You are using an outdated browser.
Please upgrade your browser
and improve your visit to our site.
Skip Navigation

A Healthy Economy

Medicine is the best stimulus.

As we move deeper into the recession, most economists are urging President-elect Obama to spend big money right away in order to stimulate and prop up the economy. The sticking point for a lot of people, however, is the long-term budget picture, especially given that Obama is planning to keep most of his predecessor's tax cuts. How are we going to drop huge sums of money on job creation and fiscal stimulus right now without continuing to suffer through yawning budget deficits years down the road?

In fact, we have a magic bullet for short-term spending and long-term saving--health care reform. During the campaign, skeptics complained that a health care overhaul would involve a lot of upfront costs and that the saving would only come later. But that's exactly what we need right now. Health care involves major spending in the near future, but, more than other initiatives, it will put a brake on federal outlays in the far future.

All this argues for temporarily throwing fiscal caution to the wind when it comes to health care reform. The idea of spiking the deficit now may seem frightening, but it's a lot better than the alternative--and it could actually make it easier to bring universal health care to America.


When talk turns to economic stimulus, health care usually gets short shrift. Perhaps that's because we are so used to thinking of health care as something we should spend less on; or perhaps it's because we assume that health care spending goes straight into doctors' pockets and hospitals' budgets. Yet, when done right, the biggest effect of broadening and upgrading coverage is to immediately help struggling families. The typical items on the stimulus menu--infrastructure spending, general aid to the states, benefits for the jobless, investments in new forms of energy--have a lot going for them. But they shouldn't blind us to the fact that government health spending is also an extraordinarily effective way to boost the economy.

After all, health care isn't a luxury good, like a flat-screen television--something you can put off when money is tight. People do economize on health care when times are tough, but only so much and with serious risks, both physical and financial. The better way to think about health care is like an upfront deduction from family income. If you make that deduction smaller, families have more to spend on other things, improving their own situation and the economy in general.

Today, however, the health care deduction is big and getting bigger. Despite widespread complaints about "overinsurance," the amount people pay for health care out of their own pocket has risen substantially as a share of personal income over the last generation, and especially in the last decade. The Commonwealth Fund recently completed two massive surveys showing that the proportion of adults younger than 65 with health insurance who spent more than 10 percent of their income on health care out of pocket (5 percent for low-income adults) skyrocketed from 13.8 million in 2003 to 21.8 million in 2007, as health plans hiked deductibles and co-payments, denied claims more aggressively, jacked up costs for out-of-network care, and so on. What's more, almost all of the increase occurred among families with higher incomes--meaning that high health care costs have become a standard deduction for the middle class.

The problem is, of course, far worse for those who lack health insurance. Indeed, if you add the ranks of the uninsured to those without adequate coverage, you have more than 40 percent of the working-age population in an immediate economic bind because of medical costs. About half these people--slightly more of the uninsured than the underinsured, but not much more--report severe problems paying their medical bills. These are the families accounting for the 40 percent to 50 percent of people in bankruptcy or foreclosure who say health care is the number one reason for their plight.

So fixing health care isn't just a recipe for better access to medical care. It's an immediate economic lifeline for working families, giving them back part of their income to use on other things. It's also a rescue package for state and local governments burdened by Medicaid and S-CHIP, for doctors and hospitals who treat the uninsured and inadequately insured, for community institutions that help people in distress--in short, for all the rapidly fraying threads of our health care safety net. Put simply, most of the money we spend upgrading coverage and spreading it to the uninsured is going to go directly into the pockets of people who need help now.

Spending money in the short term is also the best way to make health care reform salable. To grasp this surprising point, it helps to understand how different today's situation is from the one that Bill Clinton faced in 1993. Then, the economy was already coming out of recession, meaning that deficit reduction was the order of the day. So the Clinton reformers made big promises about how they would save big money immediately--and backed them up with a massively regulatory plan designed to get people quickly into tightly managed HMOs.

The result was political disaster. As Theda Skocpol of Harvard has argued, the Clinton plan was almost tailor-made to scare Americans into thinking health care would be rationed, while providing ammunition for anti-government conservatives. Moreover, in order to rein in federal spending, the plan didn't include enough handouts to appease interest groups and was far too complex and overambitious, aiming to pull almost everyone out of employer-based insurance overnight.

Reformers shouldn't make the same mistake this time around. Freed from the strictures of short-term budget balance, they can instead do what all other countries did when creating their national health programs: buy off the opposition. Britain's health minister was once asked how he had gotten doctors on board for the National Health Service. His reply: "I stuffed their mouths with gold." Money may not change everything, but it does make it easier to win friends, or at least divide and placate them.

It also makes it easier to attract public support. Americans tend to fear that reform will impair the quality and raise the costs of the care they already have. Moreover, most don't believe our nation spends too much on health care; they believe they spend too much. The way to get reform is to give Americans what they want--better coverage at lower cost, made possible in the short term by a major infusion of new federal dollars.

For this to work, reform has to be simple and unthreatening. People should be able to keep employment-based coverage if their employers provide it (with new government help to lower the cost). If they don't have workplace coverage, they should be automatically enrolled in a national framework that gives them a choice between a good public insurance plan and competing private plans. The faster everyone is in the system, the faster money flows into people's pockets, and the sooner reformers start reaping the political rewards.


And the faster all that happens, the better situated we are to start the difficult but essential task of controlling long-term health spending. Without runaway health spending, as Henry Aaron of the Brookings Institution has shown, the future fiscal picture of the federal government looks surprisingly rosy, even if taxes stay right where they are as a share of the economy. With runaway health spending, it looks catastrophic. Plus, as bad as the federal picture looks, it's prettier than what businesses and workers are facing. According to Sarah Axeen and Elizabeth Carpenter of the New America Foundation, if employer-sponsored insurance premiums and family income rise at the same rate they have for the past decade, an average family health plan will cost more than 45 percent of a typical family's income by 2016.

Lowering costs might not happen fast, but it is possible in the long term. There are some relatively easy and quick ways to bring down costs, like streamlining administration and reducing the rate of payment increase for specialty services and prescription drugs. But a good deal of the savings have to come from using resources more efficiently--and here, again, spending now will help us spend less later. The federal government invests a pittance in health-information technology and comparative-effectiveness research, and we know the private sector won't make these investments on an appropriate scale. These are public goods that require public investment. A Manhattan Project to collect health-outcomes data, develop new practice guidelines and quality measurements, and really test the effectiveness of new medical technology won't come cheap. But it will make health care cheaper--and, more important, better at improving health--in the long run.

The beauty of all this spending is that it will mean higher wages and employment, a more flexible labor market in which people feel free to change jobs or strike out on their own without risking their health and finances, and, yes, less pressure on public and private budgets down the road. We'll be running up hefty federal bills for a while. But we'll be doing so confident we're going to improve the economic standing of millions of Americans and our long-term budget situation in the bargain.

Jacob S. Hacker is co-director of the Center for Health, Economic, and Family Security at U.C. Berkeley, and a fellow at the New America Foundation. He recently edited Health at Risk: America's Ailing Health System--and How to Heal It.

By Jacob S. Hacker