Obama's Inflated Health "Savings"
June 16, 2008
He claims that a shift to electronic medical records will help save families up to $2,500 a year in his first term. Independent experts say that's wishful thinking.
Summary
Obama says his health care plan will garner large savings – $120 billion a year, or $2,500 per family – with more than half coming from the use of electronic health records. And he says he’ll make that happen in his first term. We find his statements to be overly optimistic, misleading and, to some extent, contradicted by one of his own advisers. And it masks the true cost of his plan to cover millions of Americans who now have no health insurance.
  • Obama cites a RAND study that found widespread use of electronic health records could save up to $77 billion a year in overall health care spending. But the study says that level of savings won’t be reached until 2019, when it projects 90 percent of hospitals and doctors would be using electronic records systems.

  • Much could be done to speed up the adoption of electronic record-keeping. But experts, including the lead researcher on the RAND study, are extremely doubtful the U.S. could see widespread adoption in the first term of an Obama presidency, or even a second term. Even a campaign adviser acknowledges Obama’s plan likely won’t reach the full savings potential until five years into implementation, by which time Obama could be out of office.

  • Obama says he’ll "lower premiums by up to $2,500 for a typical family per year” by investing in electronic health records as well as other efforts. But his adviser tells us that $2,500 figure includes savings to government and employers that could, theoretically, lead to lower taxes or higher wages for families – so we shouldn't necessarily expect insurance premiums that are "lower" by that amount.

  • The RAND study on which the campaign partly bases its estimates is one of the only reports available on possible cost savings. It may well be correct – no one knows for sure. But it looks at potential savings in an ideal situation and recently has faced criticism.
Many, if not most, health care experts and professionals agree that the use of electronic health records or health IT would have various benefits, in terms of quality of care as well as spending. But doctors and hospitals in the U.S. have been slow to adopt it for several reasons. Whether Obama can effectively bring about widespread adoption and large savings is an open question and not as concrete as his pronouncements imply.
Analysis
In a town hall meeting on health care on June 5, Obama talked about the savings his plan will provide within the next four years.
Obama (Bristol, Va., June 5): In an Obama administration, we’ll lower premiums by up to $2,500 for a typical family per year. And we’ll do it by investing in disease prevention, not just disease management; by investing in a paperless health care system to reduce administrative costs; and by covering every single American and making sure that they can take their health care with them if they lose their job. ... And we won’t do all this twenty years from now, or ten years from now. We’ll do it by the end of my first term as president of the United States.
    Chip Somodevilla/Getty Images
This is far from the first time that Obama has mentioned the importance of "a paperless health care system" – in other words, electronic medical records and other health information technology – to his projected savings. In a memo, his panel of health care experts wrote: "Greater use of information technology is one key to a more efficient health care system, along with incentives to use that technology wisely. The Rand Corporation conservatively estimated that significant investment in health IT could save $77 billion per year.”

Similarly, his health plan touts the figure: "A study by the Rand Corporation found that if most hospitals and doctors offices adopted electronic health records, up to $77 billion of savings would be realized each year through improvements such as reduced hospital stays, avoidance of duplicative and unnecessary testing, more appropriate drug utilization, and other efficiencies." This $77 billion is part of the $120 billion to $200 billion in total annual savings that Obama's health care experts say will come from his plan.

These rosy projections make universal health care seem almost painless, particularly when the savings estimates far outweigh the costs of Obama's plan (his campaign projects $50 billion to $65 billion a year in new government funds). But it's highly questionable that Obama could reach the level of savings he touts within one term. The RAND study on which the Obama campaign partially bases its savings estimates assumes we won't see widespread adoption – or the full $77 billion in estimated savings – until 2019. Experts we interviewed doubted Obama could prompt widespread adoption within one or even two presidential terms. Adoption of electronic health records has been crawling along in the U.S. In fact, even an Obama adviser says it will take at least five years to foster widespread use. Plus, it's unknown whether the RAND estimates will turn out to be correct: The study recently was criticized by the Congressional Budget Office as an overly optimistic best-case scenario.

