Obamacare Will Increase Health Spending By $7,450 For A Typical Family of Four

Chris Conover, Forbes

It was one of candidate Obama’s most vivid and concrete campaign promises. Forget about high minded (some might say high sounding) but gauzy promises of hope and change. This candidate solemnly pledged on June 5, 2008: “In an Obama administration, we’ll lower premiums by up to $2,500 for a typical family per year….. We’ll do it by the end of my first term as President of the United States.”  Unfortunately, the experts working for Medicare’s actuary have (yet again^[1]) reported that in its first 10 years, Obamacare will boost health spending by “roughly $621 billion” above the amounts Americans would have spent without this misguided law.

What this means for a typical family of four

$621 billion is a pretty eye-glazing number. Most readers will find it easier to think about how this number translates to a typical American family—the very family candidate Obama promised would see $2,500 in annual savings as far as the eye could see. So I have taken the latest year-by-year projections, divided by the projected U.S. population to determine the added amount per person and multiplied the result by 4.

Interactive Guide: What Will Obamacare Cost You?

Simplistic? Maybe, but so too was the President’s campaign promise. And this approach allows us to see just how badly that promise fell short of the mark. Between 2014 and 2022, the increase in national health spending (which the Medicare actuaries specifically attribute to the law) amounts to $7,450 per family of 4.

Let us hope this family hasn’t already spent or borrowed the $22,500 in savings they might have expected over this same period had they taken candidate Obama’s promise at face value. In truth, no well-informed American ever should have believed this absurd promise. At the time, Factcheck.org charitably deemed this claim as “overly optimistic, misleading and, to some extent, contradicted by one of his own advisers.”  The Washington Post less charitably awarded it Two Pinocchios (“Significant omissions or exaggerations”). Yet rather than learn from his mistakes, President Obama on July 16, 2012 essentially doubled-down on his promise, assuring small business owners “your premiums will go down.” He made this assertion notwithstanding the fact that in three separate reports between April 2010 and June 2012, the Medicare actuaries had demonstrated that the ACA would increase health spending. To its credit, the Washington Post dutifully awarded the 2012 claim Three Pinocchios (“Significant factual error and/or obvious contradictions.”)

The past is not prologue: The burden increases ten-fold in 2014

As it turns out, the average family of 4 has only had to face a relatively modest burden from Obamacare over the past four years—a little over $125. Unfortunately, this year’s average burden ($66) will be 10 times as large in 2014 when Obamacare kicks in for earnest. And it will rise for two years after that, after which it hit a steady-state level of just under $800 a year. Of course, all these figures are in nominal dollars. In terms of today’s purchasing power, this annual amount will decline somewhat [corrected as per update 5 below].

But what happened to the spending slowdown?

Some readers may recall that a few months ago, there were widespread reports of a slow-down in health spending. Not surprisingly, the White House has been quick to claim credit for the slowdown in health spending documented in the health spending projections report, arguing that it “is good for families, jobs and the budget.”

On this blog, Avik Roy pointed out that a) since passage of Obamacare, U.S. health spending actually had risen faster than in OECD countries, whereas prior to the law, the opposite was true. Moreover, to the degree that U.S. health spending was slowing down relative to its own recent past, greater cost-sharing was likely to be the principal explanation. Medicare’s actuarial experts confirm that the lion’s share of the slowdown in health spending could be chalked up to slow growth in the economy and greater cost-sharing. As AEI scholar Jim Capretta pithily put it:

An important takeaway from these new projections is that the CMS Office of the Actuary finds no evidence to link the 2010 health care law to the recent slowdown in health care cost escalation. Indeed, the authors of the projections make it clear that the slowdown is not out of line with the historical link between health spending growth and economic conditions (emphasis added).

In the interests of fair and honest reporting, perhaps it is time the mainstream media begin using “Affordable” Care Act whenever reference is made to this terribly misguided law. Anyone obviously is welcome to quarrel with the Medicare actuary about their numbers. I myself am hard-put to challenge their central conclusion: Obamacare will not save Americans one penny now or in the future. Perhaps the next time voters encounter a politician making such grandiose claims, they will learn to watch their wallet. Until then, let’s spare strapped Americans from having to find $657 in spare change between their couch cushions next year. Let’s delay this law for a year so that policymakers have time to fix the poorly designed Rube Goldberg device known as Obamacare. For a nation with the most complicated and expensive health system on the planet, making it even more complicated and even more expensive never was a good idea.

