Presidential candidate Senator Barack Obama (D-IL) has put forth
an ambitious health care plan. The plan proposes:
- Expanding eligibility for existing public programs, including
both Medicaid and the State Children's Health Insurance Program
- 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.
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. Most notable are the Lewin
Group, Health Systems Innovations Network, and
the Urban Institute-Brookings Institution Tax Policy Center.
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.
Lewin applied a type of model known as a
micro-simulation. Health Systems Innovations Network (HSI)
conducted an analysis (funded by the McCain campaign) also using
this type of approach. 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. 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. Moreover, the results are somewhat
confusing because it is impossible to determine enrollment in the
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, 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
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.
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, comparative
effectiveness, health information technology, or
prescription drug re-importation 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,' 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.
HSI estimates the Obama plan would cost $452 billion per year,
or more than $6 trillion over a 10-year period. 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.
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,
and other analysts have called into question the memorandum's
conclusions. 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.
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.
Obama for America, "Barack Obama and Joe Biden's Plan to Lower
Health Care Costs and Ensure Affordable, Accessible Health Coverage
for All,' at http://www.barackobama.com/pdf/issues/Health
careFullPlan.pdf (October 23, 2008); for an analysis of the
Obama plan, see Robert E. Moffit, Ph.D., and Nina Owcharenko, "The
Obama Health Care Plan: More Power to Washington,' Heritage
Foundation Backgrounder No. 2197, October 15, 2008, at www.heritage.org/research/health
Lewin, p. 21. Only 1.4 million would gain coverage in the
alternative scenario compared to the initial scenario where payment
levels were assumed to be at the midpoint between Medicare and
private payer levels.
micro-simulation is based on a utility-maximizing model of how
individuals choose insurance plans, allowing for variation on a
range of variables, including price and income. This type of
modeling combines individual characteristics and behavior to
estimate how each person, or subgroup, within a population would
react to a policy change. However, micro-simulations face the
possibility of selection bias, as they make a series of assumptions
based on a small sub-population and then apply them to a larger
group. Lewin used their Health Benefit Simulation Model (HBSM), a
micro-simulation of the U.S. health care system developed by Lewin
in 1989 and continuously applied and refined ever since. Lewin's
work has been deemed "the gold standard of independent health-care
analysis.' See "A Liberal Supermajority,' The Wall Street
Journal, October 17, 2008, at http://online.wsj.com/article/SB122420205889842989.html
(October 23, 2008). For a detailed description of the HBSM, see the
Lewin Group, "Summary Description of the Health Benefits Simulation
Model (HBSM),' January 29, 2007, at /static/reportimages/C0F8E652DE7821F78863A19E775D77DB.pdf
(October 24, 2008).
a detailed description of the HSI micro-simulation model, see Roger
Feldman et al., "Health Savings Accounts: Early Estimates of
National Take-Up,' Health Affairs, Vol. 24, No. 6 (2005),
pp. 1582-1591, at http://content.healthaffairs.org/cgi/reprint/24/6/1582
(October 24, 2008).
elasticity model applies the same measure of responsiveness (how
consumers respond to changes in variables, such as insurance cost)
to an entire population, but different groups within that
population may have different individual levels of responsiveness
to changes in the variable(s) of interest. A micro-simulation
allows for variation among different individuals and groups. Like a
micro-simulation, an elasticity-based approach also faces the
possibility of selection bias, as the population to which the
elasticity is applied may vary systematically from the population
within which it is established. For example, there may be
significant differences between consumers in the non-group market
today and individuals who would lose group coverage and enter this
market under a policy change.
E-mail communication with Surachai Khitatrakun, an author of the
Tax Policy Center report, on October 15, 2008.
For a longer discussion see Joseph Antos, Gail Wilensky, and Hanns
Kuttner, "The Obama Plan: More Regulation, Unsustainable Spending,'
Health Affairs, w462, September 16, 2008.
"There is insufficient evidence to conclude that disease management
programs can generally reduce overall health spending.' Douglas
Holtz-Eakin, Director of the Congressional Budget Office, letter to
Don Nickles, chairman of the Senate Committee on the Budget,
October 13, 2004, at /static/reportimages/28B282B3AB61B1B40ABD0B3FEA2ABDA0.pdf
(October 24, 2008).
According to Lewin, the Medicaid expansion would cost $910.9
billion, the premium subsidies would cost $365.6 billion, the small
employer tax credit would cost $77.9 billion, the reinsurance
program would cost $419.2 billion, and there would be a total of
$599.3 billion in offsets.
The 10-year cost assumes 7 percent medical inflation per year.
While the proposal would altogether cost $452 billion a year, its
parts considered alone would sum to an annual cost of $562 billion.
These parts include costs of minimum benefits ($23.2 billion),
community rating ($32.7 billion), the mandate for children ($211.7
billion), the employer mandate ($179 billion), the low-income
subsidy ($44.3 billion), small business tax credits ($30.8
billion), and government reinsurance ($40.4 billion).
Kevin Sack, "Health Plan from Obama Spurs Debate.'