Least-Worst Solutions

When President Barack Obama called together a fiscal responsibility summit in late February and a health care summit in early March, he seemed to be on track to start addressing our long-term fiscal policy.

Now that the AIG bonus frenzy is over, we can get back to that discussion, which has been sidelined for years. In fact, even during last year’s general election, neither candidate brought up the fiscal issue of Social Security reform. It’s understandable. All the potential solutions require telling voters something they don’t want to hear – in this case, cut guaranteed benefits, raise the payroll tax or increase the retirement age.

But Obama does realize that while Social Security might not be an issue to campaign on, this and other fiscal matters aren’t going to go away. As a matter of fact, they’re only going to get worse. As time goes on, baby boomers will begin to retire and health care costs will continue to rise.

Fiscal matters haven’t been solved yet simply because nobody’s willing to face the fact that sacrifices will have to be made – because, as Obama often says, we can’t “maintain the status quo, because it is unsustainable.”

In such cases where sacrifice is inevitable, the best solutions aren’t necessarily great solutions, just the least bad.  

Medicare is another program that is going to require significant sacrifice. The best proposal I’ve heard so far has actually come from Arnold Kling, a libertarian. Although I don’t personally subscribe to a libertarian philosophy, I do believe that on this particular issue, his solution makes the least-worst sacrifice.

His solution isn’t necessarily derived from libertarianism. Rather, it is the only rational response if you believe he has correctly diagnosed the problem. And this part, correctly diagnosing the problem, has been the hardest part of this whole mess.

Some say rising medical costs are due to price gouging by pharmaceutical companies, others say it’s due to doctors paying high malpractice insurance, and still others believe that taxpayers and insured patients are subsidizing the uninsured.

If pharmaceutical companies are price gouging, their profits (or malpractice insurance costs, etc.) should make up a large portion of health care spending. However, as Kling notes, “neither drug company profits nor malpractice costs nor ‘free riding’ amounts to even one half of 1 percent of GDP, when total health spending is 15 percent of GDP.”

Instead, Kling attributes the rise to cost-ineffective medical services, like plastic surgery or unnecessary MRIs, that we as Americans have come to expect.

As a result, these services, along with their costs, have been incorporated into health insurance premiums for private insurers and higher taxes to cover those under Medicare.

Therefore, to reel in Medicare spending, anyone who believes in Kling’s diagnosis of the problem will have to cut these medical services that, although providing benefit, aren’t cost-effective.

It’s definitely not a solution anybody wants to hear – that price mechanisms will determine whether or they get a service that probably will help them – but to keep spending in line, it’s a sacrifice we’re going to have to own up to, and soon.