As demand continues to grow, the US is in danger of slipping into state funding similar to the National Health Service, says Amity Shlaes.

The announcement that Britain plans to push taxes skyward to fund healthcare did not get much of a reaction in the US. In fact, America shrugged its collective shoulders.

If the UK wants to expand the state's presence in the economy, let it go ahead, was the feeling among those who thought about it. That's Britain, with its socialised health system and year-long waits for hip replacements. It's not us, the private sector paradise that provides the best healthcare in the world.

But the difference between "them" and "us" is not as great as Americans believe. It is true the US system is a mixture of private insurance and public funding - and certainly the private component has driven up quality. But the public share is growing: the total government share of all healthcare, once small, is now at 45 per cent and is set to grow to above 50 per cent. US healthcare would be mainly state-funded.

The main difference between Britain and the US is that the British crisis has come first and that Britain has already acknowledged, through its continued support for the "single payer" National Health Service, that government will pay for healthcare, whatever the cost. America has not yet reached a crisis and been forced to make such a choice.

But it will have to do so eventually. The reason for this is a curious cultural ambivalence over healthcare. On one hand, the nation appreciates what the private sector achieves. On the other hand, it wants more entitlements, as well as new regulations that discourage private sector health entrepreneurs. This ambivalence leads to inaction, the result being that the US will eventually face a budgetary time-bomb similar to Britain's.

A study of such ambivalence is to be found in, of all places, commercials currently airing for Oxford, a health maintenance organisation (HMO). Oxford's commercials push private insurance for senior citizens who want to top up the share of their healthcare needs not covered by Medicare, the government programme for older people.

The Oxford ads do not spell out the glories of private insurance - or even mention the word "private". Instead, they show belligerent grey-hairs gathered in a lecture hall; one by one, they call out things such as "I demand 100 per cent hospitalisation [coverage]" and "I deserve prescription drug coverage".

Perhaps Oxford's message is that the glorious private sector can provide better care than anything on offer in a welfare state dreamland. The more obvious interpretation, though, is that faith in state programmes is so great that even private products are best marketed as entitlements.

But back to the components of the budget time-bomb. The first is Medicare. A child of Lyndon Johnson's Great Society, it was once a relatively small programme, 3.2 per cent of total federal outlays in 1970.* Recently that share has ballooned to 11.3 per cent of the budget, or $202bn (£140bn). In the early 1990s, the Clinton administration made a move like Gordon Brown's, slapping a surtax of 1.65 per cent on all income to fund Medicare. The tax had formerly been capped to the first $70,000 or so earned.

Lifting the cap, of course, did not deal with the growth malady: last year alone, outlays for Medicare increased by 9 per cent. And that growth is due to continue: the proportion of US citizens who are 65 or older is likely to increase to 20 per cent of the population by 2030, from the current 12 per cent. Naturally these new senior citizens will want better services than their parents got.

Medicaid, America's programme for the poor, is likewise taking increasing shares of the federal pie. Even though Medicaid serves the poor, a group who have done better lately, it is set to grow because authorities have continued to widen the category of eligibility and expand availability of new treatments. Medicare and Medicaid together now take up 18 per cent of federal spending, up from 9 per cent two decades ago. Unreformed, they will eat up the budget, guaranteeing tax increases.

That, of course, is not all, for there are also calls for new entitlements. The largest instance of programme creep is prescription drugs for senior citizens. The debate is not whether seniors will be covered; the outstanding question is to what extent. The Republican-led House of Representatives has put forward legislation calling for a budget increase of $350bn over 10 years. The Senate, led by Democrats, wants $500bn for the same period. And the AARP, the powerful lobby for senior citizens, wants $750bn.

Meanwhile, Democrats in the Senate are seeking to use the opportunity of trade legislation to expand the federal role by attaching an amendment that would force the federal government to subsidise insurance for workers displaced by trade.

All this does not mean the US will inevitably socialise health; it only means that it must defend its system promptly by acknowledging the limits of Medicare and Medicaid and offering stronger incentives to the private sector. President George W.Bush has tried a bit, demanding, for example, that increased Medicare spending be tied to overall Medicare reform.

There is also talk of expanding a small federal programme known as Medical Savings Accounts, which allows some smaller firms to encourage workers to save by rewarding them for keeping their health costs under control. The Galen Institute, a health think-tank, has proposed expanding the idea to encourage older people to curtail their health claims on the federal system.

Still, these steps have the feel of a rearguard action. When it comes to healthcare, Americans, like the oldsters in the Oxford ads, will always want "more". But they must ask themselves now who is best at providing it.

© Copyright 2002 Financial Times