Net Exports
(Billions of
1994 Dollars)
Productivity
(Percent
Wages
(Percent
Effect in
Fifth Year
Tenth Year
75.9
75.9
$0.0
0.0
$3.8
3.8
0.01%
0.01
0.0%
0.0
Cumulative Effect
First Five Years
First Ten Years
$1.2
1.2
$15.2
33.9
Note: These projections assume savings are equally distributed between higher wages, higher
profits, and lower prices.
The Clinton Health Care Plan and Cost Containment
In addition to these immediate savings, the cost containment provisions of the Clinton plan
will reduce the rate of growtti of health care costs, creating substantial savings for firms. In recent
years, health expenditures have been rising at a rate of 9 to 11 percent annually. If the health care
system is not reformed, the rate of growth is projected to remain very high for the indefinite future,
and firms' already heavy health cost burden will grow even larger. The Clinton plan will put in
place a mechanism to slow the growth in costs, which will create large savings that we are calling a
health care dividend. In the fifth year of the new plan, this dividend will equal $72 billion.
Methods: Measuring the Savings from Cost Containment
To measure the longer term savings to manufacturing from cost containment, we subtracted
the targeted rate of growth in the Clinton plan from current forecasts of the rate of growth of health
care spending over the next 10 years. Since the cost-containment target of the plan has been
criticized as being unrealistic, we also calculated the plan's effects based on the assumption that
just half the amount of predicted long-terra savings is actually realized. In this way we have set out
a range between an optimistic and a pessimistic scenario for cost containment We have estimated
the impact of this cost-containment program under the same set of scenarios in which savings flow
to some combination of higher wages, higher profits, or reduced prices. We estimate the effect of
the savings due to cost contaimnent on employment, investment, net exports, productivity, and
wages both in manufacturing and in the economy as a whole.
The Effects of Cost Containment on Manufacturing
Whatever the benefits associated with the redistribution of costs among firms, ultimately the
major source of potential gain to manufacturing and to the economy will result from the cost
containment program put in place by the Clinton plan. The economic effects of cost containment
are shown in Table 3, and further details are in the Appendix. Table 3 shows a range of outcomes;
in each case the smaller numbers show the effects of the Clinton plan achieving half its targeted
savings, and the higher numbers show the effects of achieving all the targeted savings.
Table 3 shows that the gains to manufacturing from cost containment will eventually be
even larger than the gains resulting from the redisuibution of expenditures and the immediate
reduction in costs. Again, we assume the raidrange (Scenario 4) outcome, where one-third of
savings flows to each of wages, profits, and prices. Due to cost containment, employment in
manufacturing will be higher by 26,000 to 52,000 jobs in the fifth year of the plan, and by 68,100
to 135,100 jobs in the 10th year. By the fifth year of the plan, cumulative investment will have
increased by $1.1 billion to $2.2 billion, and by $5.4 billion to $10.8 billion by the end of the 10th
year. Cumulative net exports will increase between $2.1 billion and $4.2 billion over the first five
years and between $10.2 billion and $20.3 billion over the first 10 years. Productivity will rise by
0.15 to 0.30 percent by the end of the 10th year. By the fifth and 10th years of the plan, wages
will be an average of 0.29 to 0.57 and 0.66 to 1.32 percent higher, respecuvely.
