The Love-Hate Relationship between the U.S. Healthcare Industry and the U.S. Economy The healthcare industry plays an important part in the economy of the United States. The sustained increase and high level of spending on health care has been the subject of discussion and scrutiny for several decades. The enactment of the Patient Protection and Affordable Care Act of 2010 (ACA) was hardly the first fiscal policy for healthcare in the history of the economy. There is a long list of fiscal policy attempts from predecessors such as Franklin Roosevelt, Harry Truman, Richard Nixon and most recently Bill Clinton (Sparer, p462). In 1933, Franklin D. Roosevelt drafted amended provisions to his pending Social Security legislation to include publicly funded health care programs but ultimately removed the provisions due to opposition by the American Medical Association (Coombs, p5). Following the Second World War, President Harry Truman called for universal health care as a part of his Fair Deal in 1949 but strong opposition stopped that part of the Fair Deal (Peon, p161-168). On July 30, 1965 President Lyndon B. Johnson signed into law the legislation establishing the Medicare and Medicaid program, social insurance programs administered by the United Stated government providing health insurance coverage to people who are either 65 or meet other special criteria for need (Roemer, p845). In October 1972, President Richard Nixon signed the Social Security Administration Amendments of 1972 which extended Medicare to those under 65 who have been severely disabled for over two years (Ball). The 1980’s saw the passage of The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) signed by President Ronald Reagan, which allowed employees the ability to continue health coverage after leaving employment (Ross, p21). The early 1990’s brought the Clinton Administration and with them a major concern for health care reform (Kahn, p43). The debate in the 2008 presidential election offered both major party candidates providing positions on health care and the future of government funding in the industry. President Barack Obama signed the Patient Protection and Affordable Care Act (ACA) on March 23, 2010 establishing a Patient Bill of Rights as well as expanding medical coverage eligibility to millions of Americans (www.hhs.gov).
Healthcare is a major economic driver of federal and state budgets through the Medicare and Medicaid programs. For households, resources expended for healthcare can have a spillover effect by preventing those resources from being available for other items such as rent, utilities, savings or education expenses. Gross domestic product (GDP) is defined by Wessels as the market value of final output produced within borders of a nation (Wessels, p623). GDP is one of the primary indicators used to gauge the health of a country’s economy. There are two ways to measure GDP of a nation (Wessels, p71). The income approach is calculated by adding up total compensation and wages (Wessels, p73). The expenditures method is the more common approach and is calculated by adding total consumption, investment, government spending and net export (Wessels, p71). Gross domestic product represents economic production and growth therefore having a significant impact on nearly everyone within that economy.

To further investigate the relationship between gross domestic product, the Federal Funds Rate and the health care industry a regression analysis is carried out. All regressions were estimated with data obtained from the Bureau of Labor Analysis, reported in Table 1, using GRETL software with the results from both specifications reported in Tables 2 and 3. YEAR | HOSPITAL | Table 1: Annual Date on the Healthcare Industry for the years of 1997-2012 with Corresponding Gross Domestic Product in the United States

Table 1: Annual Date on the Healthcare Industry for the years of 1997-2012 with Corresponding Gross Domestic Product in the United States

GDP | 1997 | 271.3 | 8.609 | 1998 | 290 | 9.089 | 1999 | 303.5 | 9.661 | 2000 | 320.8 | 10.285 | 2001 | 346.7 | 10.622 | 2002 | 382.6 | 10.978 | 2003 | 409.4 | 11.511 | 2004 | 435.9 | 12.275 | 2005 | 470.6 | 13.094 | 2006 | 503.2 | 13.856 | 2007 | 531.1 | 14.478 | 2008 | 566.5 | 14.719 | 2009 | 603 | 14.419 | 2010 | 623.4 | 14.964 | 2011 | 657.2 | 15.518 | 2012 | 698.5 | 16.163 |
Source: Bureau of Labor Analysis, U.S. Department of Commerce

Table 2: Regression analysis of Healthcare Industry for the years of 1997-2012 on Gross Domestic Product in the United States

