Financing Half a Heart

According to Smetters, true cost containment must address the question of the value of extending human life. "We really haven't made that tough decision," he says. And while he notes that the problems in Social Security could be corrected with a change in benefit levels or a delay in the retirement age, Medicare costs are more difficult to get under control because they are rooted in a simple dollar amount. For example, the system -- in an effort to trim costs -- cannot decide to finance only part of a patient's heart operation.

The Obama administration, according to Smetters, seems to be focusing on overall reform of the national health care system with the hope that driving cost savings and efficiencies in the broader health care market will improve the financial outlook for Medicare. Smetters notes, however, that two-thirds of all health care spending is by the government, and he suggests that it may be Medicare that drives up costs in the private system. Meanwhile, government reimbursement is key to establishing medical treatment without regard to the costs and benefits of a certain procedure or treatment, he says.

An unexpected wild card in all these discussions has been the financial crisis, which seems to have temporarily postponed debate on the long-term financial viability of the nation's entitlement programs. At the moment, Smetters says, a sharp discussion about entitlement program shortfalls might make the buyers of government debt nervous -- just when they are needed to support interventions to aid the economy.

But delaying the discussion for now may push the debate out even further in the future as Obama comes closer to the next presidential campaign. "He's not going to take the issue on just before an election," says Smetters, adding that "every year we kick the can down the road, the present value of the shortfall in Medicare and Social Security increases."

Smetters prefers a market-oriented medical system that would make better use of health savings accounts or other methods that would encourage private saving for medical needs later in life. "The private system is not perfect," he acknowledges, adding that private insurers should be able to communicate better through standard information technology, just as other industries, including finance, have done. However, he points out that ultimately, medicine is a labor-intensive industry in which specialists are paid top dollar because the supply of trained professionals is constrained. "The training is challenging, but think about what it takes to become a PhD in a lot of other areas," he suggests. "It's all about supply and demand, and the AMA [American Medical Association] plays a role in restricting the supply of specialists."