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Does Obama's Health Care Plan Save Money?

By Brendan Nyhan

Last week, I questioned Barack Obama's statement that "over the long term we will save money" under his health care plan, which suggests that the plan actually decreases government health spending in the long term. This is not true. However, estimates for Yale political scientist Jacob Hacker's health care plan, which is similar to Obama's plan, show that it would reduce national health spending.

At the end of the post, I asked for feedback from blogosphere health policy wonks Ezra Klein and Jonathan Cohn. Over the weekend, Klein stepped up. The short answer is that cost savings from Obama's plan are ambiguous:

[T]he answer to whether Obama's plan will save us money? A definitive maybe.

First off: Barack Obama's plan is not Jacob Hacker's plan. In the update to his post, Nyhan mentions the Lewin analysis of Jacob Hacker's plan, which shows that Hacker's plan will save about $1.1 trillion over its first decade. But the mechanism for those savings are a rule Hacker places on his group market, which caps per person spending increases at the growth of GDP plus one half of one percent per year. That's a much lower rate of growth then the system currently exhibits, and Hacker is achieving it basically by government fiat -- the government will adjust reimbursement rates in order to meet the spending requirements. In other words, the group market has price controls (for a more in-depth explanation of these controls, and how the two plans differ, see this article). These controls account for approximately $1 trillion of the plan's $1.1 trillion in savings.

Obama's plan has a similar structure to Hacker's plan, but it doesn't explicitly include that provision. In an e-mail to me, Hacker argued that it could be implicit. "It really depends," he said, "on what they end up doing with the public plan alternative. Assuming it uses Medicare-like rates and bargains for prescription drug prices, it's going to have the leverage to bring down costs. The crucial issues are (a) how many people end up in the public plan and (b) whether the payments to private plans within the purchasing pool are tied to the average cost of the public plan. If the answer to (a) is 'many' and (b) is roughly as Medicare currently does it, with risk-adjusted payments based on average per capita costs, then the public plan will not only have leverage, but in addition the payments to the private plans will be contained insofar as the public plan's costs are contained. The candidates will need to spell this out, but they certainly have not ruled it out and, indeed, the architecture of their plans is set up to facilitate it."

Hacker's right about that. Obama has left the cost controls ambiguous (though a more cynical observer, like me, would say he's simply removed them), and adopted a structure that could easily support them. As a matter of policy, it's extremely easy to see how they build upon the underlying architecture of the plan to implement effective cost controls. As a matter of politics, however, it's much harder. I've little doubt that a President Obama would like his health care plan to save money. But cost controls through spending caps are a tough political sell, and if Obama can't get to 60 votes with them, he'll try and get to 60 votes without them.

The question then becomes whether Obama's plan without the "hard" cost controls will save us money. Because it does have what I call "soft" cost controls -- prevention programs, health information technology, a comparative effectiveness board that could, over time, help us waste less money on useless treatments. Will those provisions wipe out the spending from increased access? Probably not. Comparative effectiveness could have huge impacts down the road, but in the 10 year timeframe we're talking about, you can't confidently predict huge savings. These provisions will save some money, but not necessarily enough to put us in the black.

In his post, Klein also quibbles with my interpretation of Obama's statement that "I think over the long term we will save money":

Brendan Nyhan questions whether Barack Obama's health care plan "would actually cause a net reduction in government health care spending." Except that Obama doesn't say it would cause a net reduction in government health care spending. In the quote Nyhan offers, Obama says, "I think over the long term we will save money because people will be getting regular checkups, regular screenings." The "we" here refers to what the "we" in health care spending usually refers to: National health care spending.*

...*Nyhan has a bit of a sleight-of-hand at the end of his post. He concludes by writing, "In short, while the Hacker plan would reduce total national health spending, it's still projected to cost the federal government approximately $50 billion more per year than the status quo." That's like saying the new buying system will save our business millions of dollars, but it's still projected to cost our secondary checking account $10,000 more per year. Nyhan is leaving the impression that under Hacker, spending goes up. But it doesn't. Slightly more of it is shifted to the government's dime, but that's paid for through premiums. As it is, all health spending actually comes out of our pockets. We pay for it in premiums, taxes, wages, and fees. The question, then, isn't whether one or another of our intermediaries (Cigna, the government) is paying more, but whether we're paying less. And under Hacker's plan, we are. It saves money.

Klein's statement that "The 'we here refers to what the 'we' in health care spending usually refers to: National health care spending" is too broad. Policy analysts and politicians frequently refer to the projected costs of health care plans to the government rather than their net effect on national health spending. For instance, Klein himself referred to estimates of the costs to the government of both the Edwards ("$90 billion and $120 billion a year") and Obama ("$50 billion and $65 billion a year") plans.

It's also strange to suggest that American politicians and policy analysts don't refer to government actions using the pronoun "we." Obama does. ("For what we spend in several months in Iraq, we could be providing [people without health care] with the quality, affordable health care that every American deserves.")

Finally, at a more general level, it's bizarre for Klein to try to rule out any discussion of the relative change in government spending associated with a health care plan. From a distributional perspective, the extent to which health care costs are paid by the government matters quite a bit. And from a fiscal policy perspective, the projected costs of a new health care plan need to be funded to avoid widening the federal budget deficit.

Brendan blogs at