During his 2008 presidential campaign, Barack Obama relied on a standard applause line, a promise that his health-care plan would “lower premiums by up to $2,500 for a typical family per year.” Cue cheers — or jeers if you were a health-policy expert. For them, his vow was ridiculous. There was no time frame attached to the promise. There was no plan for realizing it. It was change no one quite believed in. He might as well have promised every American a puppy.
But the number wasn’t derived from the ether. It came from an actual study, by Harvard University researchers and Obama advisers David Cutler, David Blumenthal and Jeffrey Liebman. The three had added up plausible savings from a slew of health-care delivery-system reforms and then divided that number by the size of the U.S. population.
It was a pretty rough estimate, and as Cutler told the New York Times, the savings the researchers identified couldn’t properly be attributed only to lower premiums. They would result from lower taxes, higher wages and much else besides. According to Cutler, candidate Obama was trying to “find a way to talk to people in a way they understand.” That doesn’t excuse telling them something that wasn’t true.
Even without Obama’s oversimplification, the $2,500 target was extremely optimistic. So here’s the shocking revelation: The savings are actually materializing. Over e-mail, Cutler pointed out that in January 2009, the Centers for Medicare and Medicaid Services projected that national health spending would equal 19.3 percent of gross domestic product in 2016. Their 2012 projection cuts the 2016 estimate to 18.3 percent.
“One percent of GDP turns out to be — surprise — $2,470 for a family of four given expected GDP that year,” Cutler wrote, “or basically $2,500.”
Cumulative Savings
The reduction isn’t, as Obama promised, in insurance premiums. It’s the cumulative savings across all health-care spending. That’s the measure that, in the long run, really matters. When wonks talk about “bending the cost curve,” that’s what’s being bent.
Obama’s mistake, condensing the entire health-care system’s spending into the shorthand of “premiums,” is now being repeated by some of his critics — but worse. When they speak broadly of premiums, they’re not talking about the average American’s premiums, as Obama was. They’re really talking about the premiums in the Affordable Care Act’s new insurance exchanges. Sometimes, they’re speaking even more narrowly of the premiums for young, healthy men in those exchanges. That’s what a recent debate over “rate shock” was about.
Let’s be clear about what Obamacare’s exchanges are and who they serve. The exchanges are marketplaces for individuals buying insurance on their own. So these aren’t for people who get insurance from their employer or from the government. According to the Congressional Budget Office, only a small minority of the population is expected to be in this market. About 2.5 percent of Americans are expected to participate in the individual insurance exchanges in 2014, with the figure rising to 8.3 percent in 2023. What’s more, the forces determining premiums in the exchanges are not particularly relevant to what’s driving the rest of the nation’s health-care spending.
On the exchanges, the price of premiums, at least in the short term, will be decided mainly by two factors: who signs up (more sick people will raise premiums, more healthy people will lower them) and $950 billion in federal subsidies over the next decade. That is, to state the obvious, a lot in subsidies. The most comprehensive efforts to model the results of all that — including one by Linda Blumberg at the Urban Institute — suggest that most exchange participants will pay less for better insurance.
Fundamental Point
That’s not to say that some young people who earn too much for subsidies won’t see their rates rise. But remember that young adults are both the poorest age group and those most likely to lack insurance; they benefit most from the subsidies. In fact, Blumberg predicts that more than 90 percent of young adults participating in the exchanges will qualify for subsidies.
Focusing on what people pay when they’re young, healthy and rich also misses the fundamental point of health insurance. No one has a permanently fixed identity in the health system. The young become old. The healthy grow sick. The rich become poor. By highlighting what the luckiest group of people pays at a single moment in time, critics overlook the reason people need insurance in the first place. It’s like dismissing the need for a fire department based on the fact that your house hasn’t caught fire yet.
But the subsidies on the insurance exchanges won’t reduce premiums for the majority of Americans, who get their insurance through employers, Medicare or Medicaid. For those costs to come down, health-care prices need to decline more broadly throughout the system.
That will require change not just in how we deliver insurance but also in how we deliver health care. Obamacare is thick with policies to hasten such changes, including shifting to payments based on value rather than fee for service, creating more competitive insurance markets, reducing subsides for high-cost employer-based health insurance, encouraging coordinated care organizations that integrate hospital and at-home services, reducing payments to medical providers that don’t do enough to prevent infections and preventable readmissions, and much else. We can hope they work, but there’s also more we can do.
The success of the insurance exchanges is overwhelmingly important to the small minority who will actually purchase insurance on them. But it’s the fate of the health system overall that matters to most Americans. The good news is we’ve got a tailwind: The health-care system is generally on the cost track that Cutler and his colleagues defined as success.
That fact alone should have utterly reshaped the politics of health care, setting off an explosion of efforts in Congress to capitalize on this moment. We should be pushing further and faster to reform the health-care system, even as we argue about the expansion of health insurance under Obamacare. Instead, Congress is wasting the moment, doing an even worse job addressing the subject of health costs than Obama did in 2008.