Table 2: Regression analysis of Healthcare Industry for the years of 1997-2012 on Gross Domestic Product in the United States

The R-squared value of 0.969110 is close to 1 indicating a strong relationship between the variables of gross domestic product and the healthcare industry. The p-value of (F) reflected at 5.70e -12 falls below .05, or 5%, therefore revealing that the equation, as a whole, is statistically significant. The regression analysis overall suggests a statistically significant positive relationship between gross domestic product and the healthcare industry.
Table 3: Regression analysis of Healthcare Industry for the years of 1997-2012 on Gross Domestic Product and the Federal Funds Rate in the United States

Table 3: Regression analysis of Healthcare Industry for the years of 1997-2012 on Gross Domestic Product and the Federal Funds Rate in the United States

The R-squared value of 0.981037 is close to 1 indicating a strong relationship between the variables of gross domestic product, the Federal Funds Rate and the healthcare industry. The p-value of (F) reflected at 6.40e -12 falls below .05, or 5%, therefore revealing that the equation, as a whole, is statistically significant. The regression analysis suggests a statistically significant relationship between gross domestic product, the Federal Funds Rate and the healthcare industry however also suggesting that GDP has a greater significant impact on the healthcare industry than the Federal Funds Rate.

Chart 1 shows the growth in health spending for the period 1965 to 2012, as well as what the prediction of health spending would have been based solely on inflation and changes in real GDP. This chart illistrates the striking relationship between health spending and the economy, with health spending growth cycling up and down over time closely in sync with macroeconomic measures (Kaiser).
Guide to the 50 Economic Indicators That Really Matter authors Constable and Wright have identified 50 off-the-beaten-path indicators based on the following criteria: consumption indicators, business investment indicators, multiple component indicators and inflation, fear and uncertainty indicators. With regard to the relationship between the economy and healthcare the major concern is that rapid increases in health care spending can affect major economic indicators such as per capita GDP, employment and inflation (Gerber). Constable and Wright refer to these same indicators, in their own unique perspective on measurement of the status of the economy, as per capita GDP, the “Vixen Index” and the Producer Price Index (Constable and Wright).
The effects are likely to occur across all sectors of the economy-governments, businesses and households—as all these interrelated sectors play an important role in the provision, financing and consumption of health care in the United States. Federal, state and local governments collect taxes from businesses and households to finance public health insurance programs and to directly provide health care to households. Businesses provide employment to U.S. households and also provide health insurance to their employees. Households are the final consumers of health care and also bear some proportion of health care costs. National health spending in July 2014 grew 4.3% over July 2013 (Altarum). The effects of health care costs on one sector are likely to affect outcomes in other sectors with the overarching and encompassing touch points of the health care industry. For example, faced with rising health care costs governments might attempt to reduce health spending by reducing eligibility for public health insurance, consequently increasing uninsurance rates among households. The increase in health care costs might also prompt governments to raise taxes, increase borrowing or reduce investments in other critical sectors such as education and infrastructure, suppressing economic growth and effecting both businesses and households. The reason that rising health care costs have major implications for government budgets is simple: almost half of health care is paid for by the Federal, State and Local government through Medicare, Medicaid, Children’s Health Insurance Program (CHIP) and other programs (The Economic Case for Health Care Reform, p6). This amount is expected to grow in the years ahead as more of the baby boom generation becomes eligible for Medicare and as enrollment in Medicaid and CHIP increases.
U.S. companies faced with rapidly growing health care costs might reduce employment and investment in the U.S. economy. Rising health care costs could also fuel inflation in the U.S. and make U.S. goods and services less competitive in international markets over time, because increasing health care costs might eventually be reflected in higher product prices passed from the suppliers to the consumers (Gerber). Health care prices in August 2014 were 1.7% higher than in August 2013 (Altarum). Since most other nations do not have employer-sponsored health insurance, companies in those nations may be better able to keep prices low. It is not surprising that inflation and GDP are significant drivers of health spending growth. Changes in real GDP – reflecting recessions and periods of economic growth – are primarily a function of changes in consumer spending, so it makes sense that consumers will also respond to broader economic changes by adjusting spending on health care as well.
