$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.