It's the Costs

A recent WSJ Capitol Journal analysis of President Obama’s health-care summit pointed out that although no agreement was reached, at least the debate partially clarified the differences between the Democrat and Republican positions. Particularly significant, the Democrat starting point for health-care reform is the problem of the uninsured and the related problem of pre-existing medical conditions, while the Republican perspective emphasizes the need to control the escalating costs. Fundamentally, to move forward with constructive reform and actually improve our health-care system, rather than just implement change because “something needs to be done”, it must be understood that the first perspective has to be subordinate to the second.

The escalating health-care costs have alarming implications for the Federal Budget. The 2009 Medicare Trustees Reports estimates that the projected unfunded liability (the difference between costs of the benefits promised and the projected revenue from dedicated Medicare taxes and Medicare premiums) is $89 trillion dollars. This gap can only be closed with either significant benefits cuts, significant tax increases or both. A tax solution alone would require total payroll taxes to climb to 37% to meet the retirement promises (Medicare and Social Security (1/5th of the Medicare liability)) made to the young people who today are entering the work force.

If payroll taxes don’t rise to cover the deficit, general tax revenues would need to be transferred to cover the shortfall. Currently 13% of Federal tax revenues are spent to cover the Medicare and Social Security deficits. That percentage is projected to grow to 27% by 2020 and 49% by 2030. By 2050, Medicare, Medicaid, and Social Security will consume the entire budget on the current fiscal trajectory. As more and more of the budget flows to these entitlements, the other Federal Government services that now receive 87% of the Federal Budget e.g. defense, education, infrastructure maintenance, and the thousands of other federal program, will consequently be progressively and drastically scaled back with frightening and even existential ramifications.

The economic scale and scope of such a financial calamity makes consideration of additional benefits such as covering the uninsured or those with pre-existing medical conditions beside the point. Not that those problems should not be addressed but that they can not possibly be addressed on a sustainable basis until solving the fundamental issue of unsustainable health-care costs growth. Given that Federal and state governments now account for nearly 50% of all medical expenditure and given the financial status of those programs (Medicare, Medicaid, et al), can anyone reasonably believe that turning over the other 50% of health-care to the government could fix or even improve the current costs crisis? Successful reform will only occur by utilizing free market forces to promote a more consumer oriented payer system and to increase competition. As discussed numerous times on these pages, the components of successful reform should include promoting Health Savings Accounts, equalizing the tax treatment of privately purchased health-care insurance with that of employer provided insurance, allowing purchase of insurance across state lines, decreasing the number of mandated benefits, and allowing insurance companies to appropriately assess the risk of utilization of health-care services in premium pricing.

One final point, after the “health-care summit” President Obama is calling on Congress to find common ground and get health-care reform done. Yet, the 2 alternative positions, expanding a failing system to include the uninsured and those with pre-existing medical condition or fundamentally restructuring the system to curb accelerating costs, can not be reconciled to a middle ground compromise. Controlled by the far left ideologues, the Democratic majority will not accept the premise that first costs must be controlled and that successful cost control will depend on utilizing free market forces, not bigger government programs. For the sake of our children and country, we must hope the Republican minority does not compromise from that premise.