What Is Unsustainable Won’t Be Sustained

In an op-ed in the Wall Street Journal this morning George Newman, businessman and economist, addresses one by one some of the arguments in favor of healthcare reform that are most frequently encountered. The arguments he mentions include the problem of the uninsured and the competitive disadvantage our healthcare system places on American businesses. Some of his responses are good sense; others paint an incomplete picture; still others are claptrap. He doesn’t really engage the scope of the problem.

The graphic above shows the projected growth of healthcare spending in the United States. You may click on the image for a larger version. It’s essentially a straight-line projection and IMO understates the problem if anything. You see, incomes in the healthcare sector are higher than the average in the economy. While that’s good for people who work in that sector it may not be as good for the economy as a whole since another way of stating it is that for a dollar’s worth of revenue the healthcare sector employs fewer people than other sectors of the economy and as it grows the level of systemic unemployment does, too. I believe that the graph substantially understates the likely level of Medicaid spending.

Additionally, the enormous level of subsidy that Medicare and Medicaid represent indicates a substantial deadweight loss. The overall economy will be smaller than it otherwise might be as a consequence.

We can’t put off the problems posed by increasing healthcare costs any longer. The “Medicare trust fund”, the sum of all Medicare contributions since its inception less the expenditures, will be exhausted by 2017. At that point Medicare will be insolvent.

By 2012, the last year of President Obama’s first term, the Medicare system will be paying out more than it takes in. Once that happens we’ll be forced to make some choices: either we’ll reduce what Medicare spends (putting more of the burden on the elderly or on healthcare providers), raise the Medicare tax rate, increase other taxes, reduce other spending, borrow to make up the difference, or some combination.

Placing more of the burden on elders is no solution. Elders are disproportionately poorer than non-elders. Many elders only avoid poverty by virtue of Medicaid. That’s the reason that Medicare was conceived in the first place. I am, however, in favor of means-testing Medicare but I don’t believe that will solve the problem.

If we place increase the burden on healthcare providers, some will become discouraged, others will find ways of offloading their costs to other patients. Raising the Medicare tax rate will make it harder for people to do any number of other things including buy houses or cars, pay for education, or pay for their own healthcare.

As Medicare and Medicaid costs rise it will become increasingly difficult to reduce other spending to pay for it. Tax increases are far more likely. The more borrowing we do the higher interest rates will go and the more difficult it will become for businesses to grow or for people to afford other major expenses.

That’s the essential problem I have with Mr. Newman’s op-ed. It is profoundly conservative in the sense that it’s prescription is to preserve the status quo and that’s not an option. Healthcare reform is in our future. We’re merely discussing the form that it will take.

None of the prospective solutions are particularly appealing either severally or in combination. That’s why I prefer a solution based on abundance rather than one based on administering scarcity.

1 comment… add one
  • Andy Link

    This is why me and my family are planning (or at least trying our best to plan) for a future where we won’t have access to either medicare or social security. As a so-called “gen-x-er” me and my wife believe we’ll be paying a lot more in the future to support the boomers in retirement and that by the time our turn comes around those entitlements will either be gone or substantially reduced. Maybe we’re too pessimistic, but I don’t see much chance of these problems getting solved anytime soon and I don’t have much faith in Congress to really solve the fundamental issues – the best I’m expecting is a muddle-through that kicks the can down the road for a while.

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