Entitlements will Consume All Tax Revenue by 2052

The United States faces financial collapse due to out-of-control government spending, and entitlement programs have a lot to do with it. Washington has promised more than it could ever possibly deliver.

Medicare in particular puts the government on the hook for $38 trillion in long-term unfunded liabilities, and reform to address this is sorely needed. Change must address not only spending but also the system by which the program operates, which currently encourages inefficient use of health services. This trend has penetrated the health care system at large.

According to the Obama Administration, the health care overhaul passed in March addressed the need for entitlement reform. However, at a recent event hosted by the Galen Institute, expert James Capretta introduced his research that shows that this is not the case.

Peter Orszag, Director of the Office of Management and Budget, identified the main driver of increased spending in Medicare as soaring costs in the health care system at large. This argument was used to claim that Obamacare would “bend the cost curve,” reducing federal commitments and overall health spending.

But Capretta points out that the Administration was incorrect in this assessment. He writes that “CBO’s long-term budget projections from last year show that before enactment of the health law, population aging would be responsible for at least 56 percent of the spending growth for the major entitlement programs between now and 2035, and rising health care costs would account for just 32 percent of the cost growth.”

Obamacare ignores the issue at the heart of growing Medicare expenses: an increasing population of senior citizens eligible for Medicare’s benefits. What’s more, the new law will not even really address the problem that it sought to solve. The main issues with Medicare’s high costs arise from its fee-for-service payment system, which gives doctors and patients little incentive to control cost. Obamacare addresses this through top-down delivery system reform, which will have dubious effects on controlling costs.

Capretta explains that “there is nearly half a century of experience with the Medicare program indicating that confidence in ‘government-engineered’ efficiency improvement is entirely misplaced. Efforts to control costs from the top-down have always devolved into price setting and across-the-board payment-rate reductions, which is detrimental to the quality of American medicine. Price controls drive out willing suppliers of services, after which the only way to balance supply and demand is with waiting lists.”

Instead, Congress should reform Medicare by overhauling the current system and replacing it with one where cost control works from the bottom up. Congressman Paul Ryan’s (R–WI) “Roadmap for America’s Future” provides an example where consumers would make choices that rewarded providers for offering better quality care at lower prices. This would encourage greater productivity that would extend throughout the entire health care system.

The good news is that lawmakers on both sides of the aisle have displayed awareness that it is not high costs in health care that make Medicare so costly but rather Medicare itself, which drives cost trends within the overall health care system. The next step is to repeal the top-down approach taken in Obamacare and replace it with a consumer-driven approach that provides better value at a lower price.