All sides in the federal debt debate actually agree on one key point. Health care costs present the greatest long-term budget threat.
The deal reached in Congress makes no immediate changes to Medicare and Medicaid. But a 12-member Congressional “super-committee” will propose an additional round of spending cuts in November. These may include major revisions to both programs. And if Congress fails to adopt its recommendations, automatic cuts to Medicare will ensue.
However, even the most draconian cuts would only address half the problem. Health care costs don’t just threaten the federal budget. They threaten the entire economy.
Health care now consumes over 17% of the American economy. By 2020, it is predicted to consume almost 20%. This affects private health insurance as much as government programs. In fact, costs under private coverage have been rising even faster than under Medicare.
Congress can cut all it wants, but the long-term effect will be meager unless it tames this underlying health care inflation.
Why would spending cuts have such limited value? Take a look at some of the most prominent proposals:
- Paying less to doctors and hospitals will cause many of them to provide fewer services. This will lead to sicker patients who need more expensive care down the road.
- Raising the eligibility age for Medicare means that some who are newly elderly will lose access to health insurance. Many will either turn to other public programs or delay needed care, leaving them sicker when Medicare finally does kick in.
- Replacing Medicare with a voucher program would shift the cost control burden to the private sector. Experience shows that costs actually rise when private plans deliver Medicare benefits.
- Most troubling of all, some Medicare cuts would merely pass costs along to the private sector. As I discussed in previous posts, many doctors and hospitals will charge more to privately insured patients, which many of us will pay for in higher insurance premiums. And many employers will bear extra coverage costs for workers in their mid-60s who must delay retirement. This could force some of them to cut wages.
In other words, these steps may save money for the federal government in the short term, but the costs won’t go away. They’ll either hit federal budgets down the road or fall on the rest of the economy.
The only way to truly reduce costs is to make health care more efficient. To do this, we have to change incentives that encourage wasteful spending on unnecessary treatments and discourage prevention.
The hard part is that transformations such as these take time. Attitudes ingrained over decades will not change overnight. But the super-committee will need to show immediate savings.
Let’s hope that despite this, the super-committee’s members take the long view. Otherwise, their proposals could end up increasing the federal debt - and leaving Medicare’s fiscal woes untouched.
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