Medicare Review

Current Issue

Is Uncle Sam Bankrupt?

by Laurence J. Kotlikoff, Sn Fellow, NCPA

Brief Analyses No 689 | Federal Spending | Government

When it comes to nondisclosure, the United States government is the father of all financial malfeasants.  Indeed, Uncle Sam has been misrepresenting the nation's finances for decades.  In the process, he has run up an undisclosed bill that makes the financial bailout and economic stimulus spending look paltry.

Federal Financial Obligations.  According to David M. Walker, former chief comptroller general of the United States, the federal government's current liabilities to Medicare, Social Security and the federal debt total $56.4 trillion.  To put this in perspective:

·         The average Social Security, Medicare and Medicaid benefit payment per retiree is currently $30,250 - or about 80 percent of per capita U.S. gross domestic product (GDP).

·         In 20 years, when the baby boomers are fully retired, the average benefit per retiree will be the equivalent of $50,000 today (adjusted for inflation).  [See the figure.]

·         Multiplied by 78 million (the approximate number of baby boomers in the United States), the total would be equivalent to $4 trillion per year today.

But the $50,000 estimate assumes that the Medicare plus Medicaid real average benefit will grow at only 3.6 percent per year, whereas between 1970 and 2002 the average level of real Medicare plus Medicaid age-specific benefits grew at a rate of 4.6 percent annually.  In contrast, real per capita GDP grew at a rate of only 2 percent per year. 

Estimating the Fiscal Gap Using Generational Accounting.  Generational accounting is a well-established methodology to measure the burden of government.  A generational account for any given generation measures the generation's remaining lifetime net tax bill as a present value - what the generation will pay net of what it will receive, all valued as of today.  If the generational accounts of all current and future generations are added together, assuming no change in fiscal policy, the sum amounts to what all current and future citizens are going to pay, on net, in taxes to the government (measured as a present value).  This amount has to cover the government's official debt plus the present value of all future government purchases of goods and services (discretionary spending). 

The fiscal gap is the difference between the government's official debt plus discretionary spending and the amount of taxes current and future citizens will pay.  It incorporates all of the government's fiscal activities - including its financial obligations under Medicare, Medicaid, Social Security, welfare, unemployment, and interest and principal on government debt. 

Taking into consideration all of the government's financial liabilities and projected future tax receipts, the current fiscal gap in the United States is estimated by Jagadeesh Gokhale of the Cato Institute and Kent Smetters of the University of Pennsylvania at $77 trillion - more than five times the United States' present GDP.  In order to close a gap of this size, the Federal Insurance Contribution Act (FICA) payroll tax - currently 15.3 percent - would need to be more than doubled immediately and permanently.

To understand how this figure can be so large, consider:

·         There are now roughly 33 million adults in the United States receiving retirement benefits.

·         When the 78 million baby boomers retire, there will be more than twice the number of retirees receiving benefits than there are currently.

·         While there will be a significant increase in those dependent on government programs like Social Security and Medicare when the boomers retire, there will only be about 2.7 workers per retiree to help pay the benefits - down from 3.28 workers per retiree in 1985 and 3.43 in 2000.

Adjusting for Risk.  There is reason to believe that the $77 trillion figure would be even larger were the government's future cash flow discounted, taking into account that future benefit payment outlays appear to be more certain than do future tax receipts.

For example, according to the Social Security Trustees Report, Social Security is 27 percent underfunded.  That is, achieving long-term solvency would require an immediate and permanent 27 percent increase in the 12.4 percent employer and employee payroll tax rate that funds Social Security. 

Social Security's long-term solvency estimate also fails to adjust for the riskiness of the system's cash flow.  Periods of high unemployment, for example, might require increased borrowing by the Treasury in order to fund benefits.  Preliminary analysis from a recent Boston University study suggests that Social Security's failure to risk-adjust its cash flow understates its long-term financial gap by more than 20 percent.  Thus, if Gokhale's and Smetters' projections of all the federal government's unfunded obligations were risk-adjusted, they would undoubtedly be much higher.

Given the magnitude of the fiscal gap, the country is broke.  The United States is currently short more than $77 trillion and this figure will only increase . . .  The United States government, through its various financial agencies, is assuming away the country's fiscal problems rather than confronting and correcting them. Without dramatic and immediate changes in policy, future generations are likely to face lifetime net tax rates that are twice those imposed now.

