Obama sold the public pretty well in a speech to the AMA earlier today, but what we’re most interested in is how reform will be paid for. He broke down the trillion dollars healthcare reform cost over ten years into two main ways.

First, we have the $635 billion set aside in the budget called the Health Reserve Fund. $300 billion of this comes from limiting tax deductions back to the levels they were at the end of the Reagan administration. The other half of this deals with cutting inefficiencies in Medicare. $177 billion comes from ending over-payments to Medicare Advantage. As more people become covered over the next ten years, Medicare can cut the funds it uses to reimburse hospitals – saving another 25 billion. Raising taxes on wealthy elderly people to cover the less fortunate ones would allocate another $30 billion to the fund. The rest comes from introducing a far greater number of generic biological drugs.

The second half of Obama’s payment plan accounts for $315 billion not in the Health Reserve Fund. Most importantly is the adjustment of Medicare premiums to reflect the economic climate. The payment to hospitals for treating uninsured people will naturally go down as they receive more coverage – $106 billion there. Purchasing prescription drugs more efficiently retains $75 billion more. Finally rooting out fraud and waste in our healthcare makes the last couple billion.

That covers a total of $950 billion; the last fifty billion is expected to come automatically from increased usage of healthcare IT, among other things. The last thing to note is that Obama is apparently on track to make some legislative progress before the August recess. Until we know what those bills are going to look like, though, many investors are straying away from the sector altogether.