105
Table 3
The Effects of Cost Containment
Scenario 1
Employment (Thousands of Jobs)
Effect in
Fifth Year 11.1-22.1
Tenth Year 33.4 - 66.8
on Manufacturing
Scenario 3В°
28.0 - 55.3
29.0 - 78.0
26.0
-52.0
67.9 - 135.8
101.3 - 202.6
68.1
- 135.1
Investment (Billions of 1994 Dollars)
Effect in
Fifth Year $0.6-1.1
Tenth Year 1.7 - 3.3
Cumulative Effect
First Five Years 1.2 - 2.3
First Ten Years 7.3 - 14.5
$ 0.1 - 0.2
0.1 -0.2
0.3 - 0.6
0.8 - 1.6
$ 0.7 - 1.3
1.8 - 3.5
1.7 - 3.3
8.1 - 16.2
$ 0.4 - 0.8
1.2 - 2.3
l.I -2.2
5.4 - 10.8
Net Exports (Billions of 1994 Dollars)
Effect in
Fifth Year $ 0.0 - 0.0
Tenth Year 0.0 - 0.0
Cumulative Effect
First Five Years 0.0 - 0.0
First Ten Years 0.0 - 0.0
$ 1.3 - 2.6
3.3 - 6.5
3.1 -6.2
15.3 - 30.5
$ 1.3 - 2.6
3.3 - 6.5
3.1 - 6.2
15.3 - 30.5
$ 0.9 - 1.7
2.2 - 4.3
2.1 - 4.2
10.2 - 20.3
Productivity (Percent Change from Baseline)
Effect in
Fifth Year 0.04 - 0.08% 0.0 - 0.01%
Tenth Year 0.21 - 0.42 0.02 - 0.04
0.05 - 0.09%
0.23 - 0.45
0.03-0.06%
0.15 - 0.30
Wages (Percent Change from Baseline)
Effect in
Fifth Year 0.43 - 0.86% 0.43 - 0.869
Tenth Year 0.99 - 1.99 0.99 - 1.99
0.0 - 0.09
0.0 - 0.0
0.29 - 0.57%
0.66 - 1.32
1/2 Higher Wages, 1/2 Higher Profits
1/2 Higher Wages, 1/2 Lower Prices
1/2 Higher Profits, 1/2 Lower Prices
1/3 Higher Wages, 1/3 Higher Profits, 1/3 Lower Prices
The Effects of Cost Containment on the Economy as a Whole
Effective cost containment will present both opportunities and hazards for the economy as a
whole. As noted earlier, there should be an unambiguous positive effect on manufacturing from
cost containment as savings in health care are passed through in the form of higher wages, higher
profits, and lower prices. This clearly leads to gains in the form of increased employment,
investment, productivity, and net exports.
There is a second unambiguously positive effect that can be associated with cost
containment To some extent cost containment will involve lowering incomes (reducing economic
rents) earned by some of the workers and corporations in the health care industry. This would
mean reducing the excessive fees received by highly paid health care professionals or cutting the
extraordinary profits earned by some of the corporations producing pharmaceutical and other health
care supplies and equipment However, despite the lower incomes and reduced profits, there is
likely to be httle change in behavior or employment. In other words, highly paid specialists might
stiU work roughly the same hours even if their pay rates were somewhat lower. Or, pharmaceutical
companies may still produce roughly the same supply of drugs even if their profits were no greater
than those received by firms in other industries. Insofar as health cost containment brings savings
of this sort, it represents a pure gain to the economy. There is no effect on employment in the
health care sector, but because of the lower cost to the rest of the economy, there will be additional
money going to higher wages, higher profits, or lower prices.
106
While these first two effects are unambiguously positive, there is a third and probably more
important effect, the impact of which can be either positive or negative. To some extent, effective
cost containment is almost certain to involve the reduction of waste in the form of eliminating
unnecessary paperwork or reducing the provision of unnecessary services. Reduction of waste of
this sort means increasing the efficiency of the health care sector, but it also means that fewer
workers will be employed than if current trends continued. The rate of growth of health care
employment would decrease. Thus, the increase in efficiency presents an opportunity to the
economy in the sense that these workers could be more productively employed in other sectors. It
also presents a risk, however, in that it is possible that alternative forms of employment will not be
forthcoming. In this case, an increase in the efficiency of the health care sector may actually lead
to a loss of jobs for the economy as a whole.
In most economic analyses of the impact of health care reform this possibility is not
considered, since most analyses use economic models that assume the economy will always be at or
near full employment. We have explicitly not made such an assumption, since historically (and
certainly in recent years) the economy has generally not been at or near full employment If full
employment is not assumed, then the reduced rate of job creation in the health care sector could
pose a real problem. In the three years since the onset of the last recession in June 1990, the health
care sector has accounted for over 25 percent of all the new jobs that have been created. If the
growth of employment in the health care sector over this period had been slower, then in all
probability overall job growth would have been slower as well. The economy is still operating well
below full employment, and most forecasts predict slow economic growth for the rest of the
decade. In such a situation, there is a real risk that the primary impact of increasing the efficiency
of the health care sector will be to raise unemployment
However, the cost savings and resultant increased efficiency also present an opportunity.
