$2,500 Promise: It will take longer

Briefly: Here's the impact of new data about health insurance premium growth. It shows the most optimistic assumptions about both premium growth and the impact of Sen. Obama's policies would still allow his goal of reducing the average family's health insurance premium by $2,500 to be realized in 2012, the earliest year under any of the scenarios. However, under less optimstic assumptions, achieving the goal would slip considerably, from 2016 to 2027.


The results from the 2008 KFF/HRET survey makes it look that it will take longer to achieve Sen. Obama's goal of reducing the average family's health insurance premium by $2,500. (Note that we're still postponing the question of whether his policies will achieve savings, we're just doing "what if" exercises.)  

The faster premiums go up, the sooner a goal expressed in dollars can be achieved. Premium savings grow faster with a higher premium growth rate. Slower premium growth means more time to achieve the premium savings goal. The 2008 survey showed premium growth slowing from the previous year. This is at least the fifth year in a row that the rate of growth is lower than the year before.

Last month I showed the results of thought experiments with two different assumptions about how fast health insurance premiums would increase in the future. One assumption was that future growth would follow the average of the past five years. With data through 2007, the five year average was 9.62 percent a year. Dropping the 13.3 percent increase between 2002 and 2003 and replacing it with the 4.74 percent increase between 2007 and 2008 brings the five year average down to 7.67 percent. The other assumption emphasized the slowing trend in more recent years. The most recent year's growth would continue into the future. With the 2008 data, 4.74 percent per year takes the place of 2007's 6.2 percent used in my earlier posts.

How much difference does the slower growth from the 2008 survey make?

I considered two ways to think about the Obama plan's effect. One way would be to think of the Obama policies leading to a permanent slowing of the growth in health care spending. Another would be to think of them as yielding efficiencies that have a one time effect but do not have an impact on the underlying rate of growth in health care spending.

Here are the results:

Scenario 1: Obama policies lead to premium growth dropping to the rate of increase in prices overall (as measured by the Consumer Price Index (CPI)). And it happens right away (starting in 2010.) About the most optimistic assumptions you could make. With the assumption that future premium growth continues at the average of the past five years, the 2008 survey numbers do not change the year the average premium would be $2,500 lower than it would be without the Obama policies. It would still be 2012. For the other assumption, that the most recent year predicts the future, the drop from 6.2 percent to 4.74 pushes out the year when savings reach $2,500 from 2013 to 2016.

Scenario 2: As in Scenario 1, Obama policies lead to convergence in the growth rate of premiums and prices overall (CPI), but rather than happen immediately, it takes four years for the two to converge. With the "future=average of last five years" assumption, the 2008 survey numbers make the year when savings reach $2,500 slip from 2013 to 2014. Under the "trend stays at most recent year" assumption, there's no slippage. It would still be 2017.

Scenario 3. Unlike Scenarios 1 and 2, premium growth never converges to the growth of prices overall. Instead, premium growth slows to 2 percent more than the CPI. That's to make an allowance for more medical services, technologies, etc. With this assumption, the 2008 premium numbers delay the $2,500 goal from 2013 to 2015 with the "average of last five years" assumption and from 2016 to 2027 under the "most recent year continues" assumption.

That's what happens if Sen. Obama's policies were to produce a permanent slowing of growth in health care spending. I'll come back to the impact of new KFF/HRET premium numbers on scenarios that think about the Obama policies as producing one-off savings.


Technical notes: This year's KFF-HRET survey has a methodology section note about how they are changing their view of what constitutes the average premium growth. As I read it, it used to be calculated based on employer reports of how much their premiums went up (weighted by employer size.) Now its calculated as how much the average goes up (The headline number is now "the average overall percentage increase in premiums from year to year for family coverage using the average of the premium dollar amounts for a family of four in the largest plan of each plan type reported by respondents and weighted by covered workers.") This means that the change in average premium isn't consistent from data in last year's report to this year's report. What was reported in last year's report as a 6.2 percent increase in the average premium beween 2006 and 2007 becomes a 5.45 percent increase between those two years in last year's report.