In One Term? Unlikely.

If electronic medical records can save $77 billion a year (and no one knows for sure), it won’t happen during an Obama presidency, even in a second term, according to the RAND study itself. The $77 billion figure represents savings that could occur once 90 percent of doctors and hospitals have adopted and are effectively using electronic medical records, a process RAND estimates will last through the end of 2018. The study assumed a 15-year adoption period, from 2004 through 2018, a span based on the implementation of complex technology in other industries. Savings are substantially less during this period.
RAND study: At 90 percent adoption, we estimate that the potential HIT-enabled efficiency savings for both inpatient and outpatient care could average more than $77 billion per year (an average annual savings of $42 billion during the adoption period).
In other words, RAND predicts the health care system overall will save $42 billion a year on average throughout the next president's term, and even during a second term – not $77 billion as the Obama campaign says. That also means some of these savings are occurring right now. The amount would be less than the estimated $42 billion and would increasingly grow as more and more providers adopted electronic records.

So, the health care system is reaping some amount of these savings already, and the Obama campaign is including them in its calculations. John Shiels, senior vice president of The Lewin Group, a health care research organization, criticized Obama (and Clinton, who also had cited the RAND figures) for inflating the savings he could produce. The Democratic candidates "can't take credit for savings that are already occurring because of that," he told FactCheck.org in a February interview. "You could accelerate the adoption of new technology ... but savings would be far less than they're saying."

Richard Hillestad, a RAND senior principal researcher who led the study, confirms that the health care system won't reach $77 billion in savings until 2019, according to RAND's model. And he adds that the figure doesn't represent net savings; there would be some costs for maintaining the systems.

Obama adviser Dr. David Cutler of Harvard told us the campaign's savings estimates included the full $77 billion figure but didn't include a number of other expected savings, which would have made the estimates higher. Thus, says Cutler, the estimate remains conservative even if the $77 billion figure is artificially high.
When Will IT Happen?

Hillestad says steps could be taken by the government to speed up that 15-year adoption period, but he also says he's "not real confident" there will be 90 percent adoption by 2019. "It could take a lot longer if there’s not something in the health care system that gets beyond the disincentives that physicians have for adopting these systems," Hillestad told us. "Basically, they have to buy the system and yet many of the benefits go to the insurers or the payers of public health care insurance."

Dr. Rainu Kaushal, a professor of public health at the Weill Medical College of Cornell University, agreed that the right policies could make 90 percent adoption achievable, but that success wouldn't come quickly. "I think it's pie in the sky for the next five years," she told FactCheck.org. "I think we're looking more in the eight to 10 [year] range, but I think it's achievable."

 Near universal adoption of electronic health records by 2014 was a goal set by President Bush, but it's one that Catherine Desroches calls "unlikely." Desroches, an instructor at the Harvard Medical School and a researcher at the Institute for Health Policy at Massachusetts General Hospital, was part of a team that conducted a survey on the adoption of health IT that will run in the New England Journal of Medicine this week. She also doesn't believe the U.S. will see 90 percent adoption, or even 75 percent, in the next four years. "It could be anywhere from tens of billions to hundreds of billions of dollars to really have a fully interoperable national system," she told us. "And whether any administration is going to have the financial resources to pull something like that off is really an open question, I think."

Cutler, the Obama adviser, was more confident that Obama's plan could generate its full projected savings within a two-term presidency, but he also acknowledged that the system won't be seeing significant savings right out of the gate. "It's kind of a full system transformation," he told us, and "it takes a while to get anything transformed." The Obama plan phases in health information technology over five years, after which the full savings potential could still be years away.
Show Me the Savings

If health information technology can save so much money, why don't more people use it? There are a number of reasons, one of which is the financial disincentive that Hillestad mentions. In 2006, only 12 percent of physicians and 11 percent of hospitals had electronic records systems, according to the Congressional Budget Office. Estimates vary, however, and RAND used a higher level of adoption as of 2004 – 15 percent to 20 percent for doctors and 20 percent to 25 percent for hospitals. Both organizations laid out similar benefits and barriers to the use of paperless records.

