Code Red: Two Economists Examine the U.S. Healthcare System

December 29, 2008

Health Reform and Economic Stimulus: A Good Match?

Filed under: Health IT,Health Reform,Medicaid — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 8:54 am

William White:


In our last blog I argued that paradoxically, the worse the economy gets, the more likely it is that Congress will enact some sort of health reform.  Continued growth in the ranks of the uninsured will demand legislative action.  President-elect Obama has a new argument for reform: economic stimulus.

The basic rationale is straightforward.  Faced with the prospect of a deepening recession, we need to jump start the economy.  Bailing out the banks isn’t working because they are sitting on the money.  We need to inject funds directly into the economy to preserve jobs and boost spending.  Increasing health care spending seemingly offers a twofer, promoting growth and reform at the same time.

The argument hinges on two basic points.  The first is whether health care is in fact a good vehicle for stimulus.  The second is how well the goals of stimulus are likely to match up with proposed reforms. The devil, of course, is in the details, and so far, the details are pretty sparse.  Press reports indicate Obama’s draft stimulus plan includes two main health components: $100 billion in aid to the states to support Medicaid and $50 billion for health IT.

Several factors make increased Medicaid funding a good candidate for stimulus.  First, with the states’ budgets collapsing, there seems little doubt that funding will be spent rather than hoarded.  Second, benefits from increased spending are likely to diffused across the whole economy; in communities across the nation, hospitals and other healthcare providers are typically major local economic players.  Third, not only are Medicaid beneficiaries among the most needy, but health care employs large numbers of low wage workers who are particularly vulnerable in a downturn.  A possible negative is that the benefits of augmenting Medicaid funding could be partly offset by “crowd out” of private insurance.  However, in the current environment, even if some crowd out occurs, this could still be a plus if the alternative to firms off loading coverage is cutting back employment.

In the case of health IT, it is certainly true that the health care industry has been woefully slow to invest in the past.  It also true that in the current crisis, new IT investments are likely to go to the back of the queue.  The key question is the ability of the industry to absorb a large injection of new funds in a sensible fashion.  This brings us to the issue of how good a match it is to package reform goals with those of economic stimulus.

If it comes off, the current stimulus plan would represent the first major installment of Obama’s health reform proposals.  The attraction is that it could mean some important components of reform could quickly be put in place in advance of a general debate.  The concern is that by its very nature, stimulus legislation is going to be fast tracked— press reports indicate the Obama team is seeking a bill by early January— with the strong possibility that underlying strategic considerations may get sacrificed to fiscal expediency.


David Dranove:


For once I don’t think you are crazy.  Health care is produced using lots of labor and lots of domestically-made products.  Increased Medicaid spending is one of the best ways to grow the economy.  And think of all the grateful state legislators!

President-elect Obama has talked about investing in infrastructure.  I can think of no more important infrastructure investment than health IT.  $50 billion should be enough to put electronic medical records in every physician’s office.  Obama should also require that all physicians abide by common software that permits true integration across practices.  This is in investment that should pay for itself in dollars and lives saved.  But will physicians view this as an act of generosity or a Trojan Horse?  (You know the saying: “Beware of Baracks bearing gifts.”)  Most of the cost savings from health IT will come from elimination of duplicative tests and unnecessary procedures.  But one patient’s unnecessary procedure is another surgeon’s car payment.  It may take another $50 billion in increased Medicare and Medicaid payments to convince MDs to join the 21st century.


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