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Taming a Healthcare Monster

Healthcare costs are about to start creating a budget crisis that will make Americans nostalgic for today’s federal deficits of merely half a trillion dollars a year. The population is aging. Thirty years from now, there will be twice as many Americans over age 65, but only 15% more Americans of working age to produce the goods and services that retirees will consume.

The problems of the other huge entitlement program, Social Security, at least received lip service during the election campaign. Social Security payments amounted to 4.2% of gross domestic product last year. That could rise to 6.2% by 2050 under the Congressional Budget Office’s worst-case scenario. President Bush’s proposed solution of getting the government to fund private retirement accounts would reduce federal revenues by $1 trillion to $2 trillion over the next 10 years.

Fixing Social Security is easy compared with the challenge of keeping Medicare and Medicaid solvent. By 2050, spending on the two programs could be equal to 21% of GDP. Fold in Social Security and these programs would represent 28% of GDP. Today’s federal deficit is 3.6%, by comparison.

These healthcare programs cannot be rescued by any combination of borrowing, raising taxes or cutting benefits. Even if lenders were willing, even if the president called for a tax increase, even if Congress supported one, and even if boomer wrath failed to kill any such project, it wouldn’t be enough. Americans already spend 15% of GDP on healthcare, and that percentage is bound to rise in any event. Fixing Medicare and Medicaid depends, therefore, on taming healthcare costs.

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President Bush has high hopes for a multi-pronged proposal focused on so-called health savings accounts. How these work exactly is a tale for another day, but generally the machinery is supposed to work by giving consumers an incentive to buy healthcare efficiently and use as little as possible.

A major reform of the healthcare system would be nice, but if Bush is looking for a way to get the ball rolling, he should repeal his administration’s rules that forbid Medicare and Medicaid to negotiate lower prices for drugs. The pharmaceutical companies ludicrously maintain that any attempt by the federal government to affect the price it pays for drugs is tantamount to price controls. But in the case of Medicare and Medicaid drugs, the government is a consumer, not a regulator. It is ridiculous to tell citizens they should go out and bargain for cost-effective healthcare while the government’s own program is wasting money by buying from the highest bidder.


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