The rising costs of Medicare and Medicaid threaten to destroy the nation's fiscal future, but President Obama is pushing for healthcare reform that would increase costs. Instead, he should refocus his presidency on paying down debt.

America's obligations over the next 75 years now surpass $62 trillion, up 8 percent since last year. And a new report released today by the Peterson Foundation suggests that total will go even higher if the House's health care legislation is passed.

(Click table to enlarge in new window)

With today's pliant bond market, it's easy to pretend we can have things that can't be paid for. But that's the kind of attitude that led California into the fiscal abyss. We have to get serious about bringing our expenses in line with our income. Now.

Unfortunately Republicans and Democrats alike are more concerned with winning elections than passing good public policy. Republicans told us "deficits don't matter," signed a prescription drug benefit for Medicare that created a bigger fiscal hole than Social Security, waged two very expensive wars financed with debt, and borrowed to bail out banks.

For their part, Democrats complain about the deficit they "inherited," then proceed to expand the bailouts, pass hundreds of billions worth of "stimulus," and try to increase our health care liabilities over and above already unsustainable levels.

Partisan economists on both sides provide intellectual cover for this foolishness, but most Americans know better. They know our spending is unsustainable. They see what's happened to California and know intuitively that government can't deliver services it can't pay for. Not forever.

Unfortunately, and this is what happened to California, the longer we wait to solve our fiscal mess, the more expensive it will be. The more we borrow today, the less we'll have in the future.

If we wait, by the year 2040, Social Security will have gone from a small surplus as a percent of GDP (0.13 percent) to a substantial deficit (-1.34 percent). Medicare's hospital insurance plan will have gone from a small deficit (-0.08 percent) to a huge one (-3.23 percent).

The Medicare trustees don't provide estimates for the shortfalls of the two other Medicare programs, including for prescription drugs since, technically, there's no shortfall: Congress has promised to fund the programs out of other government revenues.

But at that point there won't be other revenues to spare. If nothing changes, by 2040, income taxes will be enough to cover only Social Security and interest on debt. National defense, education, Medicare, and everything else will all be unfundable. At that point income taxes would have to be doubled to put us back on a sustainable path.

But we won't get that far. Long before most economists care to admit, foreign lenders will decide it's no longer prudent to buy our bonds. That will be enough to cause interest rates to rise, hammering asset values and forcing the economy into a far deeper contraction.

The good news is that this problem can be solved a lot less painlessly if we confront it today. Unlike publicly-held debt, the unfunded obligations of Medicare and Social Security are promises that can be taken back.

So instead of making new promises he can't pay for, Obama should co-opt the Republican platform of fiscal restraint. That worked pretty well for Bill Clinton after his own health care proposal died. By the end of his presidency, we were running substantial surpluses for the first time in generations. That's the kind of change that overindulged Americans truly need.

But don't expect that to happen. Obama and the Democrats will push some sort of health reform through Congress. Then they'll congratulate themselves for expanding coverage -- for getting more passengers on board a Titanic healthcare system that's heading straight for an iceberg.

At first glance this week's budget projections paint President Obama as a spendthrift. The White House itself offered a grim glimpse of a future in which U.S. debt more than doubles to $17.5 trillion in a decade -- an increase of nearly $10 trillion.

Merely servicing the U.S. debt will cost more than America currently spends on either defense or social security.

But the yawning deficit can't be blamed on Obama -- or for that matter, on Bush or on the financial crisis. Instead the government's finances are locked on autopilot, with entitlement programs driving the country towards a fiscal crisis.

Spending on three giant programs -- Social Security, Medicare and Medicaid -- will account for three quarters of the extra borrowing over the coming decade. By 2019, it will more than double to $2.5 trillion -- more than the U.S. government expects in total tax revenues for next year.

Washington needs to address the deficit soon. To avoid pointless political wrangling, it is first important to make clear what is not causing the fiscal meltdown -- including the economic stimulus.

