Every day millions of Americans reap the benefits of having the best health system in the world. We have the most skilled specialists, doctors, nurses, and medical technicians available to us, usually within a short distance. Americans are living longer, healthier lives as a result of the sophisticated, patient-focused, competition-based health system that has emerged in our country since the advent of medical science and technology. Yet with all of its success, there are clear threats to the system’s long term financial sustainability and the health care freedom Americans enjoy. The federal government faces a tsunami of debt and deficit caused by the explosion of promised benefits that—if left unchecked—will swallow up all other government spending. The time for dealing with these threats is upon us. The solutions need to start now.

The Medicare ‘Entitlement’

A quarter of health spending in the United States, about $420 billion this year, is by the Medicare program established by the government in 1965 to ensure people 65 years old and older have access to health care. Medicare is an entitlement covering 44 million older Americans (or 14 percent of all Americans) and pays hospitals, doctors, suppliers, drug plans, and a variety of other providers. Medicare is financed by a mix of premium payments by beneficiaries, payments directly from federal revenues, and a payroll tax on workers and employers.

Entitlement programs, usually established by Washington policy makers with noble intentions, are programs literally on auto-pilot. Like all entitlement programs, Medicare spending automatically increases by significant amounts every year. The yearly increases for Medicare have been skyrocketing for many years, averaging 8 percent every year from 2000 to 2005, well ahead of the pace of overall economic growth.

Medicare spending has doubled since the mid-1990s and is expected to continue growing at about 8 percent every year for the next decade. According to the nonpartisan Congressional Budget Office (CBO), by 2017, Medicare spending is projected to more than double to $853 billion. As a share of the total economy, Medicare expenditures currently stand at 3 percent, growing to 6.5 percent by 2030. As a comparison, we will spend 4 percent of the economy this year on national defense.

These shocking rates of increase for Medicare spending would be of little consequence if money grew on trees. But absent any commonsense reforms by Congress and combined with the imminent explosion of Social Security entitlements, these increases are simply unsustainable. They constitute a gathering fiscal tsunami for America’s taxpayers. Three simple and unavoidable demographic realities are certain to push Medicare to the breaking point.

Disturbing Trends

The first of these realities is the retirement of the Baby Boom generation beginning next year, as the first Boomers born in 1946 start collecting early, partial Social Security checks. The trend accelerates in January 2011 as the ’46 Boomers retire at age 65 and become eligible for full Social Security and Medicare benefits. Put simply: the population moving into Medicare is set to explode in less than four years.

The second reality is the dramatic narrowing of the ratio of workers to retirees. According to estimates, there are roughly 3.5 workers today for every retiree. By 2020, the ratio will narrow to about 2.5 workers, and by 2040 there will be 2 workers for every retiree. To give some perspective on this: in 1945, the ratio was 40-to-1. By the 1960s, the ratio had slipped to 5-to-1.

The third reality is the rise in American life expectancy. On September 12, the Center for Disease Control and Prevention reported that life expectancy in the United States has reached 78 years, the highest ever. In the 1950s, life expectancy in the U.S. was less than 70 years. The typical American citizen now lives nearly a decade longer than the typical American citizen a half-century ago. This is good news, of course—but it also puts upward pressure on entitlement programs that have been put on autopilot by Congress.

There is another factor that has to be taken into account, and that is the on-going surge of health care costs in the United States. Unlike the three demographic changes, this trend is not inevitable. Maintaining the best health care system in the world can’t be done on the cheap, but there are many factors within our control as a society that drive up costs or infringe on health care freedom. Two examples are over-regulation and predatory litigation, which are tremendous cost drivers in health care.

The cumulative impact of all these trends on the current health system is clear and dramatic. It means an ever-increasing number of longer-living retirees moving into a Medicare program financed, proportionately, by a shrinking number of working Americans. Put succinctly, it means Medicare is locked on a collision course with massive, certain, catastrophic bankruptcy.

The impact of a Medicare bankruptcy will have an enormous impact on the personal lives of virtually every American, from the young and healthy to the aged and needy. If policy makers in Congress do not begin to alter Medicare’s path now, Washington will eventually be forced to decide between three punishing options: dramatic tax increases on all Americans, including working families; dramatic cuts in non-entitlement spending, eliminating programs Americans regard as vital, like defense or education; or, a combination of both.

A colleague of mine, Congressman Paul Ryan of Wisconsin, recently warned on the House floor: “We have a system today where all the fiscal experts in Washington and across America from the left and the right are telling us health care’s unsustainable; the entitlements in this country are bankrupting America; that our children and grandchildren simply won’t be able to pay for the government of tomorrow because of the cost of health care today and the trajectory it’s on.”

Trustees Pull Medicare ‘Trigger’

The 2007 Social Security and Medicare Trustees report, issued the past April, underscores the perilous condition of Medicare’s finances. “Social Security and Medicare both present daunting fiscal challenges,” the Trustees say, adding “their fiscal problems are driven by inexorable demographic change and, in the case of Medicare, relentless increases in health care costs, and are not likely to be greatly ameliorated by economic growth or mere tinkering with program financing.”

Medicare’s financial position is so severe is that the Trustees this year issued the first ever “Medicare funding warning.” The “trigger” for this warning is that, within the next seven years, the Trustees estimate that more than 45 percent of Medicare’s funding will come from the government’s general revenues as opposed to premiums and fees.

Retired Federal Reserve Chairman Alan Greenspan is also among those who have recently warned of the need to do something about Medicare’s ongoing march toward fiscal disaster. In a September 17 interview with Fortune Magazine, Greenspan said the most urgent economic problem facing America is addressing Medicare. “[W]hat’s at stake here is the fiscal stability of the American government…the problem is that the arithmetic is inexorable,” Greenspan said, adding “it’s unethical and immoral for a government, when confronted with these types of events, not to take action. What do we elect people for?” Continued...