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The New Yorker: Bitter Pills

Author: James Surowiecki
May 2, 2011

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James Surowiecki writes on the federal budget deficit and healthcare costs.

Multitrillion-dollar piles of debt have a way of making people nervous, so it's not really surprising that Washington is now in the throes of budget-cutting hysteria. Republicans risked a government shutdown over a few billion dollars in spending cuts, and are now threatening to refuse to raise the government's debt ceiling. The ratings agency Standard & Poor's lowered its outlook on U.S. debt because of concerns about the long-term budget. And Barack Obama has been speaking of the need to eliminate two trillion dollars in federal spending in the next ten years. Yet, strange as it may sound, the federal government does not have a spending problem per se. What it has is a health-care problem. The cost of most budget items typically rises at a reasonable rate, if at all, but the cost of Medicare, Medicaid, and the tax subsidy for employer-provided insurance has been rising much faster than everything else: in the past forty years, Medicare costs increased 8.3 per cent annually. If they're not controlled, Medicare and Medicaid will eventually be by far our biggest expense. Preventing that is the key to getting our fiscal house in order.

Politicians usually shy away from big, difficult, long-term problems like this, but at the moment there are actually two genuinely different, and reasonably specific, visions of how to deal with the health-care problem. Representative Paul Ryan, a Republican, proposes a strikingly simple solution—basically, just giving seniors less money. He'd replace Medicare as we know it; the government, instead of insuring seniors directly, would give them a voucher that they would then use to buy private insurance. His plan saves money because the value of the vouchers would rise at a much slower rate than health-care costs themselves; as the years pass, the government's contribution to seniors' health-care spending would shrink. As a result, seniors would have to spend more and more of their income on private insurance and out-of-pocket expenses, or go without. Indeed, the Congressional Budget Office estimates that Ryan's plan would actually increase the amount of money Americans spend on health care, since private insurers aren't as good at curbing costs as Medicare. But taxpayers would pay less.

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