As FT Alphaville noted in the aftermath of the signing into law of the Obama administration’s health care bill, US companies are waking up to the reality of what health care reform means for them.

Back at the White House, administration officials have challenged companies’ assertions that they will be negatively affected by the reform, saying attendant tax changes  were “nothing compared to the enormous financial benefits” the companies would receive under other measures included in the legislation.

Moving away from the micro, Ethan Harris at Bank of America Merrill Lynch argued in a note that while “we see virtually no impact on the current economic recovery from the health care reform recently signed into law, but we are concerned about the continued failure to address the long-run budget challenges.”

Here’s more from Harris and BofAML, emphasis FT Alphaville’s:

According to CBO estimates the plan will cost $940bn over the next 10 years, while expanding health care coverage from 83% of legal residents today to 95% by 2019. The plan also causes wide-ranging changes in a sector that makes up about one-sixth of the US economy. Clients are asking: could this undercut the nascent economic recovery and what does it mean over the longer term?

As Table 3 shows, both the funding and the plan itself are phased in with a long lag. The only revenue measure before 2013 is a $2.5bn fee for drug makers starting in 2011. This is peanuts compared to the $787bn stimulus plan working its way through the economy. The real shocks are in 2013 – when Medicare taxes go up – and 2014 – when employers are mandated to offer health insurance or pay a per-employee penalty. Since the health care mandate doesn’t start for 3 ½ years, it is unlikely that it impacts current hiring.

Harris then invokes Ricardian Equivalence by way of a counter argument:

A more subtle argument relies on the theory of Ricardian Equivalence (RE): the idea that households adjust their spending today in anticipation of higher taxes in the future. In this case, higher expected taxes on high-income households should encourage them to spend less and save more today. Taking this argument a step further, they may see the Medicare tax hike as a signal of even more tax hikes to come, causing even more saving. If correct, the health plan could hurt current growth.

But he swiftly dismisses it:

how could an economist dismiss a model where people are assumed to act like economists? However, there are three reasons to be skeptical about its quantitative importance. First, studies show that about half of households tend to simply spend their income and have very low savings. For these households, future taxes are a distant concern. Second, the empirical support for Ricardian Equivalence is weak at best…Third, the Obama plan is a spit in the ocean relative to the other long-run deficit problems. With or without the plan, health care costs will likely continue to grow rapidly and the overall budget deficit will surge. With or without the plan, in the long run taxes are very likely to go up, and upper income taxes are likely to rise the most.

Of course in the long run…

The CBO estimates that the plan lowers the budget deficit by $143bn over the next decade. However, the CBO also is clear about the upside risks to this number. About half of the financing comes from constraining Medicare payments for most medical services. Specifically, spending per beneficiary is assumed to fall from its 4% trend to just 2%. If we assume the old growth path, the whole deficit improvement disappears.

Our guess is that the plan will add $50 to $100bn to the deficit over the next decade. Compared to prior health care legislation – such as the prescription drug benefit under President Bush – this is a small addition to the deficit. However, two wrongs don’t make a right. As we have argued before, once the economic crisis is past, the US needs a credible plan to bring down the deficit, including real cost restraints in health care. This is not it.

Related links:
[The] US health bill…is providing all manner of investment recommendations‘ – Lex
The healthcare party is over – now comes the (accounting) hangover – FT Alphaville
Don’t Get Mad, Profit from Health-Care Reform – TechTicker

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