The savings can be seen as a health care dividend. If this money is put to productive use~for
example, if both the private and public sector invest the bulk of their savings-then it can lead to
alternative sources of employment and higher productivity for the economy as a whole. Policies
that are conducive to private investment in plant and equipment and public investment in education,
training, and infrastructure can ensure this result If, however, a large portion of the savings in
health care is used in less economically productive ways, such as to purchase imports or to reduce
the deficit then the net effect of the cost containment may well be to produce higher
unemployment In short if we do not assume the economy automatically attains fiill employment
whether or not the economy actually gains from the cost savings and increased efficiency of the
health care sector will depend on how the dividend is used. This will in turn depend upon the
macroeconoraic policies pursued by the government at the time.
Combined Effects of the Clinton Plan
This section examines the effects of the redistribution of costs among all employers, firms'
savings on early retirees' health care, and savings from cost containment on the manufacturing
sector and on the economy as a whole. By combining these three factors, it is possible to
determine the major economic effects the Clinton health plan will have on employment investment
net exports, productivity, and wages.
The Combined Effects of the Clinton Plan on Manufacturing
The impact of the combined effects of the Clinton plan on the manufacturing sector-the
effect of the immediate saving from the redistribution of costs (Table 1) and the longer-term
savings from cost containment (Table 3) - is summarized in Table 4. We assume that savings are
equally distributed between higher wages, higher profits, and lower prices. The numbers shown also
assume that the Clinton plan's cost containment targets are achieved.
Employment will be 164,700 higher in the fifth year of the plan and 258,700 higher in the
10th year (see Figure 1). In the fifth year, investment will be $2.8 billion higher (see Figure 2).
The cumulative increase will equal $1 1.0 billion by the end of the fifth year and will rise to $30.5
billion by the end of the 10th year. Net exports will be $5.4 billion greater in the fifth year (see
Figure 3). The cumulative increase will be $19.2 billion by the end of the fifth year and $53.9
billion by the end of the 10th. Productivity will have increased by 0.28 and 0.82 percent by the
end of years 5 and 10, respectively. Wages will be 1.62 percent higher on average by the fifth year
and 2.37 percent higher by the 10th year.
The Combined Effects of the Clinton Plan on the Economy as a Whole
To complete the analysis, we examine the effects of the redistribution of costs and the cost
containment on the economy as a whole. As pointed out above, the effects of cost containment on
the economy as a whole cannot be quantified with any precision. We can note again, however, that
107
Effect in
Fifth Year
Tenth Year
Table 4
The Combined Effects of the Cost Redistribution
and Cost Containment on Manufacturing
Employment Investment
(Thousands (Billions of
of Jobs) 1994 Dollars)
164.7
258.7
Net Exports
(Billions of
1994 Dollars)
$5.4
8.0
Productivity Wages
(Percent (Perceni
Change) Change)
0.28% 1.62%
0.82 2.37
Cumulative Effect
First Five Years
First Ten Years
$ 11.0
30.5
$ 19.2
53.9
Note: These projections assume savings are equally distributed between higher wages, higher profits,
and lower prices.
the savings in manufacturing produce a net gain. The net effect outside the manufacturing sector
will be somewhat ambiguous. Obviously, efficiency gains in health care will be a pure gain to the
economy. However, the ultimate impact of the Clinton plan will depend on the success in
redirecting the health care dividend toward more productive ends.
Conclusion
Our results clearly show that the Clinton health care plan could produce significant
economic benefits for the economy. Although some firms will pay more, the cost burden for many
firms that already provide insurance will be reduced. Due to the redistribution of costs that will
result from the employer mandate, community rating, and firms' savings on retiree health care, in
the economy as a whole there will be a net increase of 75,900 jobs by the fifth year of the plan. In
addition, investment will increase and net exports will rise. The manufacturing sector will save
approximately $18 billion in the first year of the plan. These savings will increase manufacturing-
related employment by 1 12,800 by the plan's fifth year as well as produce economically significant
gains in exports, wages, and profits and reduce prices. This will in turn lead to more jobs, more
investment, increased net exports, higher productivity growth, and more rapid real wage growth.
