The worst of both worlds

President Bush is insisting that Social Security is in a crisis. It's a problem, to be sure, but a relatively fixable and distant one. Social Security won't even have a deficit until 2018. Medicare, on the other hand, is already in the red. It's Medicare, not Social Security, that threatens our economy the most, as Fareed Zakaria argues in a recent column.

There are two philosophically opposed models of health care: socialized and privatized. They each have upsides and downsides. It's possible to have elements of one model in a system dominated by the other. But America's particular blend of socialized and privatized health care is extremely dysfunctional and obscenely expensive by its very nature.

Canada's health care system is largely socialized. The big downside of that is how Canadians don't have much incentive to restrain their use of medical services (or even to shop around for better prices), because they're not spending their own money. But the upside is that as an enormous single purchaser of health care, the Canadian government has great bargaining power to get low prices.

America's system has Canada's downside, but not its upside. A great many Americans receive socialized health care through Medicare, Medicaid, and state programs. They, like Canadians, have a lack of incentive for restraint (although this is not complete because of co-payments and other measures). This problem has been made worse by President Bush's addition of prescription drug benefits to Medicare, and his threat to veto any attempt to pare it down. Also, unlike Canada, America can't take advantage of its monopsony position (the opposite of a monopoly), because, as Zakaria observes, "in America the government cannot (often by law) exercise its clout as a buyer to drive down costs."

In a system more like an "ownership society," citizens would pony up their own money for health care. These citizens would have every incentive to spend that money wisely. Health care providers would then have to compete for the money of very discriminating customers by lowering prices and improving quality. The upside is that health care as a whole would become cheaper and better. The downside is that, no matter how much prices drop, there will always be some people too poor to afford to pay.

America doesn't have the benefits of a free market in health care because it's largely socialized and anti-competitive. And, since even our socialized health care isn't universal, it still leaves some completely without health insurance. Again, it's all downside and no upside.

As I see it America has two good health care policy choices. It could have a monopsony-strengthened socialized system, tempered with "privatization" measures like co-payments. Or, (and this is my strong preference) it could have a competition-strengthened privatized system, tempered with "socialization" measures like a "welfare-to-work" version of Medicaid. The system's current blend is a lose-lose situation. As more and more baby boomers qualify for Medicare, unless the system is wisely reformed, it will soon present a true crisis.