How did ObamaCare screw up the GDP report?

Yesterday’s cliff dive of an economic-growth report from the BEA had a lot of people scratching their heads over the last 24 hours. How exactly did the BEA start with an advance estimate of 0.1% annualized GDP growth in Q1 to a final estimate of -2.9%, a full three points of difference? The Wall Street Journal’s Eric Morath and Louise Radnofsky explain that the BEA bought into the Obama administration model of ObamaCare, and just assumed that the enrollment figures for Medicaid and private insurance on the exchanges meant that a deluge of spending would follow. Instead, the actual numbers turned out to be significantly more sour:

Spending on health-care services declined at a 1.4% annualized pace in the first quarter, compared to an earlier estimate of a 9.1% increase. That revision contributed to a revision of gross domestic product to a 2.9% annualized decline from an earlier estimate of a 1% decline.

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’sBureau of Economic Analysis. …

For the first two estimates of any quarter’s GDP, the Commerce Department doesn’t have direct figures on health-care output. Instead it uses wage and employment data to make estimates. Sometimes government economists consider other measures to augment their approximations.

Initially, they considered Medicaid benefit figures and the number of Americans enrolling in coverage made available under the new health-care law. That data showed an increase in Medicaid outlays and that millions of Americans were signing up for healthcare insurance, leading the Commerce Department to forecast an increase for health outlays.

In the initial reading of first-quarter GDP, released in April, the Commerce Department noted this methodology. With more reliable data now available from a Census survey, those early assumptions have essentially been replaced with more reliable figures.

Ms. Mayerhauser said the Commerce Department doesn’t plan to regularly incorporate data related to the Affordable Care Act into its standard methodologies.

In essence, then, the administration’s assumptions about ObamaCare promoting usage turned out to be incorrect, at least in the short term. Daily Beast analyst Daniel Gross warns that ObamaCare seems to be disturbing health care deliveries, if not the rest of the economy:

A month ago, the BEA thought health care spending rose at a 9.1 percent annual rate in the first quarter. After all, health care spending almost always rises—and quite rapidly. But today, upon further reflection and numbers-crunching, it concluded that health care spending actually fell at a 1.4 percent annual rate. So instead of adding 1.01 percentage points to the GDP growth rate, as the government thought last month, health care wound up sandbagging growth by .16 percent. That differential accounted for about 60 percent of the downward revision.

Why did this happen? It could be that people were hording [sic] medicines and avoiding going to the doctor during the cold weather. Or it could be that many newly insured people delayed going to see the doctor, buying medicine, or having procedures done in January, February ,or March until their health care premiums were fully processed by the state and federal exchanges in April. (Remember, April 1 was the deadline for signups under the Affordable Care Act). It could be that doctors are rationing health care—refusing to schedule appointments. Or it could be that many people are actually paying less for health care because they have insurance—i.e. seeing doctors with a $25 co-pay instead of going to the emergency room.

Clearly, the implementation of Obamacare is disrupting and disturbing the way that health care services are being priced and consumed. In the first quarter, that led to lower spending—either through lower utilization, or lower prices, or some combination thereof.

Well, it’s not lower prices. The final price to the consumer may be lower, but not the actual price set by the insurer. Tax subsidies mask premiums on the exchange by an average 76%, which applies to 87% of all private insurance bought through the exchanges, but it doesn’t lower premiums. Given all of the provider-network restrictions and contractions insurers were forced to take for cost control because of ObamaCare, it’s almost certainly lower utilization.

There is also the question of the economic damage done by ObamaCare in terms of extra tax and regulatory burdens on businesses. The White House shrugged that off after the first estimate in April by claiming increased utilization had saved the economy, a claim that makes the original question even more pressing. In my column today for The Fiscal Times, I note that businesses will have to start making decisions this summer about the employer mandate and how to minimize their exposure to costs and penalties. Those incentives will likely make for more unexpectedly bad GDP reports in the near future:

Get ready for more dampening effects on the economy from Obamacare, too. The Washington Post reminded readers this week that the employer mandates will soon come into force for most businesses, which now have to make decisions on staffing, hours, and benefits for their 2015 budgets. …

Evidence is mounting that the practice [of cutting hours to avoid the mandate] has become widespread even among companies that don’t announce their intentions. When asked about this rational response to incentives, White House economists suggested watching payroll data to see whether distribution of part-time hours remained steady or shifted as the mandate approached, and last year published a study claiming no effect had been seen.

However, the study relied on a method of rounding up that made workers averaging 29.5 hours (which does not qualify as full time for the ACA) to 30 hours (the threshold for full-time designation in the ACA). In reality, the numbers of workers getting 30-34 hours of work a week has dropped 6.4 percent since the end of 2012, while those getting 25-29 hours a week has risen 10.8 percent.

As businesses cut hours and postpone or cancel expansion plans, fewer jobs are created and workers who do have jobs earn less money. That soft labor market also hampers wage growth and has a dampening effect on consumer spending. That’s before the cost of Obamacare hits the workers themselves, with a new report suggesting that the brunt of those costs hit middle-aged women hardest.

The White House can try postponing the employer mandate again, but that’s not easily done. The subsidies now getting paid for the coverage are supposed to come in part from an estimated $150 billion in employer fines for coverage issues. Postponing enforcement another year sinks the program even further into red ink. Even if they do keep the mandate in place, though, that revenue may never come close to the projected level, as employers do whatever they can to avoid penalties — by cutting hours, especially.

This won’t be the last GDP report in the ObamaCare era that has economists scratching their heads over unexpectedly negative impacts.