Obama’s health care goal faces big obstacles

By Kevin Sack

updated 12:15 a.m. ET July 23, 2008

It is one of the most audacious promises in a campaign that has been thick with them.

In speech after speech, Senator Barack Obama has vowed that he will lower the country’s health care costs enough to “bring down premiums by $2,500 for the typical family.” Moreover, Mr. Obama, the presumptive Democratic nominee, has promised that his health plan will be in place “by the end of my first term as president of the United States.”

Whether Mr. Obama can deliver is a matter of considerable dispute among health analysts and economists. While there is consensus that the American health care system is bloated with waste, eliminating enough to save $2,500 per family would require simultaneous and synergistic solutions to a host of problems that have proved intractable for decades.

Even if the next president and Congress can muster the political will, analysts question whether significant savings would materialize in as little as four years, or even in 10. But as Mr. Obama confronts an electorate that is deeply unsettled by escalating health costs, he is offering a precise “chicken-in-every-pot guarantee” based on numbers that are largely unknowable. Furthermore, it is not completely clear what he is promising.

His words about lowering “premiums” by $2,500 for the average family of four have been fairly consistent. But the health policy advisers who formulated the figure say it actually represents the average family’s share of savings not only in premiums paid by individuals, but also in premiums paid by employers and in tax-supported health programs like Medicare and Medicaid.

“What we’re trying to do,” said one of the advisers, David M. Cutler, in explaining the gap between Mr. Obama’s words and his intent, “is find a way to talk to people in a way they understand.”

Math gets complicated
The original arithmetic was somewhat basic. In May 2007, three Harvard professors who are unpaid advisers to the Obama campaign — Mr. Cutler, David Blumenthal and Jeffrey Liebman — produced a memorandum offering their “best guess” that a menu of changes would produce savings of at least $200 billion a year (it has since been revised to $214 billion). That would amount to about 8 percent of the $2.5 trillion in health care spending projected for 2009, when the next president takes office.

The memorandum attributed specific savings to several broad initiatives, with the numbers plucked from recent studies. Investments in computerized medical records would save $77 billion a year, the advisers wrote. Reducing administrative costs in the insurance industry would yield up to $46 billion. Improving prevention programs and chronic disease management would be worth $81 billion.

The total savings were then divided by the country’s population, multiplied for a family of four, and rounded down slightly to a number that was easy to grasp: $2,500. The average cost of family coverage bought through an employer was $12,106 in 2007, with workers paying $3,281 of that amount, according to the Kaiser Family Foundation, a health research group.

Mr. Obama aspires to cover the country’s 47 million uninsured by requiring insurers to accept all comers, regardless of their health status, and by providing generous tax credits to low-income workers. The tax credits could be used to buy into a new federal health plan or private plans marketed through a government exchange.

Big up-front costs
The subsidies are expensive, estimated at well over $100 billion. Other components of the Obama plan also bear up-front costs, like a pledge to spend $50 billion over five years to speed the computerization of health records, $6 billion a year on tax credits to small businesses that provide coverage to workers, and an unspecified amount to buffer businesses from high-cost insurance claims.

The source Mr. Obama has identified to pay for them — the repeal of President Bush’s tax cuts for those making more than $250,000 — would cover only about half. That means additional health care savings would be needed, not only to keep premiums under control but also to help pay for the subsidies.

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A consensus has emerged among health economists that at least a third of the country’s spending on health care is unnecessary. Both Mr. Obama, of Illinois, and his Republican rival, Senator John McCain of Arizona, agree that significant sums could be saved through reductions in unneeded procedures and improvements in electronic record-keeping, prevention and chronic disease management.

But the dollar values Mr. Obama has attached to individual components of his plan are beginning to attract scrutiny. In particular, the Congressional Budget Office issued a report in May questioning the amount to be saved from the computerization of health systems.

Mr. Obama took his estimate of $77 billion a year from a 2005 study by the RAND Corporation (which cautioned that reductions of that magnitude would not emerge for 15 years). The Congressional analysts found, however, that for various methodological reasons the RAND study was “not an appropriate guide” to potential savings.

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