CBO doesn't offer a projection of CPI beyond 10 years. For years beyond that point, I assumed the CBO projection for 2014-2018 (CPI increase of 2.1 percent per year) would continue.

$2,500 promise: New premium numbers

The annual premium survey data from the Kaiser Family Foundation and HRET are now out.
Press release, details are here.

Top line number is that premiums rose by 5 percent from 2007 to 2008. That will lower the rate of growth used in both scenarios I've described in previous posts. The "recent path continues" scenario used an average of the rate of growth of the past five years. The 5 percent from 2007 to 2008 is lower than any of the increases in any of the previous five years. The "recent path continues" scenario assumed the 6.2 percent increase from 2006 to 2007 would continue. The new data suggests continued slowing in premium growth.

All this suggests it will take longer for the Obama $2,500 promise to be realized. I'll get out the spreadsheets and see what happens.

After the premium increase, second billing in the KFF/HRET press release went to the dollar amount of employee contributions to health premiums. "Workers Pay An Average Of $3,354 Annually Toward Family Coverage," said the release. See my September 9 post about the question: $2,500 savings on what? The health policy types see this as $2,500 savings on total premium costs, but how many ordinary folk will see this as a promise of $2,500 savings off of what is now $3,354. All I can say is, I don't want to be the person who would have to explain this in an Obama Administration.

$2,500 promise: What if savings are one time?

In brief: Rapid health cost growth and immediate savings that exceeded 15 percent of premiums would be required to achieve $2,500 savings in average health insurance premiums in a first Obama term. If cost growth was more moderate and one-time savings were 10% of premiums, the $2,500 goal would not be reached until 2021. Even then, the policies must be assumed to take effect immediately (i.e., announced in 2009 and an effect in 2010.)

The thought exercise in my Septemer 15 post considered a scenario suggested by President Clinton’s proposal: what if you could drive premium growth down to the rate of growth in consumer prices, as measured by the Consumer Price Index?

In that thought experiment, the size of the wedge between “no policy change” and “Obama” grew over time. The savings wedge had two components. One was the benefit of having the starting point for this year’s growth be lower than it would have been without the policy changes. The other is this year’s effect from making the health care system grow more slowly.

Now consider a different thought experiment. In this experiment, the Obama reforms do not change the fundamental dynamics of the system. Rather, the Obama reforms create one time savings. One those have happened, cost growth reverts to its previous rate. The Clinton-inspired thought experiment had two forces at work that determined the size of this year’s savings: the inherited benefit of savings achieved in the past and this year’s policy changes. In this second thought experiment, there are big savings in the year the Obama reforms take effect. Thereafter, the wedge between “no change” and “Obama” grows at whatever rate one assumes premiums will grow. Another way to think about this thought experiment is to ask, “How long will it take for savings of $X growing at Y percent a year to reach $2,500?”

The year in which Obama savings reach $2,500 depends on (1) how big the one time savings are and (2) what one assumes about how fast health care costs are growing.

Here are some results using the most optimistic assumption: the plan is announced in 2009, the health care system pays immediate attention, and the effect on premiums shows up in 2010.

Assume premiums grow 6.2 percent per year and Obama policies bring a 10% reduction in premiums. Premium savings in the first year would be $1365 for the average policy. Year savings reach $2,500: 2021.

Same growth rate, but a bigger bang from Obama policies: 15% one time savings, worth $2,048 the first year.Year savings reach $2,500: 2014.

Assume premiums grow 9.62 percent and Obama policies bring a 10% premium reduction. Faster growth makes year one savings $1,450. Year savings reach $2,500: 2016.

9.62 percent growth; 15% Obama savings. One time savings: $2,392. Year savings reach $2,500: 2012.

It looks like achieving $2,500 in a first Obama term requires cheering for faster premium growth, assuming the health care system immediately responds to the policy announcements, and assuming the Obama plan achieves one-time premium savings of 15 percent or more.