As the cost containment provisions in the Clinton plan reduce the rate of increase in health
caie expenditures, there will be even larger savings for health care purchasers. In manufacturing,
cost containment will create an additional 52,000 jobs by the fifth year of the plan and increase net
exports. In addition, cost containment will increase efficiency in the health care sector. By the
fifth year of the plan, the health care dividend will total $72 billion and will be rising rapidly. The
net economy-wide effects of cost containment will depend upon how this dividend is used. If it is
invested either in the public or private sector, the new jobs created will more than offset the
slowdown in job growth in health care. If the dividend is not invested, then the reduced rate of job
creation in health care could lead to higher unemployment
The proposed health care reform will also shift the economy toward a better mix of jobs, in
part because of the already discussed expansion of the manufacturing sector that provides well-
paying jobs for the non-coUege-educated workforce, precisely the group experiencing adverse wage
and job trends in recent years. Equally important, the employer mandates in the health care plan
will reduce the existing fmancial incentives for employers to use contingent forms of work-hiring
part-time and temporary workers or using independent contractors.
During the 1980s and into the current economic recovery, there has been an excessive
growth in contingent employment (duRivage 1992; Mishel and Bernstein 1993) that has undercut
the living standards and economic security of the workforce. This growth of contingent
employment has been partially driven by employers seeking to escape fringe benefit costs,
especially health insurance. Such moves will no longer be possible under the new health care plan.
Employers will have to pay a prorata share of the insurance premium of part-time workers, with the
costs of a 15 hour-per-week worker being half that of a full-time worker. Temporary help agencies
will be required to pay 80 percent of the insurance premiums for the temporary woiters on their
payrolls, as will all employers for their employees. Last, independent contractors who receive 80
percent of their income from one firm will be considered an employee of that firm and will have 80
108
Figure I
Job Growth in Manufacturing
under the Clinton Plan
Figure 2
Increase In Investment under the Clinton Plan
3 4 5 e 78 9 10
Year from Implementation
Figure 3
Increase in Net Exports under the Clinton Plan
12 3 4 5 6 7 6
Year from Implementation
Note: Rndlngs based on authors' estimates.
109
percent of their premiums paid for by the firm. Thus, the employer mandates will reduce employer
financial mcentives to shift toward contingent work. The result wUl be that employers wiU
structure their workforce based on producUvity and quality consideraUons, not on their savings from
providing fewer benefits.
The main purpose of the Clinton plan is not to aid the economy but rather to provide high
quality health care to all Americans at a reasonable cost The plan's merits will ultimately depend
on how effectively it meets these goals. However, the plan's economic impact could be very
positive as well.
November 1993
110
APPENDIX
The Effects of the Redistribution in Costs: Three Scenarios
The calculations for the scenarios discussed in the text are based on combining, with
different weights, three cases in which savings in health care are passed on completely in the form
of higher wages, higher profits, or lower prices. We first model each of these "pure" scenarios
before averaging them together to get the results discussed in the text. Each of these pure scenarios
is constructed using assumptions about elasticities that are well within the range frequently used in
economic modeling and are well supported by empirical research.
Wages
The scenario in which savings in health care expenditures are passed on entirely in the form
of higher wages is extremely stfaightforward. We simply assume that wages rise dollar for dollar in
accordance with declines in health care costs. We then calculate this increase as a percentage of
current wages in manufacturing. There are no other effects from this change because the price of
manufactured goods is completely unchanged, as are firm profits. This means that there should be
no impact on either investment or net exports. While workers in manufacturing industries will have
more income to spend as a result of their higher wages, this should be offset exactly by the
reduction in incomes of providers in the health care industry who will be earning less than in the
baseline scenario and by the increased health care expenditures of firms that had not previously
provided insurance to their workers. Since the gains in income for workers in manufacturing are
offset exactly by losses of income elsewhere, there is no change in total demand. This leaves
output and employment unaffected. The impact of $18.4 billion in health care savings for
manufacturing furns passed on entirely in the form of higher wages is summarized in Appendix
Table 1.
