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The Pauper Option

Costs of a government-run health-care program modeled on Medicare will likely be extraordinary.

12:00 AM, Apr 15, 2009 • By JEFFREY H. ANDERSON
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Democrats frequently claim that government-run health care is more affordable than privately run health care. Too often, Republicans don't challenge this wild assertion. If they don't start doing so, the costs will likely be extraordinary--both to Americans' finances and to their freedom.

Congressional Democrats, with clear presidential support, have recently begun airing sneak-previews of their upcoming summertime health-care blockbuster. It will prominently feature a "public option," which would "compete"--on very uneven terms--with private health insurance. In practice, this "public option" would channel millions of Americans into government-run health care, thereby further contracting--rather than expanding and reinvigorating--the private market and gradually closing off the public's options.

This proposal, the centerpiece of the Democrats' strategy to overhaul the American health-care system, is set to premiere in July (just in time to commemorate our nation's founding). What exactly will it look like? In the words of Tom Daschle, the "public option" will be "a government-run insurance program, modeled after Medicare."

Meanwhile, the New York Times writes that, when it comes to health policy, "The president's main focus is on starting to reduce the soaring cost of health care."

So President Obama's main health-care concern is to control its soaring costs. And his, and Congress's, proposed remedy is to add more government-run health care. High costs are the problem, and a new Medicare-like program the solution. Rarely in the whole history of medicine has there been such a disconnect between the disease and the cure.

Since its launch in 1965, Medicare's costs have soared skyward like an Apollo rocket. But these skyrocketing costs have not generally been made available for public viewing; rather, they have largely been shielded from sight. So before we consider christening another Medicare-like program, let's take a look at Medicare's record.

By 1970, having been in existence for five years, Medicare was well-established. That year, its price-tag was $42 billion. By 2008, Medicare's cost had soared to over $468 billion--an 11-fold, or 1000 percent, increase. Given the effects of inflation, this might not seem too surprising. However, that's Medicare's cost-increase after having already accounted for inflation. So, for every $1 in inflation since 1970, Medicare's costs have risen by $1--and then by another $10. In actual dollars, we now spend $62 on Medicare for every $1 we spent in 1970.

True, more people are now enrolled in Medicare. During the span that Medicare's costs have risen more than 11-fold in real dollars, its beneficiaries have slightly more than doubled. Therefore, Medicare's per-beneficiary costs have more than quintupled--after accounting for inflation.

To be sure, other health-care costs have risen as well, although this hasn't happened in a vacuum. Medicare's artificially low, government-set payment-rates lead to rampant cost-shifting, as doctors and hospitals charge higher rates to private individuals and insurers to try to compensate for the below-market fees they receive from Medicare. A recent study by Milliman Inc, a prominent actuarial consulting firm, estimates that this has raised the cost of private health-care by $88 billion annually. In addition, cumbersome Medicare-mandated administrative tasks shackle private health-care providers with much additional work, which has to be paid for by someone--and it can't be Medicare, whose reimbursement rates are fixed.

Despite this rather significant handicap, privately run health-care has proven to be far, far less expensive than the government-run variety. What Medicare saves in lower reimbursement rates for any given service, it more than makes up for in extraordinarily poor coordination of care and good-old-fashioned bureaucratic waste. The numbers speak for themselves:

Since 1970, our overall national health expenditures (NHE) apart from Medicare and Medicaid have risen 83 percent in relation to the gross domestic product (GDP). Meanwhile, the cost of Medicare has risen 304 percent versus GDP--and that is without even counting the relatively new Medicare prescription drug benefit. The passage of decades hasn't notably improved the government's performance: Since 1990, NHE apart from Medicare and Medicaid has risen 19 percent versus GDP, while the cost of Medicare has risen 57 percent versus GDP.