The Great Recession of 2007-2008 is often associated in the United States with subprime mortgage crisis and financial crisis. In the financial world it is an accepted wisdom that health care, the largest sector of the economy is the most recession-proof in times of economic hardships experienced in other industries (Arnst). The line of thinking is that people get sick no matter what is happening in the economy (Arnst). The industry added jobs in every month from January 1990 through December 2013, save for a month in the summer of 2003 (Appelbaum). Through the 2001-2002 recession the healthcare industry experienced the lowest demand for hospital services ever documented (Arnst). During this same time frame, unemployment rose from 4.2% to 5.6% and more than 1 million American lost their health-insurance coverage (Arnst). By August 2003, when the economy was recovering, only an estimated 137,000 people had regained health coverage. Since the start of the recession in December 2007, health spending through July 2014 has increased by 15.8% at an annual rate of 2.3% (Altarum). During this same period, real GDP, fell more than 6% in mid-2009 and is now 5.4% above its December 2007 level (Altarum). Since the start of the recession in December 2007 health care prices have increased by 14.7%, while the prices in the economy as a whole have increased by 10.5% (Altarum). In 2008, health care was estimated to be 17% of the gross domestic product of the United States with the expectation to increase to 20% of GDP by the year 2015 (Arnst). A significant struggle for hospitals during the 2008 economic crisis was the credit markets taking their toll on nonprofit hospitals, which fund their capital spending with variable-interest bonds. The rising cost of borrowing can’t be passed along right away with higher prices for medical care because Medicare, Medicaid and most insurers negotiate reimbursement rates in terms of two-year contracts (Arnst). To balance this challenge many hospitals delayed or cancelled capital investments during this timeframe (Arnst). Immediate and emergency fiscal policy interventions in many major economic systems worldwide were necessary. As the crisis developed into a genuine recession, economic stimulus meant to revive economic growth became the most common policy tool. After having implemented rescue plans for the banking system, major developed and emerging countries such as China, the Europe and the United States, announced plans to relieve their economies through fiscal policy interventions.
Reactionary to the recession of 2007-2008, in February 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). The primary objective of the ARRA was to save and create jobs almost immediately (CBO Report February 2012, p1). Secondary objective was to provide temporary relief programs for those most impacted by the recession and invest in infrastructure, education, health and renewable energy (CBO Report February 2012, p1). Included in the ARRA was the enactment of the Health Information Technology for Economic and Clinical Health Act (HITECH Act) as well as $155.1 billion slated for allocation to health care spending (www.recovery.gov). By the end of 2009, the CBO estimated that ARRA would positively impact GDP and employment with an increase in GDP of between 1.4% and 3.8%, 1.1% and 3.3% by the end of 2010, between .4% and 1.3% by the end of 2011 and a decrease of between zero and .2% beyond 2014 (Elmendorf). The combination of tax cuts, emergency support for the newly unemployed, fiscal support for states, and a range of investments from infrastructure improvements to energy played their intended roles. The five year impact report prepared for Congress in February 2014 stated that the Recovery Act: (1) saved or created an average of 1.6 million jobs a year for four years through the end of 2012; (2) raised the level of GDP by between 2 and 3 percent from late 2009 through mid-2011; (3) the cumulative boost to GDP from 2009 through 2012 is equivalent to 9.5 percent of fourth quarter of 2008 GDP (Council of Economic Advisers, February 2014).
In March 2010 the Patient Protection and Affordable Care Act (PPACA) was enacted with the goals of increasing the quality and affordability of health insurance, lowering the uninsured rate by expanding public and private insurance coverage, and reducing the costs of healthcare for individuals and governments (Pear). While the Affordable Care Act is the most recent and one of the largest pieces of health care reform enacted in American history, the reforms mandated in the act failed to include revenue sources for the new required services.
