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Rising costs? You bet!

| Wednesday, March 31, 2010

Mr. Peter Orszag, Director

Office of Management and Budget

Washington, D.C.

Ms. Nancy-Ann DeParle, Director

White House Office of Health Reform

Washington, D.C.

Dear Mr. Orszag and Ms. DeParle:

Recently in The Washington Post you argued that President Obama's health-care reform — the one that passed on March 21 — "won't break the bank."

You'll pardon my skepticism. When Medicare was created in 1965, its champions predicted that, by 1990, taxpayers would be spending $12 billion annually (adjusted for inflation) on it. In fact, in 1990 Medicare cost American taxpayers $107 billion. (Its annual cost today is nearing $500 billion.)

That is, Medicare's actual cost was eight times (!) higher in 1990 than its projected cost. That's not a rounding error or a small mistake. It's huge. It's game-changing — or should be in a rational world.

Think of the matter this way: Suppose you're shopping for a house and the mortgage banker assures you that in the future, your monthly mortgage payment will be $1,000. So you buy the house because it's worth, to you, a monthly mortgage payment of $1,000. But next year your monthly mortgage payments turn out to be $8,000. Would you still think you got a good deal• Isn't it possible — indeed, likely — that had you known that your mortgage payment would be vastly higher than what you were told it would be, you wouldn't have purchased that house?

The story is the same with Medicaid. Projected to cost $238 million during its first year, Medicaid in fact cost more than $1 billion during that year. And today, as The Wall Street Journal reported last Oct. 21, "Medicaid now costs 37 times more than it did when it was launched — after adjusting for inflation."

Of course, these are hardly the only two programs whose actual costs have far outstripped their advertised prices.

This cost escalation isn't surprising. Government officials operating these programs do not spend their own money; they spend other people's money. And who, pray tell, spends other people's money as wisely as his or her own?

In addition to the lack of discipline that results from spending other people's money, once any such program is in place, a bureaucracy is immediately created that becomes a vocal constituency not only for maintaining the program, but for expanding it. And this expansion is endorsed not because of any real urge to help the public, but rather because expansion means larger budgets and more power and prestige for the officials who operate the program.

Given both the history and the logic of government programs, I simply cannot believe that your cost estimates — however careful your accounting might be — will prove to be correct.

So I challenge you to put your money where your words are. Let's make a real bet.

Pick any year in the future between 2021 and 2046. Tell me your estimate today of how much Uncle Sam will spend on health care that year. I'll bet each of you $5,000 that Uncle Sam's actual expenditures on health care in that year — adjusted for inflation — will be at least 25 percent higher than your estimate.

If Uncle Sam's health care expenditures in that year are less than 25 percent higher than you project them to be, I'll congratulate you as I mail you your checks. If those expenditures are 25 percent higher than you project them to be — or more — I'll contribute my winnings to a private health-care charity, as I predict that the need for philanthropic contributions along those lines will be great.

Do we have a bet?

Donald J. Boudreaux is a professor of economics at George Mason University in Fairfax, Va. His column appears twice monthly.

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