The buy now, pay later healthcare bill

WASHINGTON (Reuters) - The healthcare bill promises benefits now and delays the payback until later, a politically savvy short-term move that may have long-run economic repercussions.

Critics' complaints that the measure will impose crushing costs on an economy still struggling to gain momentum look overblown considering most of the tax increases kick in well after 2012. Likewise, proponents' predictions that this reform will curb the deficit appear overly optimistic.

For lawmakers facing difficult November elections, the healthcare bill passed by the House of Representatives late on Sunday includes quick-hitting provisions such as barring insurers from dropping coverage when people get sick, which will likely resonate with voters.

Pushing back implementation of tax hikes and spending cuts means the sting won't set in until well after the election, but it also leaves lots of time for Congress to reverse those unpopular measures, erasing the promised deficit reductions.

Unemployment is still the top economic issue, both for voters and President Barack Obama, so the big question surrounding the bill is whether it helps or hinders hiring.

It removes one source of uncertainty, particularly for small business owners who have been reluctant to add jobs in part because they wanted clarity on what reform would mean for benefit costs.

However, much bigger hurdles remain. Small business confidence remains weak, according to monthly surveys by the National Federation of Independent Business, and the overriding concern is still weak sales.

"I don't really see small businesses running up to the roof and shouting 'This is great,'" said Andrew Busch, a strategist with BMO Capital Markets in Chicago.

"It's an increased cost to those companies at a time when they are not bullish, when they are very circumspect on whether or not they're going to hire people. Now you just increased the cost of hiring," he added.

SMALL BUSINESS

Small businesses amount for the majority of job creation in the United States, and their reluctance to hire is a critical reason why the jobless rate is near 9.7 percent and likely to remain abnormally high for the next five years.

Small companies employed 106.7 million people as of February, down from nearly 115 million at the start of the recession in December 2007, according to paycheck processing company ADP's monthly small business employment report.

The reform bill offers a tax cut to encourage small firms to provide healthcare coverage which starts right away.

Come 2014, it imposes a fine of up to $2,000 per employee for not providing insurance, although that applies only to companies with more than 50 workers. According to ADP's data, those firms accounted for about 55 percent of small business employment.

"Even though the uncertainty is off the table, the higher costs are a reality," said Harm Bandholz, an economist at UniCredit Research in New York. "This health care reform was just one of many reasons of why many companies have not hired yet. The biggest problem is still the uncertain outlook about the strength of the recovery."

A mandate requiring individuals to obtain health insurance or face a fine also takes effect in 2014. Economists thought that was most likely to affect poor and younger people, many of whom would qualify for tax credits to help cover the cost, so the impact on consumer spending would likely be muted.

BUY NOW, TAX LATER

Longer term, the $138 billion in 10 year budget deficit reductions the nonpartisan Congressional Budget Office expects are dependent on Congress sticking to the tax hikes and spending cuts envisioned in the bill. Some economists were skeptical that lawmakers would follow through.

With the exception of a 10 percent tax on some tanning services, most of the increased costs come much later. A Medicare tax hike on the wealthy begins in 2013; an excise tax on high-cost health insurance plans doesn't start until 2018; and a fine for uninsured individuals begins in 2016.

Jeffrey Kleintop, chief market strategist at money manager LPL Financial in Boston, said deficit reductions are probably wishful thinking.

Even if they do materialize, $138 billion looks paltry compared to the White House's budget shortfall projections. This year, the deficit is expected to top $1.5 trillion, and it will likely remain above $700 billion at least through 2015.

"It's a question of what is the magnitude of the increase in the deficit," Kleintop said. "Broadening healthcare coverage to the uninsured has some great social aims but it does come at a cost. We all have to decide how we want to bear that cost, whether it's through spending cuts, or higher taxes, or through a burgeoning federal deficit, which seems like the path of least resistance."

(Additional reporting by Lucia Mutikani; Editing by Neil Stempleman)