Since the signing of the fiscal policies of 2009 and 2010 spending on health care as a share of GDP in 2010 dropped slightly in 2010 for the first time since 1997 (Mangan). The slight drop in the health-care sector’s share of the economy-from 17.3 percent of gross domestic product in 2011 to 17.2 percent in 2012-came as overall growth in health-care spending remained relatively low for the fourth consecutive year (Mangan). In 2012, health-care spending rose a modest 3.7 percent over the prior year to $2.8 trillion. Total health spending works out to $8,915 per person (Mangan). Since 2009, the rate of increase in such spending has hovered between 3.6 percent and 3.8 percent annually, according to data compiled for the federal Centers for Medicare and Medicaid Services. The growth rate during that four-year span is the slowest ever recorded in the 53-year history of the National Health Expenditure Accounts data (Mangan). Changes in technology and in the way care is delivered as well as paid for is clearly part of the story of the slow growth rate. An analysis in 2013 conducted by David Cutler, a Harvard economist who was President Obama’s chief health care adviser during the 2008 presidential campaign, attributed 37 percent of the decline in health care spending from 2003 to 2012 to the recession and another 8 percent to specific changes in federal health spending. Expensive innovations like new drugs are arriving and a new focus on efficiency appears to be reducing costs (Appelbaum). In 2014 alone, the CBO expects that 12 million Americas are expected to gain insurance coverage between the mandate, the insurance exchanges, and the Medicaid expansions at the state level (Diamond). That means more paying customers for providers, who have struggled for years to treat uninsured patients and racked up bad debt as a result. The spillover effect will be reflected in the budgets at the federal and state levels.
The economic growth that accompanies the health care sector also produces ever-growing costs. Federal health entitlement programs alone are projected to balloon from less than 6 percent of gross domestic product in 2013 to more than 10 percent in 2037, according to the Congressional Budget Office, when those same programs will exceed spending on all other government functions except Social Security (Sanger-Katz). About half of that increase can be attributed on an aging population and the expanded benefits under the 2010 Affordable Care Act but the other half are the annual increases in spending for each individual’s care (Sanger-Katz). Although most states and cities used the healthcare industry to bring federal tax dollars into local economies, those streams are drying up. The Affordable Care Act will lower future hospital payments, and new payment models are designed to encourage more efficient care around the country. The ongoing deficit debate suggests that funding streams from Washington may dwindle even more. Moving forward and across the country, growth will likely be constrained by what the communities can afford. Unlike other industries such as manufacturing, health care is generally not an export business as patient care is provided in the community and must be paid for with local resources. In the current system, insurers pay providers for each test and surgery they perform, more services mean more revenue. The new models being developed as a results of the mandates contained in the Affordable Care Act (remember-lower reimbursement rates, more efficiency, higher quality of care standards) are meant to clamp down on unnecessary care by paying the providers for health outcomes instead of medical treatments. For example, under newly designed payment models, the providers would receive higher reimbursement rates for patient populations that experience decreased re-admissions rates therefore keeping those populations out of the hospital will actually increase federal reimbursement rates for those providers and facilities from the government. Hospitals have begun facing penalties if too many patients who leave the hospital return within 30 days. The transformation of healthcare will need to begin in the doctors’ offices with all health care professionals trying to work “at the top of their license”. Nurses, instead of doctors, administer a flu shot. Medical assistant, instead of nurses, take patient vitals. Medical assistants can check blood pressures. This transformation may not reduce the total number of jobs, but it will shift the total cost down. Average annual projected growth of 6% per year is projected for 2015 through 2023, largely as a result of the continued implementation of the ACA coverage expansion, faster projected economic growth, and the aging of the population (National Health Expenditure Projections 2013-2023). Health spending is projected to be 19.3% of GDP by 2023, up from 17.2% in 2012 (National Health Expenditure Projections 2013-2023). No matter how wisely fiscal policies are set, no matter how wisely the dials of monetary policy are turned, a nation’s prosperity depends on much more. Misguided fiscal or monetary policies can do enormous damage to an economy and they, in themselves, cannot create prosperity or opportunity. Healthcare has gone through many transformations and as time progresses, the healthcare system can slowly change the face of the U.S. economy.

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