Essay on Obama Plan

In the "About Me" section, I said this blog was inspired by a set of discussions about what the Obama plan was.

Those discussions, with Joe Antos and Gail Wilensky, lead to an article web published today by Health Affairs.   Its entitled, "The Obama Plan:  More Regulation, Unsustainable Spending," and is available here on the Health Affairs web site.

$2,500 Promise: How much change, how fast, does it require?

Briefly: Only the most extreme assumptions about how fast premiums would rise without the Obama approach and then slow with the Obama approach allow $2,500 savings in average family premiums to be achieved in an Obama first term. If the most recent premium growth trend continued and the Obama plan brought about a substantial moderation in cost growth, then the $2,500 commitment would be achieved in 2016.

How much would the health care system have to change to accomplish the goal of saving the typical family $2,500 per year?

We can get some insight from looking at the last time slowing growth in health care expenditures was on the national agenda. One component of President Clinton’s plan for comprehensive health care, and its financial linchpin, was a plan to slow the growth in health care costs.

The Clinton plan required growth in health care spending to slow from a rate that had been consistently faster than the rest of the economy down to the overall rate of price growth faced by consumers. Senator Obama has committed to constrain only one, albeit substantial, part of the health care system: employer premiums for the working aged population. And unlike the Clinton plan, in which government would have created tools to force the health care system to grow no more rapidly than allowed by law, the Obama plan relies on voluntary change, helped along by spending in order to save on information technology. The exception to win-win is some tough love for insurance companies.

Here’s a thought experiment the Clinton plan suggests as a way to think about achieving $2,500 savings for the typical family with employer coverage. Take the rate at which health insurance premiums have grown recently. Use this trend to project what health insurance premiums would be in the future. Call this the “no policy change” path. Then generate an alternative set of projections that show where health insurance premiums would be if Senator Obama’s approach was implemented. Call the difference between the two “Obama savings” and ask how long it would be before savings reached $2,500.

The thought experiment begins most simply with the assumption that Senator Obama takes office in 2009, announces details of his plan and the health care system voluntarily and instantaneously adjusts. The full impact of the plan shows up in premiums families pay in 2010. Now even the Clinton plan, backed by the coercive powers of government, allowed for a four year transition. So then we can re-run the thought experiment and see what happens if the Obama reforms achieve their results over time.

Across the range of thought experiments, the forces that drive the results are (1) how fast you think premiums will increase under a “no policy change” scenario, (2) what you are willing to assume about how fast the health care system responds to Senator Obama’s proposals, and (3) what change in premium growth is achievable. The faster premiums grow under a “no policy change” scenario, the faster the wedge between “no policy change” and “Obama” grows, and the faster savings reach $2,500. The longer it takes for the details of the Obama plan to be announced and percolate through the health care system, the longer it takes to reach $2,500. And finally, while we can run a thought experiment in which the rate of premium growth declines to the same rate of growth as the Consumer Price Index (CPI), is it plausible? The post World War II pattern in developed countries suggests it isn’t. Across countries and time, health care has become a larger and larger share of economic output. Health care is something people want more of as they prosper. Higher health care costs have come to be an integral part of economic progress.

What do the thought experiments show? Here are some results using two different projections for what happens to health insurance premiums under the “no policy change” path. One, which I’ll call “recent path continues,” assumes premiums continue to grow at the average of their rate of growth from 2003 to 2007, 9.62 percent. Over that time, year over year premium growth has dropped each year. In 2007, the last year for which data is available (see September post for details on data), the average employer premium grew 6.2 percent over the previous year. In the other, I’ll assume the 6.2 percent rate of growth represents a new equilibrium. In the Congressional Budget Office’s economic assumptions, the CPI grows by 2.1 percent in 2010 to 2013 and 2.2 percent over 2014 to 2018. That suggests a 7.52 percent gap between premiums and the CPI under the “recent path continues” scenario and 4.1 percent between premiums and the CPI under the “new equilibrium” scenario.