UPDATE 1: Igor Volsky at ThinkProgress has declared this article is “totally wrong.” Center for Budget and Policy Priorities’ Paul Van de Water “described this calculation as one of the stupidest things he’s read in a long time” asserting that I’ve calculated “an average that doesn’t mean anything for anyone.”  To his credit, MIT economist Jonathan Gruber at least concedes my basic point: “The bottom line is that the government has consistently reported that Obamacare will raise national health spending by about 1 to 2 percent.”  But then goes on to say ““This is a small fraction of the typical 5 to 7 percent annual growth rate in health care – and is a small price to pay for insuring 30 million or more Americans.”  Notably absent from Mr. Volsky’s scathing critique is any mention of the person who started this use of a “typical American family:” President Obama.  Most important, Professor Gruber’s point essentially substantiates my own: it was the President’s claim of $2500 premium savings for the “typical” family that was and continues to be totally wrong. It’s simply not possible for national health spending to rise by $621 billion and for the “typical” family to expect a $2500 (per year!!!!) premium reduction. Did Paul Van de Water or anyone else at CBPP call candidate Obama’s promise “one of the stupidest things he’s read in a long time”? If not, why not?

People are welcome to argue that Obamacare is a great deal, that it’s worth all that added spending to get extra coverage for tens of millions of Americans. But of course, that’s not how Obamacare was sold. Rather than tell Americans the truth that they’d have to pay more and that the extra price was worth it, candidate Obama promised the ultimate free lunch: we’ll cover 30 million uninsured AND the typical family will see their premiums go down by $2500 (per year!!!!).  And Jonathan Gruber seems to have changed his tune since the fierce debates about health reform, since as Avik Roy has recounted,   “What we know for sure,” Obamacare architect Jonathan Gruber told Ezra Klein in 2009, “is that [the bill] will lower the cost of buying non-group health insurance.”   Obamacare was sold on the promise that it would not increase health spending or the deficit or increase taxes on families making less than $250,000 a year  [“I can make a firm pledge under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”]  Every one of these promises/claims/predictions turned out to be totally wrong.  We can start having a productive debate when progressives are willing to concede these simple, easily demonstrable empirical claims. And then perhaps we can move on to junking this unworkable law and replacing it with the world-class patient-centered health system Americans deserve.

UPDATE 2: Wonkette is the latest to weigh in on the purported  stupidity of my post: “In other words, this is incredibly stupid. Sure, the latest Center for Medicare & Medicaid Services report [PDF] says that “Obamacare” will lead to “roughly $621 billion” in additional health spending over the next ten years. But that emphatically does not mean that you, me, and the other two members of our typical family will be paying this money out of pocket. Most of it will be paid out by insurance companies, who will have a whole bunch of new policyholders because of Obamacare. Much of it will be paid by the government in subsidies and increased Medicaid enrollment. And yes, some of it will be paid by healthy (for now), well-off (for now) young (for now!) people who would otherwise forgo insurance and roll the dice on not ever being carted to the hospital in an ambulance” (emphasis added).

Wonkette’s attitude about the $621B illustrates precisely the attitude that has led to the mess we’re in (both related to Obamacare specifically, and entitlements more generally). “Don’t worry. Families won’t have to pay the tab. We’ll stick it to greedy insurance companies or Uncle Sam will cover it. No problem!”  But of course, we can be pretty certain that insurance companies (especially if they are greedy!) are unlikely to be paying for any tab without turning around and passing that cost along to (gasp!) American families. Similarly, Uncle Sam has nowhere else but American families to keep replenishing tax coffers. In short, American families manifestly WILL be absorbing every single penny of the $621B in added health spending created by Obamacare and it is intellectually disingenuous (and certainly no contribution to informed public debate) to pretend otherwise.

UPDATE 3: Avik Roy at NRO has done a splendid job of explaining the genesis of President Obama’s original estimate of $2500 savings for the “typical family.” It’s essentially identical to the method used for my own calculation. Avik’s post also includes a very entertaining montage of the number of times President Obama made this claim. I encouraged anyone interested in actually understanding this issue to read his piece.

UPDATE 4: Reader Thomas Rudder makes the following comments (submitted on 2013/09/24 at 4:53 pm for anyone who cares to read his comment in its entirety): ”Authors presentation of CMS report is not accurate.” “ACA is summed up in the final sentence of the CMS Major Findings, ***it is still slower growth than over the longer-term history*** ACA Saves according to this report.”  I’m not trying to single out Mr. Rudder, but his is the clearest articulation of an apparent misunderstanding of the CMS report that I’ve observed in quite a number of comments I’ve received.

