Nothing typifies the inane cycle of government dependency and poverty more than the issue of healthcare.  Given that healthcare constitutes 18% of our economy and that millions of Americans are languishing under its crushing costs, it is important that we articulate healthcare reform from a position of strength.  We must demonstrate how it is socialist interventions in the marketplace that are responsible for high costs.  We must demonstrate how our policies will bring costs under control.

When discussing entitlements, conservatives must remember that the goal of healthcare reform is not to merely cut its costs to the federal budget; it is to alleviate the burden of government-run healthcare on the entire healthcare sector.  Any proposal to tweak the outlays for programs such as Medicare, without fundamentally reforming their anti-free-market structure, will only achieve minor savings, cause pain for those suffering from healthcare inflation, and incur the wrath of the largest voting bloc.

Medicare is socialized medicine for those over 65 in all but name only.  Its very presence in the market as the 800-pound gorilla has a counterintuitive effect of driving up the cost of healthcare, thereby forcing people to remain dependent on its broad shoulders.  Unless Medicare (along with Medicaid) is reformed as a defined contribution voucher system, instead of an open-ended market distorting behemoth, any attempt to raise the eligibility age or cut benefits would severely squeeze older healthcare consumers.

Now we learn that such a proposal would fail to stem the unsustainable trajectory of Medicare costs.

Last week, CBO published a report which suggests that a plan to gradually raise the retirement age from 65 to 67 would save $148 billion over 10 years.  That may sound like a large sum, but when compared to projected outlays, it is infinitesimal.  According to the most recent CBO budget outlook, Medicare outlays will top $7.4 trillion over the next 10 years, with a 75-year unfunded obligation of $35 trillion.  And that is probably a conservative estimate.  Thus, pulling the trigger on raising the retirement age and incurring the wrath of seniors will only reduce outlays from $7.4 trillion to $7.25 trillion.  We’ll be broke before we reach that point anyway.

Raising the Medicare eligibility age is much less effective than raising the Social Security retirement age because socialized medicine – on every level and for every age group – will induce inflationary pressure on the entire healthcare sector.  As the system is currently constituted, many “young seniors” who are retired would not be able to afford health insurance without Medicare, and would be forced onto Medicaid.  The CBO estimates that one-quarter of the $148 billion in savings would be wiped out by increased Medicaid spending.

Medicaid’s stranglehold on the marketplace is already increasing as rapidly as Medicare.  According to a new report published by Centers for Medicare and Medicaid Services (CMS), even though overall healthcare expenditures slowed in 2010, primarily due to the recession and joblessness, government’s share of healthcare spending has increased rapidly.  The culprit?  Medicaid spending; particularly, federal Medicaid spending.

In total, the government (federal, state, and local) financed 45% of all healthcare expenditures, private businesses funded 21% of expenditures, and personal households accounted for 28% – a historic low.  Even part of the business and household share of the financing went towards payroll taxes and premiums which fund… government-run Medicare.  Accordingly, over 55% of all healthcare spending is controlled by the government.  And that is before Obamacare takes effect.

Are you starting to see a pattern yet?

What we really need is a complete overhaul of the self-perpetuating inflationary government healthcare entities by transforming them to free-market voucher systems.  That will drive down costs on the entire healthcare sector, and by extension, will save trillions in superfluous taxpayer-funded spending on third-party entities like Medicare, Medicaid, and SChip.  An unencumbered marketplace under a pure voucher system (as described in the original Ryan Roadmap) would be superior to the premium support system of government-run exchanges.  It would certainly work better than the revised Ryan plan (Ryan-Wyden), which retains the current Medicare system as an option within premium support.  Nonetheless, any reform that introduces more market forces into the system will create downward pressure on healthcare inflation.

Free-market healthcare reform would also necessitate the elimination of onerous government mandates, such as issue guarantee, community rating, and other one-size-fits-all directives that encourage or coerce insurance companies to guarantee coverage and offer similar prices to every individual and every family.  We must also remove the barriers that preclude consumers from buying insurance across state lines.

How destructive are these meddlesome mandates on the private sector?  They distort the market to such an extent that, despite the decrease in demand for healthcare (as a result of the bad economy), premiums still skyrocketed to record highs.  Private insurance companies are recouping the front-loaded costs they will incur under Obamacare mandates, even before they take effect.  This is exactly what happened in Massachusetts with Romneycare.

Other reforms would include block granting Medicaid to the states and allowing them to use funds to convert Medicaid and SChip to private insurance vouchers, converting VA benefits to vouchers for private insurance (but supplement all extra costs), and eliminating the tax incentive gap between employer-based insurance and personal insurance.  The last reform would involve either the elimination of the employer tax exclusion for health insurance, or the extension of that deduction to individuals who buy health insurance.

Finally, we need to encourage personal responsibility by restoring health insurance to traditional high-cost coverage from its current status as a primary source of payment.  Expansion of high deductible health plans and health savings accounts will help reduce third-party market distortions and expose consumers to the actual costs of the services provided.  According to the CMS report, only 11% of all health expenditures are paid out-of-pocket.  That needs to change.  If our goal is to be shielded from any cost of healthcare, we will ultimately be exposed to all costs of healthcare.

Once we institute these reforms, which will generate downward pressure on the cost of healthcare and health insurance, we can discuss raising the eligibility age and cutting benefits to wealthy seniors.  It’s good policy, and while entitlement reform will never make for great politics, free-market reforms that drive down costs are easier to sell than pure austerity measures in the current socialist system.

Austere socialism will only accentuate the high cost of living with more poverty.  Only comprehensive free-market reforms will save our healthcare system.

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