Electronic health records can lead to fewer medical errors or bad drug interactions or duplicate tests. The systems could also allow doctors and hospitals to transfer or share patient records, shorten hospital stays, increase prevention efforts that lead to better health, and make getting a prescription filled as easy as hitting the send key. But all of that mostly reduces costs for the insurance companies paying the bills and, to some degree, uninsured patients who are footing the cost of their health care.

Individual physicians' offices and hospitals are the ones that have to pay to implement the systems. But, particularly at small practices, the only financial benefits they'll see are lower costs for maintaining records and transcribing data. And even health insurance companies, which stand to benefit the most, don't have incentive to push for faster adoption, because the savings benefit would go to competing insurance providers as well.

"It's really expensive to buy these systems, particularly for small, one and two doc practices," which are half of all physician practices, says Desroches. And the various records systems – CBO says there are 40 different vendors – can't communicate with each other. Desroches says doctors tell her that they're not implementing electronic records because of the cost, the limited value in terms of interoperability and the slow down in efficiency they'll face as they change the way their practices operate.
Carrots and Sticks

 Hillestad says the government could speed up adoption by offering incentive money to physicians, requiring doctors to report measures of quality of care (which is easier to do with electronic records) or providing subsidies, particularly to physicians with a high proportion of disadvantaged patients – physicians who are less likely to buy electronic records systems. Desroches, too, says the government could "offer significant financial incentives combined with sticks," such as requiring electronic records for those getting Medicare payments.

Obama has proposed spending $10 billion a year over five years and phasing in requirements for adoption. Hillestad didn't want to comment on how that might affect the percentage of health care providers with electronic records. Both the RAND study and CBO agree, however, that adoption would be a lot faster if the government played a larger role.

There have been some efforts on the federal level: Bush set up a National Coordinator for Health Information Technology to set standards for such systems; Congress modified laws to prevent kickbacks so hospitals could give a system to outpatient providers at a heavy discount; Medicare gives additional money to physicians who submit performance data electronically. The Centers for Medicare and Medicaid Services gave out $98 million in state grants, much of it for electronic records or e-prescribing systems, and in the future the agency will give bonuses to small practices that have electronic records.

Obama's health plan says he'll "commit the necessary federal resources" to make health IT happen. But Kaushal, who is also the director of a group of independent evaluators who are assessing health IT improvement efforts in New York state, thinks that sticks and carrots alone will not be enough, and that the entire system will need to be overhauled to make information technology an integral part of daily operations. "It's not sufficient to take existing physician workflow and make it electronic, not sufficient to just go from paper to a computer," Kaushal told FactCheck.org. "What we want is to really wire the system; we want doctors and office practices and nursing homes and pharmacies to all be communicating. Adoption of health information technology becomes a byproduct of the requirement to wire the system." This will require guidance and vision, Kaushal says, not just incentives and disincentives. Realizing the kinds of savings that Obama cites will take much more than federal resources. It also requires a big-picture approach, and a lot of time.
Money in Whose Pocket?

Obama says his plan will "lower premiums by up to $2,500 for a typical family per year," partly through the use of electronic records. But experts say large savings from health IT are unlikely to flow to consumers.

Desroches points out that the average voter may never see the savings that the RAND study postulates. "Definitely insurance companies and federal and state payers would see savings," Desroches says. "I’m not sure individuals will see savings, [except] in the unlikely event that payers realize these savings and pass them on in the form of lower premiums."

The Obama campaign is counting on that unlikely event. Obama health adviser Cutler confirmed that the campaign's $2,500 per family projection doesn't represent only out-of-pocket savings for individual Americans. It includes savings to the government, employers and insurers, savings that could, Cutler says, trickle down to families in the form of lower taxes, higher wages or reduced premiums. In fact, Cutler says the $2,500 figure simply comes from dividing an overall savings estimate that's somewhat larger than $120 billion by an approximate number of four-person families in the U.S. "[W]e take the total and divide by the total population, then consider a 4 person family," he explained in an e-mail to FactCheck.org.