To be sure, there has been a slowdown in the growth of health spending. But it is manifestly NOT due to Obamacare. The whole point of Tables 2 and 2a in that report was to compare a set of projections assuming ACA was in place to an alternative set of projections in which ACA was assumed NOT to be implemented, i.e., that the pre-Obamacare world had simply continued forward until 2022, inclusive of slightly rising numbers of uninsured etc. The critical point Mr. Rudder and other readers seemed to have missed is that the recent slowdown in health spending happens in both scenarios. Why? Because the slowdown in spending relates principally to the slowdown in the economy and to more cost-sharing such as the growing number of Americans who have jumped into high deductible health plans. The reason we know for certain is not the cause of the observed slowdown in spending is because in every single year from 2010-2022, health spending is higher in the set of projections that assumes ACA is implemented than in the scenario in which it is not (readers can examine the tables themselves if they have any doubt on this fundamental point).  If Obamacare truly slowed down health spending more than in the counterfactual world without it, then it obviously would make no sense that spending would be $621B higher under Obamacare than without it. In short, the CMS report manifestly is NOT drawing the conclusion Mr. Rudder erroneously attributes to it.

Once Obamacare proponents reluctantly reach the conclusion that Obamacare will increase national health spending, many seem to want to switch to the argument that of course spending rose since we’re covering more people. I agree, it is pretty obvious we should have expected that to happen, but unfortunately, that’s not the way candidate Obama and his advisors saw it. They were convinced their plan–notwithstanding its expansion of coverage for tens of millions of uninsured–would SAVE $200 billion in health spending a year, which translated into roughly $2500 a year. And candidate Obama’s claim that he could pull this astonishing feat off before the end of his first term was not some off-script overenthusiastic bit of puffery that occurred during a campaign speech. As Kevin Sacks at the NYT reported: “Mr. Obama’s economic policy director, Jason Furman, said the campaign’s estimates were conservative and asserted that much of the savings would come quickly. “We think we could get to $2,500 in savings by the end of the first term, or be very close to it,” Mr. Furman said.”  Thus, the savings was not some long-term aspiration to “bend the cost curve” that would happen down the road outside of the range of the latest CMS projection (as many other readers have claimed).

In my post, I have avoided trying to speculate on whether the President was delusional. lying or simply mistaken in his forecast (readers can view below the many instances in which he made this claim and draw their own conclusions).  The indisputable truth is he was dead wrong–not even close to hitting the mark. That was the simple take-home message I’d hope to deliver in my piece, but which way too many readers appear to be furiously shutting their eyes to see.  It’s hard to have a productive debate about what to do about this terribly misguided law without agreeing on some pretty indisputable facts.

UPDATE 5: Regrettably, in its eagerness to defend Obamacare, Andrew Lazarus at DailyKos has made a flagrant misstatement of fact:  ”The $7450 figure is calculated as a mean, what we colloquially call an average. By “typical”, Obama is evoking the median family.” Unfortunately, Kevin Sacks at NYT (known to many as a newspaper of record) has put on the record exactly how candidate Obama and his advisors came up with their figure of $2500 in premium savings for the “typical family:”

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 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.”

If that calculation sounds familiar, it’s because it’s precisely the one I did in my post–the only difference being that unlike President Obama, I manifestly did NOT characterize the result as the expected change in premiums. It’s the total change in health spending, which will end up being borne in a variety of forms, higher premiums, higher out-of-pocket costs, higher taxes etc. If Obamacare were financed honestly and transparently, we actually could say how much of an increase would be faced by any given family. Because it’s quite the opposite, we have to resort to talking about “average” effects recognizing that some will pay more, some will pay less than this average. Perhaps Mr. Lazarus will do his homework a little better in the future.

I did make an error that Mr. Lazarus was correct to point out and now have deleted this original sentence: “Of course, all these figures are in nominal dollars. In terms of today’s purchasing power, this annual amount will rise steadily.”  It was a goof, pure and simple, for which I apologize. It does not materially affect my central conclusion–that Obamacare increases health spending by many thousands of dollars for the average family of 4–but for wonks who are interested, the $7,450 in present value terms (using the GDP deflator as projected by CBO) is $6,777 in today’s dollars. Somehow I don’t think most Americans will be comforted to learn that the Obamacare hit on their pocketbooks will amount to only $6,777 per family of 4.  Perhaps this will pave the way for Mr. Lazarus to apologize for his own mistake.

Footnotes

[1] The Medicare actuary first issued a report carefully estimating the cost impact of Obamacare on April 22, 2010. Its annual national health expenditure projections reports for 2010, 2011 and 2012 all have contained tabulations showing that Obamacare will increase health spending over the next 10 years compared to a counterfactual scenario in which the law was never enacted.

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