Even if you add in interest payments from the $789 billion recovery bill, the stimulus accounts for only a tenth of the rise in debt up to 2019, according to calculations by Chris Edwards at the Cato Institute.

Three years of weak tax receipts, courtesy of the recession, will cost the country about $1.3 trillion if interest costs are included. This represents just 15 percent of the borrowing binge.

And there is little the government can do with the other spending it has under its control. Indeed Obama is assuming that he will have little money to play with.

The White House forecasts have discretionary spending falling slightly in real terms from $1.26 trillion to $1.12 trillion. This includes a hefty real cut in defense from $687 billion to $559 billion in 2019. Spending on all other departments, including energy, education, labor and agriculture, is also set on a downward trajectory.

Failure to act could have a number of severe consequences. The first would be that debt servicing will swallow up an ever greater share of tax revenue. By the time current teenagers are working, around 36 cents for every dollar of income tax they pay will go to interest payments, according to White House figures. This compares with about 19 cents now.

Then there is the threat of a buyers strike on U.S. bonds. Berkeley economist David Romer argues that investors can quickly pivot from being eager to lend to governments at low rates of interest to being unwilling to buy Treasuries at any price. This may never happen, but the dangers increase along with the deficits.

Time is running out. Powerful as the United States is, the country continues to accumulate debt at this rate at its peril. The focus must be squarely on the real problems -- medical spending and social security.

On healthcare this means ensuring that the costs to Americans are no longer hidden by employer-provided schemes. A more transparent system would put the brakes on rising costs more effectively than any other measure.

On Social Security the United States should gradually start to ratchet up the retirement age until it reaches 70. Social security was not designed to cope with an average retirement that now lasts more than 20 years.

The first step to preventing a looming fiscal disaster is to have a non-partisan discussion about the source of the problem.

The financial crisis has brought forward crunch time. Political procrastination on entitlement reform is now even more dangerous.

There's something scary about big numbers. It's one reason we in the media often like to put the biggest number we can find into a headline.

So it was no surprise that most media outlets went gaga over the Obama administration's projection that the nation's debt will grow by $9 trillion over the next decade. And sure enough, critics of the administration's efforts to reform healthcare were quick to seize on that scary number as another reason to advocate doing nothing.

But without wading into the muck of the current debate over healthcare reform, it's worth taking stock of just how much hypocrisy there is when it comes to the subject of government spending and those big bad deficits.

Let's start with the Republicans. They talk a good game about reining in federal spending, but they bear as much responsibility as the Democrats for the nation's $11 trillion in total debt.

It's sometimes hard to remember that when President Clinton left office in January 2001, the federal budget actually was in surplus. Yet by the time President Bush left town, the federal government was running a nearly a $1 trillion deficit thanks to spending on the wars on Iraq and Afghanistan, the bank bailout and increased spending on prescription drug coverage for Medicare beneficiaries.

But the Republican deficit hawks didn't really start squawking about government spending until President Obama took office and proposed a $700 billion stimulus package for the ailing economy.

In reality, no political party can claim title to being prudent fiscal managers. All that talk about reducing the deficit often is just a wedge issue that gets used by politicians -- both Republican and Democratic -- to score points and torpedo legislative proposals they oppose.

So while I'm no proponent of profligate government spending, the current budget deficit shouldn't be used as excuse to squelch a potentially worthy government program that could benefit generations of Americans.

A proposal like health care reform should be judged on its own merits and not shelved simply because government spending is currently out-of-whack largely because of a need to stave off the worst economic crisis since the Great Depression.

In considering something like health care, there's a need to take a long-term view-not the just impact on the federal budgets for the next few years.

And don't be fooled by conventional media wisdom that the average American is concerned about the deficit. Sure, in an abstract polling question most Americans will say big federal deficits are bad. But the truth is most Americans don't mind government spending when it provides a useful service or puts money in their pockets. If that wasn't true, the cash-for-clunkers program wouldn't have run out of money so soon.

The current financial crisis is in large part due to the fact that we're a society that loves to live beyond its means. It's the American way to buy more home than is necessary and run-up the credit card bill to pay for a family vacation.