Laurence J. Kotlikoff
 is a professor of economics at Boston University and a senior fellow with the National Center for Policy Analysis.  This article is adapted from his forthcoming book,
Jimmy Stewart Is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking.

Read the entire Analysis 689. . .

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Government is not the solution to our problems, government is the problem.

- Ronald Reagan


Medicare Review

Previous Issue

Medicare uses two obsolete models for coverage

NCPA – Goodman, et. al.

The modern era has inherited two models of health insurance: the fee-for service model and the HMO model. Neither is appropriate to the Information Age.

Both models assume that (1) the amount of sickness is limited and largely outside the control of the insureds, (2) methods of treating illness are limited and well defined, and (3) because of patient ignorance and asymmetry of information, treatment decisions will always be filtered by physicians, based on their own knowledge and experience or clinical practice guidelines.

However, an explosion of technological innovation and the rapid diffusion of knowledge about the potential of medical science to diagnose and treat disease have rendered these assumptions obsolete. In this chapter, we briefly outline the type of insurance we believe would emerge if we rely on markets, rather than regulators, to solve our problems.



Although the HMO model is often viewed as the more contemporary, it is actually the less compatible with the changes the medical marketplace is undergoing. The traditional HMO model is fundamentally based on patient ignorance. The basic idea is a simple one: make health care free at the point of consumption and control costs by having physicians ration care, eliminating options that are judged “unnecessary” or at least not “cost effective.”

But this model works only as long as patients are willing to accept their doctor’s opinion. And that only works as long as patients are unaware of other (possibly more expensive) options.

As we argued in the Introduction, we could spend our entire gross domestic product on health care in useful ways. In fact, we could probably spend the entire GDP on diagnostic tests alone—without ever treating a real disease.

The information reality is that patients are becoming as informed as their doctors—not about how to practice medicine, but about how the practice of medicine can benefit them. Combine the potential of modern medicine to benefit patients with a general awareness of these benefits and zero out-of- pocket payments, and the HMO model is simply courting disaster. The fee-for-service model is only a slight improvement. It tries to control demand by introducing deductibles and copays. But even it offers strong incentives for patients to over consume health care.

Some believe that managed care can solve these problems. They are wrong. Imagine grocery insurance that allows you to buy all the groceries you need; but as you stroll down the supermarket aisle, you are confronted with a team of bureaucrats, prepared to argue over your every purchase.

Would anyone want to buy such a policy? Traditional health insurance isn’t designed to work much better.

Stay tuned . . .

Goodman, et al, NCPA

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Government is not the solution to our problems, government is the problem.

- Ronald Reagan


Medicare Review

Past Issue

Is ObamaCare Paving the Way for Universal Poor Quality HealthCare?

Sally Pipes

August 14, 2013

Suffering from illness or injury? Good thing you're not British. U.K. police recently investigated the deaths of 300 patients at one hospital. The suspected cause is? Neglect. That could never happen in America, right? On the contrary. ObamaCare's new insurance exchanges and expansion of Medicaid represent the building blocks of a British-style, government-run health care system in this country, says Sally C. Pipes, president, CEO and Taube Fellow in Health Care Studies at the Pacific Research Institute.

If that system metastasizes, rationed care and subpar health outcomes will follow.

  • Less than four in 10 Americans say they support "single-payer" health care.

  • But the idea remains a hobbyhorse for many Democrats. A single-payer bill has been introduced in Congress every year since 2003.

  • Vermont Gov. Peter Shumlin (D) recently signed a single-payer bill into law. And former Congressman Anthony Weiner (D) is pushing for a citywide single-payer system as part of his campaign for New York City mayor.

Initiatives like these could lead to a piecemeal government takeover of the health care system. Consider ObamaCare's health insurance exchanges, which are scheduled to open for enrollment on October 1. Each was intended to be a state-run marketplace offering affordable coverage options. The exchanges haven't unfolded as planned.

  • Just 17 states are operating their own exchanges.

  • Seven states asked for federal help running their exchanges, and 27 left the task to the feds altogether.

  • So the federal government will soon effectively control the individual and small-group insurance markets in more than half the states.

