Medicare: The Problem and the Solution?

What has the most potential to mire the United States in long-term debt? According to White House Office of Management and Budget Director Peter Orszag, the answer is Medicare and Medicaid.


Orszag writes that every other federal program’s effect on future deficits and debt is “swamped” by the effects of these two flagship government-run health care programs. His solution? Create a massive new Medicare-like program, in the form of a universal “public option” for health insurance.

If only life were so easy in other realms. Overweight people could get thinner by eating more. The New York Yankees could fill their empty seats by raising their ticket prices still higher. The housing crisis could be solved by encouraging more loans to unqualified buyers.

But no one would ever propose such things — at least no one outside of Washington.

Orszag’s statement is puzzling. Obviously, he’s a smart guy. How could he seriously think that the way to stop our drift toward financial disaster is to paddle harder toward the falls?

Orszag seems to believe that the underlying problem of skyrocketing Medicare and Medicaid costs is the rising costs of all health care nationwide. He seems to view the costs of Medicare and Medicaid as the cart, not the horse. If only we could get nationwide health care costs in line (the thinking apparently goes), we could also get Medicare and Medicaid costs in line.


In short, Orszag — like President Obama — seems to believe that if the government takes over health care it could impose lower prices by fiat, and our looming deficit nightmare could be avoided.

There are four central problems with this plan:

1. Government-run health care has proven to be far less affordable than privately run care. As research that I’ve recently had published by the Pacific Research Institute reveals, since 1970, Medicare’s per-patient costs have risen 34% more per patient than the combined costs of all health care in America apart from Medicare and Medicaid — the vast majority of which is provided by the private sector. Medicare’s costs have risen $2,511 more per patient.

2. Government-run health care isn’t the ticket to innovative, dynamic, consumer-friendly care. Yes, our current health care market falls short of this ideal in many ways. It is largely a product of WWII-era wage restrictions and tax policy, which ushered in a system of employer-provided care and moved us away from having consumers purchase health care or insurance directly. It made employers the middlemen, made insurers less responsive to consumers, made consumers less price-conscious, and left those without employer-provided insurance on the outside looking in.


Now, having inherited this imperfect system, the way to fix it is to change the tax code to stop penalizing people whose employers don’t provide insurance. Whether you get a tax-break for health insurance shouldn’t depend on what kind of job you have. That policy is fundamentally unfair. And with a substantial new tax credit in hand, millions of Americans could far more easily afford private insurance, which would also inject needed life into a free market that has been sapped of much of its vigor by poorly conceived government meddling.

What we don’t need is to break down the entire system of employer-provided coverage and force millions of Americans off of their employer-provided insurance and onto government-run care. If President Obama’s “public option” passes, millions of employers will choose it — for millions of unsuspecting employees.

3. Medicare pays doctors, nurses, and hospitals only about 75 cents on the dollar per procedure. So, if the whole system moves toward government-run health care, medical professionals will take a financial hit, and fewer people will choose to work in that field. Do those who doubt this also doubt that lower salaries drive away teachers?


4. The combination of fewer medical professionals and the pressing need to control costs would lead to the inevitable result of all government-run health care: rationing. There are only two ways to control costs — through having a vibrant free-market in which competitors vie for the business of value-shopping consumers, or through having the government ration care.

Government-run health care is the horse, not the cart, on the road to higher costs. Adding more horses will only pull us further and faster in the wrong direction.

Under a government monopoly, the quality of health care and the freedom of consumers would diminish, while costs, tax-bills, and deficits would rise. Americans would lose all around.

But that’s exactly what we should expect when someone correctly identifies the problem — and then says that the solution is to expand the problem.



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