Credit became way too easy during the run-up to the financial crisis, but credit isn't going away. It's simply taken a breather. That's because everyone in the federal government and on Wall Street is rooting -- almost urging -- for Americans to start spending again.

For good or ill, credit and spending is the lifeblood of a consumer economy. Yet sadly, the only real solution policymakers have for ending the economic crisis is to encourage people to starting living off their plastic cards again.

And that's why deficit spending by the federal government is probably here to stay for a long time. The government is only doing its part to help.

The debate over healthcare reform heated up this weekend when a top U.S. health official called into question the government-run health insurance option favored by President Barack Obama.

Health and Human Services Secretary Kathleen Sebelius said on Sunday a public option was “not the essential element” of any overhaul, and that non-profit cooperatives being considered by a Senate panel could also fulfill the White House goal of creating more competition on insurance.

Democratic dissenters of this view come out in full force.

“You can’t have reform without a public option,” Howard Dean, a former Democratic National Committee chairman and a vocal supporter of an overhaul, said on CBS’s “Early Show.”

“I don’t think it can pass without the public option,” Dean said. “There are too many people who understand, including the president himself, the public option is absolutely linked to reform.”

Democratic Representative Anthony Weiner of New York, who backs a public option, said in a statement “leaving private insurance companies the job of controlling the costs of healthcare is like making a pyromaniac the fire chief.”

Reuters.com asked a panel of experts to weigh in on the debate. Here are their responses:
(Updated at 8:15 pm ET)
Ted A. Okon is the executive director of the Community Oncology Alliance, a professional organization representing community oncologists. The views expressed are his own.

A government-run insurance program — the public plan option — is not essential to health care reform and could even be detrimental. The government should focus first on creating a consumer-friendly insurance exchange that provides transparency and easy comparison of private health care options. This combined with regulatory reform at the federal level will foster greater competition within the private insurance sector.

Proponents of a public plan want a low-cost, government-run insurance option that will force private payers to reduce premiums to compete. This would be achieved in large part by basing provider reimbursement on Medicare, or a nominal percentage above Medicare. Thus, between Medicare and the public plan, the government would have the leverage to virtually control provider payments.

Greater government control over provider payments would force practitioners to close their practices because in many cases Medicare rates are not realistic. For example, Medicare already pays for approximately 45 percent of cancer care at rates that are forcing community cancer clinics, which treat over 80 percent of Americans with cancer, to cut staff and close facilities. In 2010, Medicare is planning further payment cuts for the administration of life-saving cancer drugs by over 20 percent.

Extending the influence of Medicare pricing through a public plan offering would have catastrophic consequences on the cancer care delivery system in this country.

Dr. Steffie Woolhandler and Dr. David Himmelstein are both associate professors of medicine at Harvard Medical School and primary care doctors at Cambridge Hospital. They co-founded Physicians for a National Health Program. The views expressed are their own.

Even with a strong public option the president’s plan for health reform was far too timid, falling well short of the single payer reform that would resolve the health care crisis.  Dropping the public option assures that reform will merely pump more money into private insurers’ coffers and reinforce their stranglehold on America’s health care system. The measure the president appears ready to accept would do little or nothing to help patients, and much to help the corporate interests who profit from care.

Wendell Potter is the senior fellow on healthcare for the Center for Media and Democracy in Madison, Wisconsin. The views expressed are his own.

I’m hoping the comments from the White House over the past few days are part of a trial balloon to gauge the reaction to the possibility of throwing the public option overboard–and that the reaction from the president’s core supporters has been swift and clear.

There can be no meaningful reform without the public option. The suggestion that nonprofit co-ops can be created as an effective alternative to the public option is fantasy. The insurance industry would love to see the idea of co-ops included in the bill that reaches the president because insurance executives know co-ops would have no chance of ramping up to be competitive in any market.