Those markets won't function properly if people don't enroll. That outcome is looking increasingly likely. The exchanges are designed to take premiums from the young and healthy, who typically consume less care, to subsidize coverage for the aged. The individual mandate was designed to force these young folks to participate. But if they ignore the mandate, the exchanges will crumble.

Without young people's premiums to cover costs for older people, the insurance prices will skyrocket. The federal government may feel compelled to reduce premiums, or simply insure everyone directly.

Add the 13 million new Medicaid enrollees to the nearly 63 million people already enrolled and the 50 million people on Medicare, and more than 40 percent of the country will be on publicly financed insurance.

Source: Sally C. Pipes, "Is ObamaCare Paving the Way for Single-Payer System?" San Diego Union Tribune, August 1, 2013.

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Government is not the solution to our problems, government is the problem.

- Ronald Reagan


Medicare Review

Past Issue

Ten Steps to Achieve Health Care Reform

Steps to Free Our Health Care System
by John C. Goodman, PhD, President, NCPA

To confront America's health care crisis, we do not need more spending, more regulations or more bureaucracy.  We do need to liberate every American, including every doctor and every patient, to use their intelligence, creativity and innovative abilities to make the changes needed to create access to low-cost, high-quality health care.

Here are 10 steps to achieve these goals.

1.  Free the Doctor. Medicare pays for more than 7,000 specific tasks, and only for those tasks. Blue Cross, employer plans and most other insurers pay the same way. Notably absent from this list are such important items as talking to patients by telephone or e-mail, or teaching patients how to manage their own care or helping them become better consumers in the market for drugs. Further, as third-party payers suppress reimbursement fees, doctors find it increasingly difficult to spend any time on unbillable services. This is unfortunate, since it means that doctors cannot provide the type of low-cost, high-quality services that are normal in other professions.  

To make matters worse, providers often face perverse incentives. When  they lower costs and raise the quality of care, their income typically goes down, not up. For example, Geisinger Health System in central Pennsylvania gives heart patients a "warranty" on their surgeries. Patients who have to be readmitted because of complications pay nothing for the second admission. Whereas most hospitals make money on their mistakes, the warranty forces Geisinger's staff to provide higher quality care (to avoid readmissions) but lowers Geisinger's income from Medicare and other payers. 

To change these perverse incentives, Medicare should be willing to pay for innovative improvements that save taxpayers money. And doctors and hospitals should be able to repackage and reprice their services (the way other professionals do), provided that the total cost to government does not increase and  the quality of care does not decrease. This change in Medicare would almost certainly be followed by similar changes in the private sector.

2.  Free the Patient. Many patients have difficulty seeing primary care physicians. All too often, they turn to hospital emergency rooms, where there are long waits and the cost of care is high. Part of the reason is that third-party payer (insurance) bureaucracies decide what services patients can obtain from doctors and what doctors will be paid. To correct this problem, patients should be able  to purchase services not paid for by traditional health insurance, including telephone and e-mail consultations and patient education services. This can be done by allowing them to manage more of their own health care dollars in a completely flexible Health Savings Account.

3.  Free the Employee. It is now illegal in almost every state for employers to purchase the type of insurance which employees most want and need: individually owned insurance that travels with the employee from job to job, as well as in and out of the labor market. We need to move in the opposite direction - making it as easy as possible for employees to obtain portable health insurance.

4.  Free the Employer. Liberating employees would have the indirect effect of liberating employers as well. Employers have been put in the position of having to manage their employees' health care costs, even though many businesses lack the experience or expertise. Instead, employers could make a fixed-dollar contribution to each employee's health insurance each pay period. Like 401(k) accounts, the health plans would be owned by employees and travel with them as they move from job to job and in and out of the labor market.   

5.  Free the Workplace.  If a new employee has coverage under her spouse's health plan, she doesn't need duplicate coverage. But the law does not allow her employer to pay higher wages instead. On the other hand, a part-time employee might be willing to accept lower wages in return for the opportunity to enroll in the employer's health plan. The law does not allow that either. The answer:  Employers should be free to give employees the option to choose between benefits and wages, where appropriate.

6.  Free the Uninsured. Most uninsured people do not have  access to employer-provided health insurance, purchased with pretax dollars. If they obtain insurance at all, they must buy it with after-tax dollars, effectively doubling the after-tax price for middle-income families. The answer: People who must purchase their own insurance should receive the same tax relief as employees who obtain insurance through an employer. 

