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Savings of $2,500 in Total Health Care Costs for A Typical Family under Health Reform

New Report Estimates Savings of $2,500 in Total Health Care Costs for a Typical Family under Health Reform

Using Findings of Additional Research, Study Finds Greater Deficit Reduction and Greater Savings for Families than CBO and CMS

Key Points:

  • An important new study released this week analyzes the impact of the House and Senate reform bills on national health expenditures, the federal budget deficit, and the premiums and total health care costs for a typical family. By taking into account the implications of important research not reflected in previous analyses by the Congressional Budget Office (CBO) and the Centers for Medicare and Medicaid Services (CMS), the new study finds greater cost savings than CBO and CMS. 
  • The report, “Why Health Reform Will Bend the Cost Curve,” was released by Karen Davis, President of the Commonwealth Fund, and David Cutler, Professor of Economics at Harvard University. Following are some key findings of the report.
  • Both the House and Senate health reform bills would result in reductions in premiums for the typical family of $1,900 in 2019, compared to current law.  
  • When reductions in out-of-pocket costs and lower taxes for Medicare and Medicaid are added in, both the House and Senate health reform bills would result in savings in total health care costs for the typical family of $2,500 in 2019, compared to current law.
  • Under the House bill, there would be deficit reduction of $459 billion over the next 10 years ($321 billion more than CBO estimates). Under the Senate bill, there would be deficit reduction of $409 billion over the next 10 years ($279 billion more than CBO estimates).
  • The House bill would result in a reduction in national health care expenditures (public and private) of $532 billion over the next 10 years, compared to current law - the net result of $549 billion in increased medical spending due to covering 96 percent of non-elderly Americans offset by $1.081 trillion in total health system savings due to savings provisions, reduced administrative costs and payment and delivery system reforms.  

Below is a more extensive overview of the findings of this new report, focusing on its findings regarding the House health reform bill.

Impact of Reform on National Health Expenditures

This new study finds that the House health reform bill would result in a reduction in national health expenditures (public and private) of $532 billion over the next 10 years, compared to current law - the net result of $549 billion in increased medical spending due to covering 96 percent of non-elderly Americans offset by $1.081 trillion in total health system savings due to savings in public programs, reduced  administrative costs, and health system modernization. Following is an overview of these components.

$549 Billion in New Medical Spending Due to Expanded Coverage. As the study points out, “Extending health insurance coverage to essentially all Americans would increase medical spending, at least in the short run.” Based on studies that have been done of the impact on medical spending of expanding coverage, this study estimates that the House health reform bill would, due to extending coverage to 96 percent of non-elderly Americans, lead to new medical spending of $549 billion over 10 years. 

$364 Billion in Savings in Public Programs.  As the study notes, “Both the House and Senate health reform bills contain a number of changes to Medicare and Medicaid payments” - designed to reduce waste, fraud and inefficiencies. Using the CBO report, this study estimates that the net impact of the proposals in the House bill regarding Medicare and Medicaid spending would achieve savings of $364 billion over 10 years.

$187 Billion in Savings from Reduced Insurer Administrative Costs - Due to Insurance Exchanges and Public Option. The study also finds that reform will save the health system money through reduced administrative costs for insurance companies. As the study points out, “Currently, 13 percent of insurance premiums are accounted for by administrative costs. These costs range from 5 percent in large firms and firms that are self-insured to 30 percent for individuals. Higher costs for marketing, underwriting, churning, benefit complexity, and brokers' fees explain the bulk of the difference. Both the House and Senate bills propose insurance exchanges that would group individuals and small firms into larger entities and thus drive down administrative costs. A public option would contribute to this effort. In many areas of the country, there is little meaningful insurance competition. By providing such competition, the public option can drive down profits and force insurers to streamline other components of administrative costs, including benefit design.” This study uses a conservative estimate that reform will reduce average administrative costs from 13 percent of premiums to 10 percent - resulting in savings under the House bill of $187 billion over 10 years.

$530 Billion in Savings from Health System Modernization. The third major source of savings in reform is what the study calls “health system modernization” - which covers key payment and delivery system reforms. As the study notes, “Both the House and Senate bills include numerous provisions to change the information available to patients and providers and the incentives facing medical care providers, and thus make medical care more efficient.” Among the many provisions in the House bill cited by the study are payment innovations, including bundled payments for acute and post-acute medical services; providing financial incentives for relatively low-quality, high-cost providers to improve their care; and mechanisms to streamline demonstration and pilot projects in Medicare and the rapid expansion of successful models across the program. Based on research that has been published in several academic studies, this new study estimates that these payment and delivery system reforms would result in savings under the House bill of $530 billion over 10 years.

Impact of Reform on Federal Budget Deficit

$459 Billion in Deficit Reduction. The Congressional Budget Office estimated that the House reform bill would reduce the federal deficit by $138 billion over 10 years. The estimates of the bill's impact on the federal deficit in this study differ from CBO's in two ways. First, the study includes savings to Medicare and Medicaid resulting from health system modernization. Secondly, reductions in employer spending for health insurance lead to increases in wage and salary payments, which are taxed by the federal government. While CBO accounted for some of this effect, this study estimates further reductions in employer spending for health insurance due to modernization and lower administrative costs - resulting in additional federal tax revenues. As a result of these two factors, this new study estimates that, under the House bill, there would be deficit reduction of $459 billion over 10 years ($321 billion more than CBO estimates).

Impact of Reform on Health Care Costs for Families

Savings of $1,900 for Typical Family in Insurance Premiums. As the study points out, “Reducing insurer administration and modernizing the delivery of health care services will each result in reductions in private insurance premiums.” The analysis in this new study finds that reductions in administrative costs and more efficient health care delivery will reduce premiums for the typical family by $1,900, in 2019. Specifically, the study finds that, without reform, the premiums for the typical family would increase from $13,649 in 2010 to $22,535 in 2019. The study finds that, under the House bill, in 2019, premiums would be $20,635 - or lower by $1,900 or 8.4 percent than under current law.

Savings of $2,500 for Typical Family in Total Health Care Costs. Finally, when reductions in out-of-pocket costs and lower taxes for Medicare and Medicaid are added in, the study finds that the House bill would result in savings in total health care costs for the typical family of $2,500, compared to current law. 

Read the study>>