Fronts
In the scenario where the health savings are kept entirely by firms as increased profits, we
have to make an assumption about how higher profits affect investment. For this we relied on
recent work on the effect of cash flow on investment by Steve Fazzari (1993). In the most
Appendix Table 1
Effects of Cost Redistribution
Employment Investment Net Exports Productivity Wages
(Thousands (Billions of (Billions of (Percent (Percent
of Jobs) 1994 Dollars) 1994 Dollars) Chanee) Change)
Higher Wage Scenario
Effect in
Fifth Year
Tenth Year
Cumulative Effect
First Five Years
First Ten Years
$0.0
0.0
$0.0
0.0
0.0%
0.0
3.15%
3.15
Higher Profit Scenario
Effect in
Fifth Year
Tenth Year
Cumulative Effect
First Five Years
First Ten Years
108.0
144.1
$5.3
7.1
26.3
58.1
$0.0
0.0
0.57%
1.45
0.09
0.0
Lower Price Scenario
Effect in
Fifth Year
Tenth Year
Cumulative Effect
First Five Years
First Ten Years
230.2
227.6
$0.1
0.0
$11.0
11.0
45.4
101.6
0.10%
1.10
0.0%
0.0
Ill
extensive microlevel study to date of the investment patterns of manufacturing firms, Fazzari found
a very strong link between cash flow and investment. We aggregated the coefficient for the
different categories of manufacturing firms in his study to derive a coefficient for the manufacturing
sector as a whole. The aggregate coefficients are as follows, with the subscript indicating the length
of the lag in years:
CF, = 0.072
CF,., = 0.11
CF,.2 = 0.067
The rate of growth of sales also affects investment This means that as investment increases
the sales of firms producing capital goods, it will induce further investment To estimate the size of
this effect we again used the results of the Fazzari study. His estimated coefficient for the effect of
sales growth (expressed as a percent of current sales) on the firm's investment divided by their
capital stock is:
SG, = 0.138
SG,., = 0.085
SG,.j = 0.042
To use these coefficients to calculate the amount of investment induced by sales growth, we
multiplied the sales growth by the size of the capital stock in manufacturing. We estimated that this
will be $2.4 trillion in 1994 (in 1994 dollars) based on data from the U.S. Department of
Commerce's Fixed Reproducible Tangible Wealth in the United States. 1925-1989, and subsequent
investment data. To calculate the growth rate of final sales we used a denominator of $2.0 trillion,
which is approximately equal to final sales of manufactured goods in 1993. We assumed that the
only change in sales was that due to the profit-induced effect on investment, with the rest of the
redistribution in demand from the service sector to manufacturing bringing no net change in final
demand.
Over the longer term this increase in investment raises national output by increasing
productivity. To calculate this impact we assumed that the effect of capital on productivity is the
same in manufacturing as elsewhere in the economy. DRI, a leading econometric forecasting firm,
estimates the elasticity of output with respect to capital services to be 0.33. This means that a 1
percent increase in capital services will increase output by 0.33 percent. This figure is similar to
estimates that have been produced in a wide range of studies over the years. At present capital
services are being used up at an approximately $650 billion annual rate (all numbers are in 1987
dollars unless otherwise indicated). Gross domestic product (GDP) is approximately $5.0 uillion.
This means that a $6.5 billion increase in capital services would lead to a $16.7 billion increase in
output To translate current investment into capital services in future years it is necessary to adjust
for the life of the investment According to BLS' most recent multifactor productivity tables, the
annual rate of depreciation for structures and equipment is approximately 5.5 percent and 11.7
percent respectively. The ratio of investment in equipment to structures was approximately 4.8 for
the five years from 1986 to 1990. This gives an annual rate of depreciation of sUghtly more than 10
percent If the ratio of equipment to structure investment remains the same, this means that roughly
$65 billion dollars of investment is needed to generate an additional $6.5 billion of capital services.
Applying the elasticity cited earlier, we calculate that an additional dollar of capital generates
approximately $0.25 in additional output in subsequent years. This is the ratio we used in
calculating the impact of increased manufacturing investment on productivity and GDP.
In order to be consistent, we assumed that the increase in productivity is translated entirely
into higher profits. Prices do not fall and wages do not rise even as workers become more
productive and profit margins are growing. As productivity and profits grow, the amount of
investment they induce grows as well. We translated the increase in invesunent into gains in
employment at the rate of 20,270 jobs per billion dollars of additional demand. This ratio is derived
from an Economic Policy Institute study (Baker and Lee 1993) that measured the secondary
employment impacts associated with jobs in various sectors of the economy. Baker and Lee