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In the Nation's Interest

Medicare’s Fix Is a Long Wait

By now just about everyone understands that the root cause of the federal government's budget problem is health care, driven mostly by the $555 billion a year Medicare program.

While popular opinion fixates on Social Security as the big "entitlement" problem, health care is by far the bigger cost driver. Between now and 2085, Social Security spending is likely to increase from 4.8 percent of the gross domestic product to 6.4 percent, according to the Congressional Budget Office. That's an increase of 1.6 percentage point in 74 years.

Net health-care spending, meanwhile, is expected to increase from 5.1 percent of GDP to 17.2 percent in 2085, or more than a three-fold leap. CBO says the program will cost taxpayers $903 billion by 2020.

The enormous projected growth in health-care spending has led many elected lawmakers to the obvious conclusion: Forget about everything else, just focus on health care. Such a policy recommendation is airtight, except for one problem: It's wrong.
Here are three reasons why a singular focus on health-care costs will lead to trouble, and why we have to turn elsewhere for immediate answers to our debt problem.

No Consensus

First, we have not yet settled on a likely solution for runaway health-care spending. Far from it. Just about every policy maker has a personal preference, so we are nowhere near a consensus.

Every popular option has flaws. The political left wants a single-payer system -- which sounds good, until you consider that Medicare is a single-payer system, and Medicare is the primary source of the problem.

The political right wants high insurance deductibles, medical savings accounts and consumer choice -- which make sense, until you realize that the big money is in serious illnesses that blow past any conceivable deductible, and those patients are often in no condition to direct care decisions, even ignoring that they don't have medical degrees. Left and right won't find common ground here for years to come, if ever. We can't wait that long.

Measuring Success

Second, even if we thought we had the solution, we wouldn't be able to measure its effects with any accuracy. We can't even measure the apparently straightforward result of cutting Medicare reimbursements because doctors have responded to past reductions in the reimbursement for each diagnosis by making more diagnoses, or making more expensive diagnoses instead of cheaper ones. So imagine what the health- care industry might do if confronted with far more complex changes in the system. The one sure thing is that the estimates would be wrong.

Third, even if we had the solution and we acted today, the savings would arrive many years down the road -- far too late, given the state of the budget and the public debt. The health-care industry is a supertanker, not a powerboat. It will take miles to turn around. Health-care thinkers who have talked about "bending the cost curve" argue that we have built too many hospital beds, bought too much high-tech hardware, such as MRI machines, and trained too many specialists.

Unfortunately, all of those -- even the labor of the specialists -- are fixed costs. We made those investments, and we have to pay them off. Even if we changed our distorted incentives at noon today, the gears of our health-care industrial complex would change us into the lean, compassionate health-care machine that we need only over years, perhaps decades.

Time Running Out

Back in December 2007, CBO estimated that the U.S. public debt would reach 60 percent of the gross domestic product in 2022. That's many economists' notion of a prudent maximum for a nation's debt burden; it's also the proforma limit for members of the European Monetary Union.

Because of the economic paroxysm and the tax cuts and the spending needed to attenuate it, the debt at the end of 2010 already was 62.8 percent, and it continues to grow. So with the debt already in the red zone, we no longer have the luxury of debating our health-care options over port in front of the fire, and then waiting for the analysts to tell us in a decade or so whether our choices have panned out.

We can't possibly bend the health-care cost curve until well after the debt curve must be bent sharply.

So while revamping the health-care system remains necessary in the long run, it's not sufficient in the short run. We need substantial budget savings now to ensure that we even get to the long run.

And that will require putting every part of the budget on the table. Domestic appropriations were cut in the August debtlimit agreement, and many will argue that defense has given enough. We must hit spending as hard as we can again.

And then we will need new revenues, too.

Health care is indeed the big fiscal problem, but we have allowed the problem to grow so large that it can no longer provide the solution we need today.


Joe Minarik, senior vice president of the nonprofit Committee on Economic Development, is former chief economist at the White House budget office and a Bloomberg Government columnist. The views expressed are his own.