The Department of Health and Human Services administers the huge and fast-growing Medicare and Medicaid programs. The department will spend $910 billion in 2011, or $7,710 for every U.S. household. It employs 68,000 workers and runs more than 420 subsidy programs.

So we can see how the money, the $910 billion dollars annually is allocated. We can see how Medicare and Medicaid are the two elephants in the room. If we could eliminate them, we have moved substantially close to saving our proposed $910 billion each year. So what do they actually consist of that makes them so sacrosanct?

The federal government subsidizes medical care for more than 45 million elderly and disabled Americans through Medicare. Medicare is the third-largest federal program after Social Security and defense, and it will cost taxpayers about $430 billion in fiscal year 2010.1 Medicare is one of the fastest-growing programs in the federal budget, with spending likely to double over the next decade and to surpass Social Security spending by 2028.2 Numerous studies suggest that about one-third of Medicare spending is wasted.

So we are picking on the old folk and the disabled. It’s easy to see why politicians immediately recoil in horror at the merest suggestion of cutting their benefits. So immediately we confront an ethical question, that suggests our moral compass is dysfunctional. This moral question is raised by Lyndon Johnson

At the signing ceremony for the new Medicare program in 1965, President Lyndon Johnson declared, “No longer will young families see their own incomes, and their own hopes, eaten away simply because they are carrying out their deep moral obligations to their parents.

Let us look at the problem. [i] I have a responsibility to look after myself. I cannot ethically expect others to look after me. [ii] therefore to look after myself into the future, or in the immediate future, I need to take steps to do so. My options include [i] saving and investing on my own behalf [ii] purchasing insurance, whereby I pass that responsibility onto the investment professionals.

There is no ethical or moral responsibility for complete strangers, who may be in a worse financial position than I am, to fund the money required. With regard to family over strangers, family may well feel an obligation, but no obligation can be passed onto strangers for my failure to provide for myself.

Polling data that show public support for Medicare do not prove that the program is a success. Such polls reflect the fact that the government has made enrollees dependent on Medicare by taking away their freedom to choose better health insurance options. It is only natural that Medicare enrollees would want to protect the only source of health insurance coverage they have left to them.

Always have to be careful with polling data, unless it measures demonstrated choice. Regardless, their choices can and should be returned. Remove government 100%. What will be left? [i] the individuals who require medical insurance [ii] insurance companies who already do, or want to enter this market. [iii] a free market. The free market will balance supply and demand via price. Price will fall. Not immediately, but it will fall. Why?

Let us for arguments sake use an aggregate. Ugly I know. Let us suppose that the average dollar amount was $100 that could be spent. Let us say that the average policy currently cost $1000 dollars. A pretty wide gulf. First why such a price gap? The price gap exists because government overpays. It is free and easy with taxpayer money, hence with any subsidy, the demand from beneficiaries, who are the subsidised, far exceeds the supply, and price rises. The subsidised, will claim for anything and everything, simply because it is subsidised, and therefore to them cheap. If they had to pay out of their own savings, or from their own policies, they might choose to claim less.

Assume for the moment that they didn’t. That their demands remained constant, inelastic. The truth of the matter then is that the supply is woefully low. The profit margins would be high. High enough that it would attract increasing resources to the area, which would lower prices. The prices could fall, as there is so much demand at lower prices, that profit margins could be maintained on a volume basis. Thus price will fall to the point where the marginal demander will choose not to purchase care, his ailment is not so bad that it is his highest want on an ordinal scale, he values other things higher.

However, I suspect that the ordinal value scales are different to those that are demonstrated when the taxpayer pays. That many who have a cold, who now book a doctors appointment and demand cold/flu medication, would not do so if they had to pay. Thus much demand, created by subsidy would simply disappear. With a falling off of demand, the high costs, and high profit margins undergo a profound change. They shrink. Over supply to a falling demand, brings falling prices. Falling prices is what the free market creates.

In the 20th century, Congress replaced personal savings, family obligations, and charity with giant centralized programs to support the elderly.4 Congress funds the two main programs for the elderly—Social Security and Medicare—primarily by taxing younger workers. That intergenerational funding structure has set the nation on a financial collision course because the number of elderly people in the nation will grow 75 percent by 2030, while the number of working-age people supporting them will grow by just 11 percent.5

Demographics. Maltheusian economics. It’s doomed. Do not wait for it to implode. Do something now, while there is still time to transition a softer landing. When the economic law forces your hand, there are no choices left. Eliminate the programs now.

Medicare is less a “sacred bond between the generations” than a pyramid scheme allowing each generation to take advantage of the next.8 Since the elderly are a politically powerful group, each generation has been able to secure larger Medicare subsidies at the expense of young working-age Americans. Medicare has spawned an average of one tax increase every three years for the past 45 years.9

Younger workers will face massive tax increases unless Congress cuts Medicare spending. Jagadeesh Gokhale has estimated that Congress would have to increase the Medicare payroll tax sixfold—from 2.9 percent to 17.8 percent of all wages—to pay for all of Medicare’s current promises.13 Martin Feldstein estimates that such a tax increase would so damage the economy that the total burden would equal nearly 25 percent of wages.14

This is the problem. The same demographic change that mandates failure, also mandates the political backing of maintaining the subsidy. Understandably, if you have already paid out to support those ahead of you, and now it’s your turn at the front of the que, you are not going to be happy that now the restaurant is out of food. This is the major problem. Many, will not have saved a dime. Many will have no insurance. Many will have saved up medical problems that they intend to have seen now. In a word, they are screwed.