Fastest possible: High trend, instantaneous adjustment. Premiums would have continued to grow at 9.62 percent a year and the health care sector instantaneously adjusts to the Obama plan. Premium savings on the average employer provided plan reach $2,500 in 2012.

New equilibrium trend, instantaneous adjustment. Premiums would have grown at 6.2 percent a year, immediate change from Obama plan. Premium savings reach $2,500 in 2013.

Recent trend, four year convergence. The 9.62 percent trend continues, but it takes four years for the Obama plan’s full effects to be realized and the premium growth rate to converge to the CPI. The phase in of Obama changes means it takes one more year to reach $2,500, 2013 instead of 2012.

New equilibrium trend, four year convergence. As with “recent trend” and four year convergence, one year slippage in reaching $2,500, 2014 instead of 2013.

Recent trend, four year convergence, not to CPI put to CPI plus 2 percent. CPI isn’t realistic, allow 2 percent for more and new services. Still reach $2,500 in 2013.

New equilibrium trend, four year convergence to CPI+2. Two year slippage by moving from convergence to CPI to CPI+2, from 2014 to 2016.

Next: What if the Obama changes did not fundamentally change the rate of growth in premiums, but were one-time changes and after they were implemented, health care premium growth reverted to its previous level?

Details: The assumptions about the future path of the Consumer Price Index come from the Congressional Budget Office (www.cbo.gov/budget/data/econproj.pdf [Accessed September 13, 2008.])

$2,500 Promise: When do we get it?

Bottom line:   When Senator Obama's reforms reach the $2,500 target determines how much we get.  If the savings were instantaneous, $2,500 would be 20% off on the cost of family coverage on the average employer plan.  However, Senator Obama's reforms will take time to implement.  If the target was achieved by the end of his first term, Senator Obama's $2,500 target would take between 13 and 15 percent off the premium of the average employer plan.  If the target was not met until the end of his second term, the $2,500 savings would be between 9 and 12 percent of the cost of an average plan.  If he took office and said he had a ten year plan to achieve $2,500 in savings, the savings would represent between 7 and 10 percent of the average family premium in 2019.  If he took office and said making our health care system more efficient was a generation's work, $2,500 would be between 3 and 5 percent off the cost of the average family premium in 2029.  

The value of the $2,500 promise depends on when you get it. Time is money. A dollar less in health insurance premiums four years from now is worth less than a dollar saved this year.

While Sen. Obama was bold to make a commitment of (“up to”) $2,500 lower health insurance premiums for the typical family, he cut himself a lot of slack by not saying when. The cost of health insurance has gone up over time. Even shaving a bit off the rate of growth in premiums will make for $2,500 in annual savings – if we look far enough out in the future.

Time is one factor that will determine what $2,500 is worth. Another is the long-lived trend for health insurance premiums to rise faster than prices in the economy overall. Why this trend? Because of more. More procedures, more technologies, more capability. The price of health insurance reflects both the price of health care and the quantity of health care services.

“Saving” doesn’t mean health insurance premiums will go down. Rather, it means that you’ll pay less than you would have otherwise. Saving $2,500 means paying $2,500 less for health insurance in some future year than you would have paid that year if Sen. Obama’s changes hadn’t happened.

Thinking about $2,500 lower health insurance premiums requires comparing two worlds. In the first, Sen. Obama’s program gets implemented. (What that program is will be the topic of future posts.) In the second, it doesn’t. The difference between the two is the amount of savings attributable to Senator Obama’s plan.

Here are the mathematics for two status quo scenarios, one assuming growth will be like that in the recent path and one assuming the slower growth of 2006 to 2007 will remain the pattern. One assumes that the future will be like the recent past. I averaged the annual growth rate over the past five years (2003-2007) in the KFF-HRET employer survey (see yesterday’s post for more about the survey.) Over those five years, premium growth averaged 9.62 percent per year. The trend has been falling, from 13.9 percent in 2003 down to 6.1 percent in 2007. The other scenario assumes that we’ll stay at the 6.1 percent as a steady state annual rate of growth. (We’ll know more when the KFF-HRET survey comes out later in September.)

