Presidential candidate Senator Barack Obama (D-IL) has put forth an ambitious health care plan.[1] The plan proposes:

• Expanding eligibility for existing public programs, including both Medicaid and the State Children's Health Insurance Program (SCHIP);
• Creating a National Health Insurance Exchange to serve as a federal regulator of private insurance plans that would compete alongside a new National Health Plan;
• Providing income-related subsidies for those without employer-sponsored health insurance while mandating that children have coverage; and
• Requiring that medium and large employers provide coverage or pay a tax, while extending tax credits to small businesses and creating a government reinsurance program to cover businesses' catastrophic health costs.

Differing Estimates

Analyzing proposals based on campaign documents and media accounts is inherently difficult, as these materials lack the level of detail necessary for a rigorous econometric analysis. Nonetheless, several organizations have done so, using a variety of assumptions and methodologies.[2] Most notable are the Lewin Group,[3] Health Systems Innovations Network,[4] and the Urban Institute-Brookings Institution Tax Policy Center.[5]

The best independent research shows that the Obama plan would cover roughly half of the 45 million uninsured through an expansion of public coverage; rely on soft methods of cost-savings; and require significant increases in federal expenditures.

Coverage. According to the Lewin Group, the Obama plan would reduce the number of uninsured by 26.6 million in 2010 if fully implemented in that year. The plan would also bring about significant shifts in sources of coverage. While 21.6 million people would lose their private health insurance, 48.3 million people are projected to obtain public coverage through Medicaid, SCHIP, or the new National Plan. Private employer-sponsored coverage would decline by 13.9 million, and private non-group coverage would decline by 7.7 million. Meanwhile, 18.6 million employees would buy into the new public plan through their workplace (as their employers switched to this plan from private coverage), 13.1 million individuals would buy into the public plan in the non-group market, and 16.6 million individuals would become newly enrolled in Medicaid or SCHIP. Therefore, the expansion of coverage under the Obama plan would be driven by enrollment in public coverage. This would entail a crowd-out of existing private non-group and private employer-sponsored insurance.

Estimates of sources of coverage, however, are sensitive to assumptions about the level at which provider reimbursement is set for the National Plan. The figures above are based on the assumption that the National Plan would reimburse providers at a level halfway between private market rates and the lower rates set by Medicare. In an alternative scenario modeled by Lewin, reimbursement was reduced to Medicare payment levels. Enrollment in the National Plan reached as much as 42.9 million, contributing to a 32-million-person decrease in private health insurance and a 60.1-million-person increase in public coverage. While sources of coverage would change significantly, there would not be a significant change in the net reduction of the uninsured.[6]

Lewin applied a type of model known as a micro-simulation.[7] Health Systems Innovations Network (HSI) conducted an analysis (funded by the McCain campaign) also using this type of approach.[8] It found that the plan would reduce the uninsured by 25.5 million. It also found that 24.6 million people would enroll in the new public plan through employers or in the non-group market. However, the HSI study did not look at the proposed expansions of Medicaid and SCHIP that would further increase enrollment in public coverage.

In contrast, the Tax Policy Center (TPC) applied a different type of model known as an elasticity-based approach.[9] The TPC estimated the Obama plan would reduce the number of uninsured by 18.4 million in 2009. In that year, 4.3 million people would gain employer sponsored insurance, 5.8 million would obtain non-group coverage, and 8.3 million would enroll in public coverage. The TPC did not take into account the differences in provider reimbursement between the National Plan and private insurance.[10] Moreover, the results are somewhat confusing because it is impossible to determine enrollment in the National Plan.

Cost. According to the Lewin Group, health care system-wide savings over the 2010-19 period would be about $571.6 billion. Since the plan does not fundamentally change incentive structures in the health care sector,[11] most of its anticipated savings come from various delivery system improvements common to Obama's and McCain's plans, ranging from health information technology to disease management. The effectiveness of these initiatives assumes major behavioral changes. As Professor Mark Pauly, a prominent health care economist at the University of Pennsylvania, explains:

The main problem is that these [popular, common methods] are "if only' savings, which can be achieved "if only' certain events would occur, such as physicians' being willing to adopt health IT, consumers being willing to accept changes in diet and exercise. … There is little evidence that there are known methods to cause the "if only' behavior to occur, and to occur quickly on a large enough scale to matter.[12]

The efficacy of these "if only' savings has been seriously questioned by the Congressional Budget Office (CBO). The CBO has reported that evidence of disease management,[13] comparative effectiveness,[14] health information technology,[15] or prescription drug re-importation[16] reducing costs quickly and appreciably is lacking.

Obama says the reason people lack health insurance is that they cannot afford it. The Obama campaign, in an effort to "talk to people in a way they understand,'[17] made an audacious promise: The typical family would save $2,500 on premiums under the Senator's health plan. In calculating this figure, the Obama advisors relied on their own best-guess estimates of "if only' system savings at full implementation. In its analysis of the Obama plan, the Lewin Group projects that the average savings per family would be $426.

Lewin, HSI, and TPC all found that spending by the federal government would, on net, have to increase significantly in order to implement the plan.

Lewin projected that the Obama proposal would increase federal spending by about $1.17 trillion over the 2010-19 period.[18]

HSI estimates the Obama plan would cost $452 billion per year, or more than $6 trillion over a 10-year period.[19] The dramatic difference between this estimate and others is largely a result of HSI's assumption that under Obama's mandate to cover children, the federal government would subsidize virtually the full cost of coverage. Also, HSI finds that the employer mandate would add sizeable costs to the federal government.

The TPC projects the Obama plan would cost $1.6 trillion over 10 years. However, the TPC model did not account for any of the savings measures in the plan.

In May 2007, advisers to the campaign issued a memorandum to "interested parties' that estimated the plan's cost.[20] Under "best-guess' assumptions, the Senator's advisers estimated the plan's net cost at $50-$65 billion a year at full implementation. The memorandum then claimed any new cost could be covered by rolling back part of the Bush tax cuts. It is controversial because of both its cost and savings estimates,[21] and other analysts have called into question the memorandum's conclusions.[22] Since the Bush tax cuts are set to expire within two years anyway, they are not a viable offset, because beyond expiration they are built into the federal government's budget baseline. Complicating the matter further, repealing the Bush tax cuts early has already been proposed by Obama as potential source of revenue for a number of other policy initiatives.[23]

Expanding Government Control

The Obama plan would reduce the number of uninsured citizens, but it would not control costs in any significant way while demanding considerable increases in federal expenditures. Coverage expansion would be driven by enrollment in public plans in which the government would set benefit levels and provider reimbursement rates. Cost-savings would not come from fundamentally realigning economic incentives but would rely on dubious "if only' propositions related to changes in health care delivery.

Greg D'Angelo is Policy Analyst in the Center for Health Policy Studies and Paul L. Winfree is a Policy Analyst in the Center for Data Analysis at The Heritage Foundation. Jeet Guram, a Heritage health policy intern from the University of South Carolina, contributed to the research in this paper.