Sen. Conrad should spend more time learning about what has happened to the insurance industry in recent years before championing an idea that would ensure the continued profitability of insurers at the expense of his constituents and millions of other Americans.

For full Reuters coverage on the healthcare reform debate, click here.

– Peter Morici is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission. The views expressed are his own. –

American health care is broken.

At 16 percent, the United States spends a much larger share of GDP on health care than Western European economies. Yet the United States has about 45 million uninsured, while its peers do not.

Many Americans between 50 and 65 cling to jobs they don’t want simply to keep health benefits. Their European cohorts are not so constrained.

Simply, European systems ration and control prices more effectively than do U.S. private insurers.

Americans can see a specialist quicker than patients elsewhere; however, U.S. private insurers impose endless paperwork and multiple trips to tawdry, inconvenient locations for blood work, x-rays and other tests that should be conducted simultaneously and under one roof with the specialist.

After your internist finds blood in your urine, it takes many absences from work and visits to moribund waiting rooms to locate the kidney stones, and finally schedule surgery.

In Britain, the National Health Service just makes you wait—it’s cheaper.

Instead of formal rationing, U.S. insurance companies harass patients with processes reminiscent of queuing procedures for a Black Sea vacation in the old Soviet Union. They chisel down physician fees and hospitals stays and lavish the savings on insurance executives who become wealthy in the bargain.

Prescription drugs are another issues altogether—pharmaceutical companies set prices arbitrarily and well beyond the reach of even the tough guys at insurance companies.

President Obama has some good ideas and some bad ones. He proposes a government run program that uninsured Americans may join if they can afford; however, since most of the uninsured can’t pay full price for coverage, he plans to subsidize their membership with tax dollars. In addition, he wants to pay doctors to use computers and software, and establish a national data bank on best medical practices.

Hence, he aims to fix the system by creating a massive new entitlement, subsidizing doctors to buy technologies other businesses already purchase to increase efficiency and profitability, and compile information doctors and insurance companies already collect when they prescribe and approve treatments. Those will drive costs up more than lower them.

Republicans reflexively oppose another government health agency, and this is to the detriment of genuine reform. Medicare has proven more effective at providing doctor and hospital services to the elderly than private-managed-care alternatives.

My plan is simple. Establish an optional plan, similar to Medicare, for Americans between 50 and 65. Let those Americans subscribe, if they choose, by transferring their employers’ payments to that system or keep their existing coverage. That would create needed competition for private insurers and drive down prices, and permit statist Democrats to prove the government can do better or fail.

Require drug companies to charge Americans no more than they charge in the regulated markets of Canada, Britain, France and Germany. Drug prices would rise abroad as those systems would no longer be able to free ride on Americans paying for drug company research, but U.S. prices would fall to a lot less than current levels.

Finally, the government already pays for about 45 percent of U.S. health care. President Obama has promised to weed out waste. Fine—cap spending at its present share of GDP, and find the money there to pay for the uninsured with the savings.

Obama believes in international competition for business—let him show that U.S. government health care can be as efficient as government systems abroad in providing universal coverage.

–Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. –

Today President Obama submits his budget outline to Congress, and, with it, a $634 billion fund for health care drawn from higher individual and small business taxes and lower reimbursements to medical providers.

Reform of our health care system is long overdue.  If you’re unemployed, or work for a small business that offers no health plan, or someone in your family has an existing illness known as a “pre-existing condition,” your main concern might be how to get health insurance.

As Obama said on Tuesday night in his address to the nation, “We can no longer afford to put health care reform on hold.”  But setting up a $643 billion fund and raising taxes in the middle of a recession isn’t necessarily affordable either.

In testimony yesterday before the Senate Committee on Finance, Congressional Budget Office Director Douglas Elmendorf presented options for controlling health care costs.  He warned that “reducing or slowing spending over the long term would probably require decreasing the pace of adopting new treatments and procedures and limiting the breadth of their application.”  That’s rationing by another name, not a comfortable concept to Americans. (To read the testimony in pdf format, click here.)

