$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.])