That's a bit of misleading math. It assumes individual Americans will share in all of the savings for the health care system, which includes insurance companies, the government and health care providers. Obama claims families will save $2,500 under his plan, but they won't see at least some of those savings directly in the form of lower premiums. And they may not see them indirectly either.
Questioning RAND
Even if Obama can beat the odds and implement widespread health IT in less than four years, it's unclear whether savings can reach $77 billion a year, as RAND said. Some have found RAND's figures to be optimistic. "There's definitely been a lot of rumbling about the RAND study," says Desroches, who adds she's skeptical of the dollar amounts. "I'm not sure we're going to see enormous savings."

In late May, the Congressional Budget Office published a report that was highly critical of the RAND study. It cited three main points:
  • First, it says, RAND measures the potential impact of health information technology, rather than the likely impact. The RAND study looked at what would happen if 90 percent of doctors and hospitals had adopted health IT and implemented and used it perfectly. CBO points out that there are many factors impeding widespread adoption and limiting efficient use. These have to be figured into any truly realistic calculation of costs and savings.

  • Second, CBO points out that RAND based its conclusions only on studies that found positive effects of health information technology, throwing out data that showed negative effects. The study acknowledges that “we chose to interpret reported evidence of negative or no effect of HIT as likely being attributable to ineffective or not-yet-effective implementation.” Hillestad told FactCheck.org that the researchers assumed electronic records systems that had led to increased errors would be fixed or wouldn't be adopted by other health care providers.

  • Finally, CBO says, the RAND researchers were estimating the savings based on the actual level of adoption in 2004, not the possible level of adoption – even without any changes in policy – in the years covered by the study. That means RAND was using an inaccurate baseline, one that doesn't account for the doctors and hospitals that would have implemented health IT systems from year to year.
None of these points are huge “gotchas.” The RAND authors are up front about the fact that they are examining potential impact of HIT, that they are discounting studies that found negligible or negative effects from HIT, and that their calculations are based on 2004 adoption levels. Kaushal told us that in her opinion, the CBO and RAND studies were trying to answer different questions: CBO wanted to look at likely outcomes, and RAND wanted to look at potential savings. But CBO is of the opinion that RAND's projections are overly rosy.

Obama’s advisers disagree, calling the RAND estimate “conservative.” Hillestad also told FactCheck that “we felt our numbers were relatively conservative,” adding that RAND had left out some factors that could have resulted in even higher savings estimates. Kaushal agreed, with a caveat: "I personally don't think that the RAND numbers are going to be found to be completely off. I don't think they'll be off by an order of magnitude. But it depends on the way things are being implemented." Because RAND predicts potential savings in an ideal situation, there's a lot of room for its estimates, and those of the Obama campaign, to be wrong.

– by Jess Henig and Lori Robertson
Sources
U.S. Congressional Budget Office. "Evidence on the Costs and Benefits of Health Information Technology," May 2008.

Hillestad, Richard, et al. "Can Electronic Medical Record Systems Transform Health Care? Potential Health Benefits, Savings, and Costs." Health Affairs, Sept./Oct. 2005.

 Blumenthal, David and David Cutler and Jeffrey Liebman. "Final Costs Memo," 29 May 2007.

"Barack Obama’s Plan for a Healthy America." BarackObama.com, accessed 16 June 2008.

Interview with Catherine Desroches, instructor at the Harvard Medical School and a researcher at the Institute for Health Policy at Massachusetts General Hospital, 4 June 2008.

Interview with Richard Hillestad, senior principal researcher, RAND, 9 June 2008.

Interview with Rainu Kaushal, professor, Weill Medical College, 12 June 2008.

Interviews with David Cutler, Dean for the Social Sciences, Harvard University, 5 June and 12 June 2008.

Barack, Obama. Town hall meeting in Bristol, Va. Transcript, BarackObama.com, 5 June 2008. 16 June 2008.

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