Health Spending and First Quarter GDP: What Happened?

A couple of months ago, the Bureau of Economic Analysis told us that first quarter Gross Domestic Product (GDP) was going to decline by one percent, prevented from tanking only by explosive growth in health spending.

However, the final estimate of real first quarter GDP has thrown everyone for a loop, reporting an annualized decline of 2.9 percent. It was the hugest revision in years.

The huge error in the earlier figure was almost entirely driven by a poor estimate of the effect of Obamacare by the Bureau of Economic Analysis (BEA):

The downward revision to consumer spending was mostly to services, especially to health care services. The revision to health care services reflected the incorporation of newly available Census Bureau quarterly services survey (QSS) data for the first quarter. The QSS data reflect the revenues of for-profit and nonprofit hospitals, physician offices, nursing homes, and other health care providers and the expenses of nonprofit hospitals and other nonprofit health care providers. Prior to receiving the Census QSS data, BEA used information on Medicaid benefits and on Affordable Care Act insurance exchange enrollments to prepare the previously published estimates of health services.

In other words, the BEA thought that Obamacare enrollees would immediately start consuming lots of medical services. In fact, consumption of health services declined in the first quarter.

The revision in the health-care category was the largest in recent memory, said Nicole Mayerhauser, an official that oversees GDP statistics at the Commerce Department’s Bureau of Economic Analysis.

“Trying to initially estimate health care this first quarter was a very unique circumstance because of the rollout of the Affordable Care Act,” she said. “We made an adjustment from our normal methodology…(but) our assumptions ended up being too strong.” (Wall Street Journal)

And figuring out Obamacare’s impact on the economy is only going to get more difficult:

Analysts expect the contribution of health care to the overall G.D.P. to be bumpy and unpredictable in the quarters ahead because of uncertainty about the law.

“Looking forward, the volatility in the measurement of health care services represents a risk to our G.D.P. forecasts,” Doug Handler, chief United States economist at IHS Global Insight, wrote in a note. “Since this volatility is not business-cycle related, its impact should be heavily discounted in assessing the general health of the economy.” (New York Times)

Maybe it’s a conspiracy, like the IRS targeting nonprofits with names that sound like “Tea Party.” Tyler Durden at ZeroHedge thinks that the Department of Commerce has simply deferred billions of dollars of health spending to the second quarter, predicting that the second quarter’s GDP growth will be reported at over five percent. Presumably, this would help the president’s party in the November elections.

Mark Gongloff at the Huffington Post notes that “we might not really have seen the full impact of Obamacare sign-ups on the economy yet, particularly as large numbers of them happened at the tail end of the first quarter, for insurance that actually couldn’t be used until April — the second quarter — at the earliest.”

However, what we need to remember is that the BEA’s GDP estimate is a set of accounts (and a poor one, according to Austrian-school economists), not a description of cause and effect.

Changes in the rate of economic growth drive changes in the rate of consumption (including health care), not the other way around. Recent research indicates that changes in GDP, lagged up to four years, explain about two-thirds of changes in health spending.

So, Obamacare is having an effect: It is creating uncertainty and increased government control of society, which holds down economic growth. In turn, that suppresses consumption, including health care. Although the government is striving mightily to transfer consumption from other goods and services into health care, it is not enough to overwhelm the current stagnation.

Those in the healthcare sector who cheered Obamacare through Congress should have thought of that before they lobbied for it.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.