Here’s issue #10 of my Policy and Politics Newsletter, written 12/9/11. The previous newsletter discussed Social Security and the fact that 1) it has no impact on the deficit, 2) the shortfall is relatively small, and 3) there are a number of straightforward ways to address the shortfall. This newsletter will begin to address Medicare and Medicaid, the other two entitlement programs that are consistently raised during deficit discussions.
Medicare and Medicaid present much greater challenges than Social Security, both because they do have a significant impact on the deficit and because the solutions are much more difficult.
Medicare is our universal health insurance program for seniors. It spent $502 billion in 2009. Medicaid is our health insurance program for low income, low wealth individuals. It spent $374 billion in 2009. Note that more than a quarter of Medicaid spending is for seniors. 
Medicare and Medicaid are NOT socialized health care. (Neither is the health care system under the recent reform legislation.) In a socialized health care system, the health care providers (e.g., the hospitals, doctors, and nurses) are government facilities or employees. Our Veterans’ Administration’s health care system and theUnited Kingdom’s health system are socialized health care. Both are highly regarded, although not perfect.
Medicare is a single payer system for our seniors (with some twists). Most other advanced countries’ have single payer health care systems that cover all residents (not just seniors).
Medicare and Medicaid, as parts of our overall health care system, face the same challenges of rapidly increasing costs that the overall system is experiencing. In the US, we spend over $7,500 per person per year on health care; almost two and a half times the average of other advanced countries. And yet our outcomes are worse: we have the highest infant mortality rate, many people with no health insurance or under insurance (where they pay significant costs and/or are exposed to significant risk), and a shorter life expectancy (77.9 years versus 79.4 years). 
Health care costs are high and growing rapidly in the US. Our system creates incentives to spend money on unnecessary tests, drugs, and procedures. Our privatized system includes marketing costs and profits. Our fragmented system has high administrative costs of 15 – 30%; twice the rate of other advanced countries. (Medicare is very efficient; its administrative costs are roughly 3%.) Our overall health system has high drug costs because there is no central entity that can negotiate with drug companies for cost control as other countries’ single payer systems do. This is why drugs are cheaper in Canada. Our Veterans’ Administration and some large health insurance companies do negotiate and get much better drug prices. (Medicare was prohibited from negotiating drug prices by the drug coverage law enacted by the Bush administration.)
Medicare, because of its size and role as the single payer for seniors, offers a means to controlling health care costs, if our politicians would let it. Medicaid, because of its size, also has significant leverage. (They can also address quality issues more effectively than our fragmented private payers.) Furthermore, Medicare’s clout could be enhanced by allowing non-seniors to join. Estimates of the potential savings of an expanded Medicare program range from $58 billion to $400 billion per year.
Medicare and Medicaid aren’t the problem. They only reflect the problems of our overall health care system. They have the potential to lead the way in solving our health care system’s problems, if our politicians will let them. Cutting back on Medicare and Medicaid will only exacerbate the problems by further complicating and fragmenting the system, while leaving many more people without affordable, decent health insurance – on top of the 50 million without insurance today.