Mr. Elmendorf pointed to the current employer-based health insurance system, where health insurance premiums are untaxed income to workers, as one of the main causes of price increases.  He suggested replacing the tax exclusion or restructuring it, so that patients have more incentives to control costs.  In that way the purchase of health insurance would be similar to the purchase of home insurance or auto insurance, services that consumers appear able to purchase without major problems.

President Obama has said he will consider all proposals.  During his campaign, the centerpiece of his health reform effort was to set up a new health insurance plan, similar to the Federal Employees Health Benefits Program. It would be open to all, with “affordable” premiums and co-payments.

In addition, he proposed a new National Health Insurance Exchange to set standards and regulate private insurance underwriters. Those who could not meet the standards would close.

In a third provision, some employers who offer health insurance now would have to pay higher premiums in order to raise benefits to the level of the new public plan.  Those employers who don’t offer health insurance would be required to pay into the new plan, a new tax.

One way President Obama proposes to save health care dollars would be to encourage or require doctors and hospitals to use electronic health records.  Although privacy concerns have stalled this effort, it could save billions of dollars a year in medical error.  The stimulus bill allocates $20 billion to this effort.

Yet setting up an electronic data base raises many questions.  Can people opt out of the national database?   Should the federal government or individual states mandate one type of standard that can be shared between institutions? Can private companies be allowed to compete among themselves to offer the most convenient method to the medical community?  These questions need debate.

Obama plans to fund his $634 billion fund through higher income taxes on those making over $250,000 as well as limiting itemized deductions by 20 percent. This would be a substantial increase in tax for those households, as well as for small businesses who file under the individual tax code.

Yet even these numbers might be understated.  The insurance program for federal employees is of a higher quality and more costly that typical private-sector coverage.  Expanding health insurance and providing better care costs more money, not less.

Everyone agrees that health insurance needs to be easily accessible and portable, like auto and home insurance.  The question facing us is how to get there and how to pay for it.

Diana Furchtgott-Roth can be reached at dfr@hudson.org. For previous columns, click here.

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. –

On January 29, the U.S. Senate passed the reauthorization of the State Children’s Health Insurance Program (SCHIP), originally enacted in 1997 as an addition to Medicaid. It would have expired on March 31, potentially leaving over 7 million children without health insurance.

The bill passed 66 votes to 32, with several Republicans joining Democrats to pass the bill. The Republican leadership wanted to expand SCHIP spending by $5 billion over five years, an annual increase of 20 percent. In contrast, congressional Democrats succeeded in increasing SCHIP by $32 to $39 billion over five years, according to estimates by the Congressional Budget Office, almost tripling the program by 2013.

Democrats seek to move the government toward national health insurance that is not a low-income program but would be like national defense—available to everyone, and paid for by the taxpayers, as in Europe and Canada. This is a fundamental philosophical difference.

Since the House of Representatives passed a similar bill on January 14, the two bills will be reconciled in conference. The bills are funded by increasing tobacco taxes (assuming the smokers don’t quit in response to the higher tax). The legislation will then go to President Obama, who indicated that he will sign it, unlike President Bush, who vetoed a similar SCHIP increase as excessive.

Senate Finance Committee Chairman Max Baucus declared, “When President Obama signs this bill, the real victory will belong not to politicians, but to kids. The winners today are the kids who need health care.”

The losers, however, might be the taxpayers. The bills are costly because they would raise income eligibility well into the middle class. Last year, SCHIP covered about 7 million low-income children and Medicaid covered an additional 23 million. The proposed bills would add another 6.5 million children to the SCHIP and Medicaid—and, according to Census Bureau data, 42 million children would be eligible.

In addition, the bill allows states to receive federal reimbursement for adding more immigrant children and pregnant immigrant mothers, and drops the five-year waiting-period now required for legal immigrants to be eligible for the programs. This would enable immigrants to come to the United States and qualify for benefits on day one.

