If Medicare Were a Country

Most health care reform proposals assume that it is the private health care system that needs fixing. However, over the past 25 years, government spending on health care has been increasing at a faster rate than private spending on health care.

Medicare accounts for more than 15 percent of health care spending in the United States. Fiscal projections for the middle of this century show that the looming cost of Medicare is by far the biggest problem for the federal budget.

And yet, in too many discussions of health care reform, Medicare is ignored.

The implicit assumption is that policy changes are required in other parts of the health care system, but Medicare ought to be left alone. That may be comfortable politically, but simple arithmetic will show that it is not realistic if we wish to rein in health care spending. We are not going to achieve meaningful progress in curbing health care spending without touching Medicare.

In 2004, health care spending in the United States totaled $1.9 trillion, an average of $6,280 per person. Many observers put this figure in perspective by using other countries as a benchmark. For example, in 2003, health care spending in France was only $2,900per person.

Along these lines, the table below treats Medicare as a country, and compares its budget to the health care budget of France. In the table, health care spending in France is multiplied by the ratio of population in the United States to the population in France. This provides an estimate of what France would spend if its population were 300 million people, as in the U.S.

France:* 900 ($ billion)

United States: 1,900

Medicare: 300

Non-Medicare: 1,600

*scaled up by the ratio of population in the United States to the population in France

[Sources: for France, OECD Health Data 2005; for U.S., Centers for Medicare and Medicaid Services, press release Jan. 10, 2006 and author calculations]

This division between the countries of Medicare and non-Medicare provides some perspective on the limitations of health care reform if we leave Medicare alone. For example, suppose that the goal of health care reform is to reduce our health care budget to the level that would prevail if our per capita health care spending were the same as in France. That would mean our total health care budget would be $900 billion. If we leave Medicare at $300 billion, our non-Medicare spending would have to be cut from $1600 billion to $600 billion, a 67 percent reduction.

This little exercise in arithmetic brings out some important truths:

1. Although other countries use single-payer health care systems and those countries have lower per capita health care expenditures, a single-payer system in the United States would not necessarily reduce our health care expenditures.

The country of Medicare already is a single-payer system, and yet it is part of the problem of extravagant U.S. health care spending, not part of the solution. Indeed, Medicare expenditures on Americans age 65 and over exceed France’s expenditures on that age group by the same ratio that spending on Americans under age 65 (which is predominantly privately financed) exceeds spending on the non-elderly in France.

2. Whether we attempt to move toward a market solution or a government solution, if the goal of health care reform is to put our nation’s health care spending on a diet, seniors will have to participate in the reduction program.

Many people claim that the American health care system wastes money compared with other countries’ health care systems. However, what this exercise shows is that waste in the American health care system is not confined to that part of health spending that is privately financed. Resources are not managed any better under Medicare than under private health insurance.

Proponents of health care reform must face that reality.

Arnold Kling is the author of "A Crisis of Abundance," a book on health care policy to be published later this year by the Cato Institute.