ECONOMIC ANALYSIS: Health care cost 'solutions' only worsen the problems

June 26, 2006

As an economic forecaster, I am almost always optimistic. But that's not a personality trait. It's the nature of the business. The economy around us is doing amazingly well. We've had much longer economic expansions, steady job and income growth, and less frequent recessions for more than two decades now. So when you deliver an optimistic forecast these days, you stand a pretty good chance of being right.

But if there's one area where my optimism vanishes, it is this-how we will wean ourselves away from the runaway costs of publicly funded entitlement programs, especially health care. What troubles me is not the size of the challenge, or even the fact that we've ignored it for so many years. It is that so many solutions proposed for the problem will only make it worse.

At least when it comes to financing Social Security, we're beginning to see the light. Most of us understand that it is the working generations who pay the bills for those collecting benefits, and that lower birth rates and longer-living retirees are creating an imbalance. Most ideas that address that imbalance-other than simple denial-are unpopular, unsurprisingly, but at least they are out there and are being discussed.

The debate in health care financing, where the crisis is much more acute, is in much sorrier shape. Not only is the discussion taking us in the wrong direction, but, if anything, it's picking up steam.

For example, consider this fact: For many people, if not most of us, the single, largest problem with health care in this country is that millions of Americans-and hundreds of thousands of Hoosiers-do not have health insurance. In the wake of the Massachusetts law that purports to solve this problem by mandating that individuals carry insurance, there has been a resurgence of enthusiasm for universal, single-payer health care.

Such a system already exists in this country. It's called Medicare. And if you think this has solved the issue of health care for those age 65 and older, consider this: By 2020, according to official projections, that program will be insolvent. In that year, Medicare taxes will cover only 79 percent of program expenses, with the remainder made up from the so-called Medicare trust fund.

But that trust fund is invested in federal securities, which have, in turn, financed other government spending. Drawing down this trust fund means either retiring debt-something that has rarely been done by the federal government-or issuing new debt. To state it another way, Medicare becomes a burden on the rest of the federal government's finances the day its tax revenue no longer covers its expenditures.

And that day has already happened. According to the trustees' report, Medicare program expenditures crossed the revenue threshold last year. Other entitlement programs are not far behind. By 2017, Social Security revenue will fall short of expenditures as well. In fact, by that same year, the spending on just five areas-Social Security, Medicare, Medicaid, defense and interest on the national debt-will exhaust every dollar of revenue the federal government has. Indeed, by 2030, just the first three items on that list will break the bank.

As a sustainable mechanism for financing the delivery of health care to seniors, Medicare as it stands today can only be called a colossal failure. Yet we find ourselves urged to expand its single-payer concept to more subpopulations and more health care services.

In fact, the more expensive health care becomes, the more urgent these calls for expanded coverage under the tent of universal care become. Which, in turn, makes the collapse of the entire tent even more imminent. And I find that depressing.

Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at
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