7.  Free the Kids. The recent expansion of the State Children's Health Insurance Plan (S-CHIP) to cover four million additional children will result in up to half losing private coverage, according to the Congressional Budget Office. However, under S-CHIP, children have access to fewer doctors and medical facilities than children in private plans. 

These incentives should be reversed. S-CHIP money should be used to encourage parents to enroll their children in their employer's plan or another plan of the parents' choosing.

8.  Free the Parents. Under the current system, a child could be enrolled in S-CHIP, a mother could be enrolled in Medicaid and a father could be enrolled in an employer's plan. However, medical outcomes are likely to be better with a single insurer. The answer:  Medicaid and S-CHIP funds should be used to subsidize private health insurance, so that low-and moderate-income families are able to see the same doctors and enter the same facilities as other citizens. 

9.  Free the Chronically Ill. Under current regulations, insurers are not allowed to adjust premiums to reflect higher expected health care costs. This encourages insurers to seek the healthy and avoid the sick before enrollment. After enrollment, insurers have an incentive to over-provide care to the healthy and under-provide to the sick. These incentives need to be reversed. For example, in the Medicare Advantage program, the government pays higher premiums for seniors with more expensive health needs. This encourages insurance companies  to create specialized plans - especially for chronic illnesses - that compete with each other. 

Chronic patients also need to be able to manage more of their health care dollars directly. For example, "Cash and Counsel" programs in many states allow homebound, disabled Medicaid patients to hire and fire the vendors who provide them with services. Patient satisfaction in these programs is almost 100 percent.

10.  Free the Early Retiree. Most baby boomers will retire early, before eligibility for Medicare. Two-thirds will not get health insurance from their former employer and even those who have been promised employer coverage may see those promises broken, since there is almost no prefunding of benefits. Under current law, an employer can include early retirees in its regular health plan, but cannot contribute to more economical, individually owned plans. 

The answer: Employers should be able to contribute pretax dollars to the individually owned insurance of their retirees. Early retirees should be able to pay their share of premiums with pretax dollars. Both the employer and the employee should be able to save (pretax) in preparation for these events.

John C. Goodman is president and Kellye Wright Fellow at the National Center for Policy Analysis.

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Government is not the solution to our problems, government is the problem.

- Ronald Reagan


Medicare Review

Past Issue

A Framework for Medicare Reform

John C. Goodman, PhD, President, NCPA

Executive Summary

Health care is the most serious domestic policy problem we have, and Medicare is the most important component of that problem. Every federal agency that has examined the issue has affirmed that we are on a dangerous, unsustainable spending path:

  • According to the Medicare Trustees, by 2012 the deficits in Social Security and Medicare will require one out of every 10 income tax dollars.

  • They will claim one in every four general revenue dollars by 2020 and almost one in two by 2030.

  • Of the two programs, Medicare is by far the most burdensome — with an unfunded liability five times that of Social Security.

  • On the current path, health care spending (mainly Medicare and Medicaid) will crowd out every other activity of the federal government by mid-century.

There are three underlying reasons for this dilemma: 

  • Since Medicare beneficiaries are participating in a use-it-or-lose-it system, patients can realize benefits only by consuming more care; they receive no personal benefit from consuming care prudently and they bear no personal cost if they are wasteful.

  • Since Medicare providers are trapped in a system in which they are paid predetermined fees for prescribed tasks, they have no financial incentives to improve outcomes, and physicians often receive less take-home pay if they provide low-cost, high-quality care.

  • Since Medicare is funded on a pay-as-you-go basis, many of today’s taxpayers are not saving and investing to fund their own post-retirement care; thus, today’s young workers will receive benefits only if future workers are willing to pay exorbitantly high tax rates.

Ideas Changing the World, National Center for Policy Analysis, John Goodman, PhD, President

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Government is not the solution to our problems, government is the problem.

- Ronald Reagan


Medicare Review

Past Issue

Medicaid: Another loss of access caused by Obamacare: When will it end?