The proverbial rock and hard place. Welcome to Socialism. Socialism is a miserable failure. It cannot calculate, and eventually, like the Soviet Union, it goes bust. Well Medicare & Medicaid are pure Socialism. It has gone bust. Are some going to be hurt? Yes. Is it fair? No. Whose fault is it? Clearly government.

The only answer is that there is no perfect answer. No happy ending. The faster, and more total the cut, the faster the free market will lower prices. Prices can fall very, very quickly, as anyone in the financial markets knows. Charities will spring up, there are enough really, really rich people in the US who currently try to give away their money to Africa etc, that can pick up some of the worst cases. The free market will adjust supply and demand via price very quickly. Time to bite the bullet.

Second, Medicare spending grows because the government keeps expanding the list of goods and services that Medicare subsidizes. Congress created the huge Part D prescription drug program in 2003, which has added hundreds of billions of dollars to the federal debt because legislators provided no funding source. Other expansions occur, without any congressional action or approval, when Medicare officials deem new procedures eligible for subsidies. In 2004, the Bush administration unilaterally announced that Medicare would begin subsidizing obesity treatments.

Here we have an example of ordinal rankings. Fat people. Fat people, because the taxpayer is paying, decide that their weight problem can now be addressed. If they, or when they had to pay themselves, it was not such a burning issue for them. This will be found across the board. Cigarette smokers. Smoked for 50yrs. Now they want medical care. Was never an issue to plan ahead, dang, that would have reduced the number of packets they could smoke. If you make the individual choice of “X” and “X” is a bad choice – do not expect me to pay for your medical care. You chose, you pay, or not, your choice.

Taxpayers foot the bill for an alarming amount of fraudulent and improper Medicare spending. Medicare’s massive size and the huge numbers of doctors and hospitals in the system make it very difficult to police. The government processes 1.2 billion Medicare claims each year by computer, generally without human eyes checking them for accuracy.

Eliminated under a free market. If you cannot keep accurate accounts, you my friend, go bankrupt. The free market polices itself.

Other estimates of improper Medicare payments are higher. Malcolm Sparrow of Harvard University, a top specialist in health care fraud, argues that estimates by federal auditors do not measure all types of improper payments. He believes improper payments account for as much as 20 percent of federal health spending, which would be about $85 billion a year for Medicare.2

Government is incompetent. They are throwing your money, and my money, around like it was going out of style. Get a grip.

One area of rampant fraud is Medicare’s medical equipment subsidies.31 One scam occurs when doctors steer patients to purchase (Medicare-subsidized) motorized wheelchairs that they don’t really need, for which the doctors receive “kickbacks” from wheelchair supply companies or other operatives. A 2008 report by Senate investigators found that 30 percent of medical equipment payments that they examined appeared to be fraudulent.3

Dirty doctors. Unfortunate, but true. I have had numerous personal experiences with corrupt doctors, medicine is a dirty business. The free market polices them far more efficiently than government, lost in internal bureaucracy.

Medicare operates 16 different pricing systems for different types of health care services.40 Physician services provided under Part B, for example, use a complex pricing scheme based on the “resource-based relative value scale” (RBRVS). The government assigns each of 6,700 distinct physician services a value, which is then adjusted for each of 89 regions in the United States and converted to dollars. The result is that the government sets about 600,000 different prices for just this part of Medicare. A 29-member board of doctors sets the “relative values” of medical procedures under the RBRVS. The values are based on the inputs to medical care, such as the cost of procedures, but they do not take into account consumer-side factors, such as the quality or outcomes of procedures, or the demand.

Free-market prices are much different from these government-set prices. Market prices emerge through the voluntary and demonstrated interaction of consumers and competing producers, and they guide consumers to use resources wisely and guide producers to make goods and services more efficiently and more widely available.

The compromise. Instead of going cold turkey and cutting off the program tomorrow, how about a fixed dollar value via a voucher?

Congress should end traditional Medicare and give each enrollee a voucher to purchase the health plan of his or her choice. Subsidizing Medicare enrollees through fixed-dollar vouchers would give enrollees more control over their medical care, encourage them to be more cost conscious, spur innovation by eliminating Medicare’s price and exchange controls, and contain federal spending.

These vouchers value are determined by life expectancy. Slightly higher for those closer to death, lower the younger that you are. These vouchers are on a timetable. They will be eliminated over the life expectancy of the youngest users from year “X”. Thus they have a sale by date. All programs cease 100% by year “X”

All taxes for these programs end today. The value of the vouchers must be supplied by cuts in expenditure elsewhere. You become responsible for your own medical care today. Prices will fall. All costs in administration etc are cut. You get your voucher, end of story. You spend it where you will. It is still a subsidy, it will still distort the market, but it is moving, definitely in the right direction. Demand, to some degree is capped. It may not accurately reproduce the totally free market, but it comes far closer than the current system.

More importantly, it has an end date. It lifts the disaster that is the unfunded liabilities cloud. It will force innovation and competition, more so once the voucher system dies out and only the free market remains.