Healthcare and the Fiscal Cliff

The Fiscal Cliff stories are everywhere and as a result, lots of misinformation, conjecture, and supposition of deals, no deals and what happens next abound within the media.  The economist in me can’t help but opine on the economics at stake but for this purpose, I’ll take only a slice of the overall issues; a healthcare slice.

Suffice to say, the issues on the table are polarizing and complex as the intricacies of policies current, past and yet in transit are all actors in a grand ideological play.  If for example, I chose to take each possible issue that is part and parcel to the Fiscal Cliff discussions singularly, elaborating on what the issue is, why it is part of the discussions, and the pros and cons of addressing the same temporarily or permanently, I would pen the equivalent of War and Peace.  The healthcare elements are complex enough and below, I’ve done my best to summarize and focus.

• Obama Care/PPACA: This is the grandaddy of conundrums at the table, ideologically and practically.  The ideological issues are clear while the economic implications are muddy and tied to issues within the Fiscal Cliff discussions.  Taking this issue in two big chunks for sanity and brevity, the discussions tilt on separate axis’: Deficits and Taxes.  Sequestration which is part of the Fiscal Cliff discussion (cuts in federal spending), impact Medicare and are a direct result of rising federal deficits and the debt ceiling (yes, its back) debate.  The primary driver of current deficit levels is entitlement spending.  Within and inextricably linked to the Fiscal Cliff discussion is renewed discussion regarding entitlement spending, the debt ceiling, etc. and thus, costs associated with the PPACA.  As Congress controls funding for federal programs, an unavoidable discussion regarding Medicare and Medicaid spending is embedded within the Fiscal Cliff/debt ceiling discussion and thus, core elements of the PPACA are on the table (metaphorically).  The second chunk of PPACA impact is its phase-in of new taxes.  Here’s where things get horribly complicated. First, the PPACA imputes an additional Medicare tax on individuals that earn over $200,000 and families that earn over $250,000 (.9%).  This tax applies only to “people” not employers.  In addition, the PPACA imputes a 3.9% tax on investment income for individuals and families.  Investment income is defined as dividends, capital gains, rents, royalties, etc.  This tax applies to any individual with a Modified Adjusted Gross Income of $200,000 or families at $250,000. The Fiscal Cliff twist or dilemma?  If no compromise on current tax rates is attainable and the rates rise to pre-Bush levels, a person earning over $200,000 per year could pay capital gains tax (including the PPACA portion) of 23.8% (currently 15%) and a dividend tax of 43.4% (currently taxed at individual tax rates or approximately, 35%).  This implication alone has many economists fearful of signficant market reactions and potential pullback from investors enough to create a recession.
• Medicare Cuts: This element of Fiscal Cliff discussions contains known and unknown elements.  The known elements involve Sequestration cuts if unresolved, equal to approximately a 2% Medicare cut in provider payments and the evaporation of the present “doc fix” funding, netting in January to a 27% cut in physician and other Part B provider payments. Without resolution, both occur automatically.  The unknown elements center around the debt ceiling and the structural deficits current and projected in entitlements, principally Medicare and Medicaid. In a recent Fitch outlook, Fitch indicated that while the healthcare industry outlook at present is stable, deficit reductions, increased taxes, etc. could drastically change industry fortunes to negative and quickly.  Fitch notes that margins today are small and capital levels reasonably adequate but fortunes can change quickly with margin erosion via cuts and unmeasured structural changes to Medicare and Medicaid funding.  Given that numerous provisions across healthcare arising from the PPACA are presently in-play (hospital readmission penalties and medical device taxes for example), the industry is already under a certain amount of constraint.
• Healthcare and the Economy: Healthcare today is a $3 trillion economy, larger in scope than the entire Canadian economy (GDP) of $1.74 trillion. In fact, only three other nations in the world have a larger total economy than the U.S. healthcare economy (Germany, Japan and China). The Fiscal Cliff implications for healthcare also hold enormous economic implications for the U.S.  Simply, if the U.S. economy moves closer to a total stall or recession, the impact on healthcare is enormous.  The two largest entitlement programs are tax funded and a reduction in tax revenues via additional economic slow-down, further employment rescission, etc. places not only additional deficits into Medicare and Medicaid but additionally, removes paying patients from the system.  More deficits in Medicare and Medicaid place greater burden on policy makers to cut spending.  Economic weakness moves patients away from seeking care and ultimately, shifts the health risk profile of the population.  This shift is insidious and fraught with long-term implication as it is typified by undiagnosed and ill-treated chronic diseases – already a major problem in the U.S. Any further long-term erosion of population health status due to persistent underemployment, unemployment, etc. pushes the unresolved care burden incrementally higher (more expensive).  The net result is a sicker population overall, one that becomes ridden with chronic illness, disability, etc.  Further, additional burdens for providers arise in the form of patients seeking too much urgent and emergent care; expensive and often, under or not reimbursed adequately, if at all.  Given that the economy remains in an overall fragile state of recovery and the last series of years have been straining on providers, any inability on the part of Washington to resolve the Cliff issues with certainty and equanimity bodes poorly for providers and patients alike.