The significant promotion of Obama’s Health Plan initiative was to provide greater access to health care for the poor and poorly covered Americans. California was at the forefront of placing their Medicaid recipients into HMOs. These patients were thrilled with having a health insurance card like most middle class American. They did not notice the GMS at the end of their ID numbers which they interpreted as still being part of the government Medical service. We didn’t either when we were asked to have 500 of these added to our panel. We have always had an average of 20 percent of our practice from Medicaid rolls as our fair contribution to the down and trodden since the reimbursement never equaled our cost of caring for them.

We were asked by our IPA (independent practice association) to accept 500 of these Medicaid/Welfare --recipients into the HMO portion of our practice, which was approximately half of our practice. We were promised improve reimbursement to the Medicare fee system for the first visit and a 10% improvement for the follow up visits. We had assumed that several of these would enter our practice on a weekly basis. It should not have been a problem with our single employee practice in the final years before retirement. She was my receptionist, publicists, patient scheduler, buyer/purchaser of all office supplies, inventory control officer, accounts manager, and my sole office manager for a very controlled practice. There were the usual phone calls from a half dozen patients to schedule appoints, reps to be scheduled for five minutes of my time, daily charts to be processed, and filed. She was busy.

The very first day after these 500 welfare patients were added to our obligations, we had 65 messages on the phone the next morning instead of the usual three or four.  These messages came in at all hours of the day and night. It took her two hours to record all the messages and another three hours to process all the messages.  This rate continued on a daily basis. It was then that we realized that these patients did not have jobs. But they all had cell phones and could call from any place they were, day or night. We found that most of these had not been to a physician for three to 15 years. So there were no significant records to be transferred most of the basic informational data which greatly reduces the initial consultation in the usual new patient. It takes about twice as much time to obtain a complete medical history from the medically unsophisticated. Just to record the dates of a patient’s operations takes seconds to record from a prior record or from the medically informed as it does from a medical illiterate who begins to answer such a question with let’s see, we were living in Oklahoma at the time, my eldest was just starting the first grade, and . . . . . the year of her cholecystectomy took five minutes instead of five seconds.  So the first initial office consultation, examination, ordering lab testing, x-ray requests and prescription writing grew from 45 minutes to 75 minutes. But we got paid Medicare rates of $85. But when these patients returned for their office visits to review their status, response to drugs, go over their lab and x-ray data, make plans for their future care, the office call increased from 15 minutes to 25 minutes. But remember we would get a 10% boost in payment. It took a few months before the data came in and we noticed that the HMO vs Medicaid reimbursement for office visits had increased from $18 to $19.80 under the HMO coverage.

We also found out that our referral arrangements were no longer valid. Some of them noted the GMS at the end of their ID number and tracked them immediately and found the reimbursement was not significantly different than Medicaid and refused to see them. So these patients had far less access to care in their new arrangements than they had with Medicaid. The HMO had to find consultants for these patients in more remote areas. We felt uncomfortable to refer patients to consultants we didn’t know. This increases our liability also. When the HMO said that they could not find any consultants in one specialty that we needed for our patient in the Sacramento area, and gave us the name of a physician in San Francisco, about a hundred miles west of here, we were convinced that Obama’s promised of improved access in his plan was a blatant lie, we sorrowfully knew we had to make plans for withdrawal from this component of humanity.

These patients also gave us greater cause for concern. I always greeted these patients in the waiting room, welcomed them to my practice with a nice warm and friendly hand shake. One patient complained that I held her hand too long. Another asked me at the end of her exam, what could she do about her obesity, I pointed to her abdomen and gave my usual spiel (which is identical to the one Weight Watchers uses) that to maintain her weight of 180 pounds, she was eating 1800 calories. If she would reduce that by 500 calories a day, then in a 7 day week, she would lose 3500 calories which equals one pound. She complained to her HMO that I had called her a fatty, which then directs it to the State Department of Health Services, and hours can be spent on clearing this complaint that never happened. The state feels they need to pacify their “members” and makes such recommendations as “we have advise your doctor to take a course in sensitivity training” or take a course on “HIPAA Compliance.” Such little items on an evaluation form can cause great jeopardy to one’s license and we knew we had to make changes.

We also have completed 40-years of hospital and critical care pulmonary medicine practice having had as many as ten patients on life support in several hospitals at the same time. About five years ago, we moved our office into suburban Sacramento in Carmichael and continued with an ambulatory practice. This was reasonable since the hospitals had all established hospitalists to take care of inpatients. This has been common practice for decades for most physicians. However, our IPA and HMO were so desperate to become an Accountable Care Organization under Obamacare, that they used force to place patients. We were threatened to accept a patient on a gurney. We tried to reason with the HMO that such patients do not belong in an ambulatory care setting, but in a practice that saw hospital patients on a regular basis.

