$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.