Debt Ceiling Debate: Fallacies Everyone Should Know (and One Simple Solution)

The following are common fallacies that everyone should know:

1) Entitlements are driving the long-term debt crisis in the U.S.

Well, actually this is true, but should be more specific. While Social Security does have serious solvency issues, specifically $12 Trillion in unfunded liabilities; Medicare is the true danger to our national finances (excluding ObamaCare) with the potential of $90-150 Trillion in unfunded liabilities.

2) Medicare is going broke because of the demographic “bump” in baby-boomers retiring.

No. While it would help if there were more younger workers paying Medicare taxes, this is not the reason for the explosion in benefits projected to occur over the next 40 years. In fact, if the per recipient expenditure could be kept below the inflation rate PLUS real GDP growth, there would not be a Medicare crisis. As the Congressional Research Service stated:

If spending on the health programs grew at the rate of GDP, they would not place a significant strain on government finances. (Page 16)

3) There is nothing the government can do about the increases in medical costs except cut benefits, raise the retirement age, or raise revenues (i.e. taxes)

Wrong. While some of these measures might have to be used, there is another way. (And it is not having the government ration care—Sorry Paul Krugman) This method of health insurance has proven to be very successful. Over a 10 year period, health care expenditures for companies that switched their workers to this type of insurance program saw their health claims grow at only a 3.7% annual rate versus 15% for traditional health insurance. This insurance program is: High Deductible Insurance (HDI) combined with Health Savings Accounts (HSA). (If you are unfamiliar with HDI and HSA, the Cato Institute has some good articles on their use)

It reduces costs for two reasons: 1) When people pay money out of their own pocket, they are more careful on what they spend it 2) When people pay money out of their own pocket; they shop around for the best deal. (Yes, people actually shop for medical treatment: They ask about price, service, guarantees, etc. When was the last time you asked your doctor for a guarantee?)

Why High Deductibles are the Solution to Medicare

Usually High Deductable insurers save so much from reduced claims that they are able to reduce premiums by the same amount as the increase in the deductable. In my case, for example, my premiums were reduced by $300 per month and my maximum out of pocket was increased by $3000. The reduced premiums paid for the increased deductible. I then put the $3600 in savings from my reduced premiums into my health savings account. A health savings account is just a checking account at a bank that can only be used for health care purchases.

High deductible insurance could work for Medicare as well. To reduce the long term growth in Medicare, I propose that we increase the deductible from $163 to $3000. Then, just as private insurers do, reduce premiums by $3000. That means, each year Medicare would put $3000 into each beneficiary’s health savings bank account.

No senior would be worse off because if they had some unexpected medical need, they could simply use their health savings account. Additionally, since they are using their own money for the first $3000, they would not be limited as they are now to only doctors who are accepting new Medicare patients–they could choose any doctor they wished.

Moreover, paperwork would be drastically reduced because no claims would have to be filed for first $3000.

Finally, according to an executive I know at Blue Cross/ Blue Shield, the greatest dollar amount of fraud takes place on small transactions because it is harder to detect and very difficult/costly for an insurer, such as Medicare, to investigate each small claim. A high deductible plan would eliminate these easier opportunities for fraud. In 2009, fraud took an estimated $60 Billion from Medicare.

This is real savings now, and more importantly, high deductible plans could reduce health care inflation producing huge savings over the years to come and averting a financial crisis. (And it does not hurt that this would be politically popular because it does not require higher taxes or cuts in benefits, and would actually help seniors have access to more doctors)

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