And so after six months, when my one person office staff gave me notice, I had to give my IPA notice that we had to withdraw from the remainder of the 500 welfare patients and extended to the President our apologies that his plan was not working. Their access to care was far worse despite our valiant attempts to improve it, they took more than twice as much professional time to deliver less than a quality of care that they did not understand and generally did not appreciate, that their hostility to my services were hazardous to my professional health, and the reimbursement for our professional care was less than their cost to me.

We should have followed the practice of Sandy Marcus, MD, President of the Physician’s Union, who accepted welfare as 10 percent of his practice, but never added the cost of billing and general harassment from Medicaid which he felt would exceed the 10% contribution to welfare by seeing these patient free.

So we decided it was good policy to see our long term welfare patients, which are 20% of our practice, avoid the cost of billing and make it a true charity. As long as physicians accept any welfare payments, no one recognizes our work. By eliminating  accepting payment, the public recognizes this as charity, gains respect and profession status, with no loss in income.

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Government is not the solution to our problems, government is the problem.

- Ronald Reagan


Medicare Review

Past Issue

In Government medicine, there is a perverse incentive to be uninsured "free riders."

As we move into the 21st century, it is clear that we are living with a number of institutions that were not designed for the Information Age. One of these institutions is our health care system.

Characteristics of an Ideal Health Care System

By John C. Goodman, President

National Center for Policy Analysis

NCPA Policy Report No. 242

Web site:

Why should government be involved at all in our health care system? Aside from providing care for low-income families, the most persuasive argument is that in the absence of coercion people will have an incentive to be uninsured “free riders.” In our society, people who choose not to pay for insurance know that they are likely to get health care anyway — even if they can’t pay for it. The reason is that there is a tacit, widely shared agreement that no one will be allowed to go without care. As a result, the willfully uninsured impose external costs on others — through the higher taxes or higher prices which subsidize the cost of their care. 

What evidence is there that free riders are a problem? One piece of evidence is the number of uninsured:

  • According to the Census Bureau, in 1999 there were 42.6 million people who were uninsured at any one time, a larger percentage of the population than a decade ago.
  • The rise in the number of uninsured has occurred during a time when per capita income and wealth, however measured, have been rising.

Although it is common to think of the uninsured as having low incomes, many families who lack insurance are solidly middle class. And the largest increase in the number of uninsured in recent years has occurred among higher-income families:

  • About one in seven uninsured persons lives in a family with an income between $50,000 and $75,000, and almost one in six earns more than $75,000.
  • Further, between 1993 and 1999, the bulk of the increase in the number of uninsured was among the households earning more than $50,000.
  • By contrast, in households earning less than $50,000 the number of uninsured decreased by about 5 percent.

In deciding to be uninsured by choice, many healthy individuals are undoubtedly responding to perverse incentives created by government policies.

  • On the one hand, we make an enormous amount of free care available to the uninsured; in Texas, for example, it totals $1,000 per uninsured person every year, on the average.
  • Also, federal and state laws are making it increasingly easy for people to obtain insurance after they get sick — thus removing the incentive to buy insurance when they are healthy.
  • Finally, although the federal government generously subsidizes employer-provided insurance, most of the uninsured are not eligible for an employer plan, and they get virtually no tax relief when they buy insurance on their own.

Far from solving the free rider problem, most government interventions these days are making the problem worse. Indeed, we might be better off under a policy of laissez faire.

If we accept the free rider argument, however, what policy implications logically follow from it? One commonly proposed solution is to have government require people to purchase insurance. However, this is neither necessary nor sufficient. Instead, a complete solution would have 10 characteristics. Adhering to each of them would lead to a system that provides a reasonable form of universal coverage for everyone without adding to national health care spending and without intrusive and unenforceable government mandates. . .

To read Dr. Goodman’s Ten Recommendations, go to . . . .

“People who fail to insure are likely to get health care anyway — even if they can’t pay for it.”

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Government is not the solution to our problems, government is the problem.

- Ronald Reagan

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