We’ll start off with the average family premium for 2007, $12,106. We’ll go through the numbers for two possibilities for when the $2,500 savings goal is accomplished, 2012, the last year of a first Obama term, and 2016, the last year of a second Obama term.

The average growth scenario. Premiums go up by 9.62% a year. By 2012, the family premium would be $19,162. That’s a $7,056 increase from the 2007 level. The $2,500 savings brings the increase down to $4,556. Going on to 2016, the average family premium would reach $27,670, with the $15,564 increase more than doubling the level premiums were at in 2007. The $2,500 savings would displace 16.1% of the increase.

The slowing growth scenario. Prices go up by 6.1% a year. By 2012, the average family premium would be $16,354, $4,248 above the 2007 level. Achieving $2,500 savings by 2012 would mean Obama savings would displace 58.9% of the increased premium cost. By 2016, it would reach $20,802, $8,697 above the 2007 level. Not achieving the $2,500 goal until 2016 would mean Sen. Obama’s reforms would offset 28.7% of the underlying growth in premium.

$2,500 Promise: How Big Is It?

Summary: It could be described as 76% of what families pay for health insurance. Or 21%. Which number best fits depends on how you view “paying” for health insurance.

Is $2,500 a lot or a little? One way to think about the magnitude of $2,500 is to compare $2,500 to what health insurance costs.

The most common way for Americans under age 65 to get health insurance is through an employer, either their own or as a dependent of someone who gets coverage through an employer. (We’ll leave the less common route, buying it directly from an insurer, for another post.)

Immediately we’re thrown into a question where economists think about this one way and pretty much everyone else thinks about it another way. The non-economist (dare I say intuitive?) approach is to look at the pay stub of someone who has health insurance through an employer and see how much gets taken out of the pay check as a contribution to health insurance costs.

Here’s what the pay stub approach shows:

- On average, those who had family coverage contributed $3,281 towards the cost of their health coverage in 2007.

- A few people don’t make any contribution toward the cost of their health insurance. In 2007, 20% of those with single coverage paid nothing, and 6% of those with family coverage paid nothing.

- For most people, the employee contribution is less than half of the cost of coverage. Among those with single coverage, 2% paid more than half, and among those with family coverage, 15% paid more than half.

So here’s one way to think about $2,500: For the average person who has family coverage through an employer, it is 76.2% of what he or she contributes towards the cost of health insurance. I’d call that substantial.

Economists come at the question, “How much?” from a different direction. The cost is the cost. How much of that comes from a payroll deduction and how much of that comes from substituting health benefits for cash compensation isn’t important to the employer. The number to look at isn’t the amount that’s deducted from a paycheck but how the employer pays for the health plan.

The average total cost for family coverage was $12,106 in 2007. Employees paid $3,281 and the employer $8,824. Savings of $2,500 represents 20.7% of the total cost of the average premium. (Single coverage cost an average of $4,479 in 2007.)

Sources:

The most commonly cited source of data about employer health insurance is the Kaiser Family Foundation/Hospital Research and Educational Trust Survey of Employer-Sponsored Health Benefits. Data is from the 2007 survey. (Data from the 2008 survey is due out later in September.)
For total premiums and work contribution, Exhibit B, "Average Annual Firm and Worker Premium Contributions and Total Premium for Covered Workers for Single and Family Coverage, by Plan Type, 2007." (page 2 of the report.)
For percentage paying no premium, Exhibit 6.5, "Average Percentage of Premium Paid by Covered Workers for Single and Family Coverage, 1999-2007." (page 73)

The most detailed treatment of "who pays? the employee or the employer?" is in Mark Pauly's book, Health Benefits at Work: An Economic and Political Analysis of Employment-Based Health Insurance.