rather than lack of insurance—was the main barrier to receiving hospital care when individuals had life threatening, treatable conditions.

Other economists, writing at the Chicago Federal Reserve, have found that Medicare did reduce mortality rates immediately following its implementation. But they also found that the effects of Medicare on mortality have been diminishing ever since. These researchers found that by the mid-1980s, there is no evidence of Medicare having any effect on mortality. As legal access to the health insurance market for the elderly has expanded over time, whatever effect Medicare once may have had on mortality has since disappeared.

Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.