The bills would raise family income ceilings for states to qualify for Federal reimbursement. The present limit is 200 percent of the poverty line, or $44,000 for a family of 4 (although individual states can and do fund higher levels without the Federal share). The new bills raise the Medicaid limit to 300 percent, or $66,000. An exception for New York will include families at 400 percent, or $88,000.

According to the Senate Minority Leader, Kentucky’s Mitch McConnell, “It’s grossly unfair that a family in Kentucky making $40,000 must pay for the health insurance of a family making double that — especially if the Kentuckian can’t afford it for his own family.”

The median U.S. household income is $50,000. Sixty percent of American households earn less than $62,000. By raising government insurance eligibility to embrace three fifths of households, Congress will change government-provided health care from a low-income to a middle-income program—even as middle-income households pay lower taxes under the pending economic stimulus plan. The fiscal consequences of this new entitlement will be felt far into the future.

The SCHIP bill prefigures crucial health-care questions for Americans of all ages in the next few years: Who should be insured under federal plans, and who under private plans? Do the American people want increased nationalization of health-care financing, as they have seen increasing nationalization of the banks?

The answer to these questions will determine the shape of American health care for years to come.

Diana Furchtgott-Roth can be reached at dfr@hudson.org. For previous columns, click here.

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute.  The opinions expressed are her own. —

The economic outlook is bleak. Unemployment is rising.  Credit markets are dysfunctional.  Students are worried about job prospects, for good reason.

If you’re a young person choosing a career path, forget banking, forget autos, and forget Wall Street.  A new study coming out from the Hudson Institute in January, funded by the Bill and Melinda Gates Foundation, shows that enrolling in a community college and earning a two-year degree or certificate in a health-related profession—the only field that showed significant job gains in November, and the one with the most jobs openings—can open a pathway to higher earnings.

These findings demonstrate that the role of community colleges in American higher education has been expanding for good reason: they are cost effective.

The study, by economists Louis Jacobson and Christine Mokher of CNA in Alexandria, Virginia, examines 145,000 students in Florida from 1996 to 2007, using individual data on education and earnings.

The study shows that getting a two-year associate degree in a health-care field — such as nursing, medical imaging, and physical therapy — gave students an unusually good starting salary, and a good return on investment.  Students with health-related concentrations earned the highest salaries when they left school, with median incomes of $46,000.

This was about $10,000 more than students who prepared for professional fields such as law and banking; $12,000 more than those who prepared for vocational or technical degrees in fields like agriculture and construction; and $15,000 more than those who studied in the category now abbreviated as STEM, which includes science, technology, engineering, and mathematics.  Students with concentrations in humanities had the lowest starting salaries, with a median of $27,000.

For students who pursued a 4-year BA degree, the additional two years of health-care study made little difference in salary.  However, students who majored in STEM over four years pulled down initial salaries of $46,000, matching health-care earners.  Those who got a BA in a professional field, or in a technical vocation, earned $40,000 and $39,000 respectively, still less than those who took a two-year degree in a health-related field.

The data shows that while it is not necessary for students with concentrations in health-care to attend college for four years to boost earnings, students who go into more academic fields win high-starting pay with a four-year degree.

This is especially relevant in Florida, which has fared badly in this recession.  Its loss of 58,600 payroll jobs between October and November, a decline of seven tenths of one percent, was the largest in absolute numbers and the fifth largest in percentage terms in the nation.  Over the past year, Florida has lost 207,000 jobs and its unemployment rate has shot up from 4.4 percent to 7.3 percent.

In all, the almost 1,200 community colleges in America now enroll 11.5 million students, according to the American Association of Community Colleges, or 46 percent of all undergraduates and 41 percent of first-time freshmen.

Average in-state tuition and fees are $2,400 a year, a bargain compared with tuition at four-year schools, public or private.

Do the math.  Two years’ tuition at your local community college comes to $4,800 (on average).  A major in a health-care field might lead to a job paying around $46,000. Times might be bad, but opportunities abound if one looks in the right direction.

Diana Furchtgott-Roth can be reached at dfr@hudson.org. For her previous columns, click here.