$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.