Obama's $2,500 Promise

Wilson H. Taylor Scholar
Joseph Antos
Presidential candidate Barack Obama has a cure for high health-care costs. If elected, he would cut the average family's annual health-insurance premiums by $2,500, and everyone would get health coverage just as good as his.

But do the numbers add up?

Taken literally, 116 million American families would save as much as $290 billion on health insurance annually under the Obama proposal. That's a remarkable claim, considering the rapid increase in health insurance costs over the past four decades.

Sen. Obama's plan will ensure that someone writes a check to cover the high cost of your health care. But that someone will probably be you.

Where will the Senator find the money? According to Harvard professors David Blumenthal, David Cutler, and Jeffrey Liebman, the Obama plan will rely heavily on improving health-care efficiency, in addition to taxes covering $50 to $65 billion of the cost. Most of the plan's savings will come from health IT, improved clinical decisions, and reduced administrative overhead. Improvements could, and should, be made in each of those areas. However, there is ample evidence that such policies cannot produce the kind of savings that are being promised.

Health IT (including such innovations as electronic health records and e-prescribing) is popular with politicians on both sides of the aisle as the key to better care at lower cost. Anticipating big returns, the Obama plan would spend $50 billion to promote health IT. A well-known RAND study credits health IT with $77 billion in savings, but only after 15 years of putting the infrastructure in place. Nonetheless, the Congressional Budget Office (CBO) says health IT will not produce significant savings, at least in the near term. So for the foreseeable future, this initiative will push costs up, not down.

Determining which treatments work best for which patients, and doing a better job of managing care is another worthwhile idea that is not likely to have a quick payoff. It is often claimed that 30 percent of what we pay for health care is wasteful and unnecessary. Comparative effectiveness research could give us a basis for eliminating the unnecessary, but only with the investment of many billions of dollars over a long period. CBO finds only $6 billion in reduced health spending over the next decade from such research. That's less than a 0.05 percent reduction in the $32 trillion that will be spent for health care during that time.

No one can doubt that health costs could be cut if we increased efficiency in the delivery of care. Yet no one should doubt that if we knew how to accomplish that, we would have done it long ago.

That leaves the insurance industry. This year, the administrative costs of private insurance are expected to be about $100 billion, or just over 12 percent of the cost of health coverage. Arguably, the insurance industry could become more efficient, but under the Obama plan, money will still have to be spent to do the paperwork, go after the cheaters, and pay the bills. As much as $46 billion could be saved if the insurance industry's overhead costs were lowered to levels seen in Germany, according to the Commonwealth Fund. Even if that were the case, we would still be $240 billion short of the promised savings.

The Obama plan would also create new subsidies to cover the uninsured and help people facing high health costs. That, and the fact that we can't expect to see savings in the health sector that approach the promises made by the campaign, will unavoidably mean higher taxes. The Senator would increase the top two income tax brackets, raise the top capital gains tax rate, raise the top dividends tax rate, increase payroll taxes, and bring back the estate tax. According to the Urban Institute-Brookings Institution Tax Policy Center, those proposed tax increases would yield an additional $600 billion in revenue--but only over the next decade. That is not a great deal of new money for a major expansion of health programs (much less for one costing several hundred billion a year) and other initiatives supported by the candidate.

Sen. Obama's plan will ensure that someone writes a check to cover the high cost of your health care. But that someone will probably be you.

Joseph Antos is a Wilson H. Taylor Scholar in Health Care and Retirement Policy at AEI.

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