Of all the dangers and costs facing the Western economies in the 21st century — terrorism, global warming, overpopulation, social security bankruptcy — the most expensive over the course of the century is likely to be the spiraling cost of healthcare — not just a money pit, but a money chasm.

The actuarial effect of spiraling healthcare costs is as yet only partly apparent. In the past few weeks, United Press International colleagues from around the world have reported on healthcare financing in their countries. The picture is uniformly a grim one, driven by two inexorable factors: the running costs of healthcare, which tend to be excessively protected from the winds of competition, and the continued technological advances in the area that produce medical wonders, all of which seem to be high cost.

One further factor will make the picture grimmer in years to come in Western countries: the aging of the baby boom generation, which will produce crisis, not as in social security systems from around 2010, when the baby boomers start turning 65, but from around 2025, as the baby boomers turn 80 and start to make their maximum demands on healthcare systems.

There are, nevertheless, additional factors that make the spiral in healthcare costs worse than it needs to be. In Britain, healthcare is run by the National Health Service, which provides a service that is free at the point of delivery and for which demand is thus essentially infinite.

The service operates through a public sector bureaucracy that 15 years ago was described as being second in size in Europe only to the Russian army, and must by now have mushroomed past that sadly depleted force. The Blair government is attempting to solve this problem not by fundamental reform, to which it is opposed on ideological grounds — not its own ideology, but that of its backbench members of Parliament and supporters, but by throwing further money at it, allowing the public sector share of British healthcare spending to soar from 6.5 percent of gross domestic product currently to 9.4 percent in 2007-8. Can there be anyone, outside of government and the beneficiaries of this largesse, who thinks this will actually work?

In the United States, the problem is more or less the opposite. Here the private sector dominates healthcare, and has made a very successful living out of its contracting with the government through Medicare/Medicaid and the health insurance industry, through health maintenance organizations, or HMOs, and insurance companies.

Consequently, both the state sector and the insurance companies use their purchasing power to hold down their own costs, allowing the hospitals and other health care providers to reap the bulk of their often inordinate profits from the uninsured.

The “disallowed” portion of a substantial healthcare charge processed through an insurance company is often as much as 50 percent of the total, while Medicare/Medicaid reimbursement rates are even more outrageously below the true cost of the service. Only the uninsured, and those compelled to insure privately rather than through a group policy, are forced to bear the full service charges, which are of course grossly inflated by the bureaucracy required to process insurance and government claims.

The best approach to managing healthcare costs is to take an “economic man” approach, looking at all times at the incentives for each participant in the drama, and taking a cold-eyed accountant’s view of when healthcare intervention is in society’s interests and when it isn’t.

Actuarially, healthcare financing faces a number of problems. Costs of healthcare and benefits to society from it are poorly aligned. In general, healthcare costs are greatest in the last six months of life, in early childhood, and for those with chronic diseases and handicaps. None of these groups can be expected to pay for healthcare out of current income, nor through repaying a healthcare debt later on. Inevitably, then, the costs of their healthcare must be borne either by others or by saving in advance, generally many years in advance.

Geriatric healthcare, first, is of doubtful benefit to society beyond a certain point. Of course, any patient with the means to pay should be entitled to any healthcare he wants to pay for. The problem arises with the healthcare needs of the indigent, or of those with diseases so complex or expensive that their resources are exhausted before healthcare treatment is complete.

In such cases, a financing plan such as the Singapore Provident Fund seems appropriate, under which an individual accumulates monies during his working life that can be used to fund healthcare costs in his twilight years. There would be a certain amount of mutual co-insurance, so that costs over a certain level would be partially covered by a central fund, spread over all the participants.

Nevertheless, catastrophically expensive geriatric healthcare is of little benefit to society, because the patient is unlikely to make further financial or intellectual contributions to society after treatment, so that in cases where private resources are exhausted such treatment should in general not be provided.

As in Singapore, health and social security plans should be linked, so that an individual would have the option of providing further insurance of late-in-life healthcare costs, such as nursing homes, in return for accepting a somewhat later retirement and deferred pension. Indeed, a money purchase funding methodology of both healthcare and social security systems is essential if the burden on future generations is not to be intolerably increased.

Healthcare that allows everybody to live to 100, but not to prolong their economically active life beyond 75, is highly damaging to the general welfare if universally practiced, and should thus be discouraged as far as possible. To the extent that healthcare advances allow people to live longer, they must be prepared to spend a relatively high proportion of that longer lifespan economically active, so that the actuarial costs of their old age may be borne by them and not fall on later generations as a whole. A Provident Fund scheme, in which savers have options on how to spend their health and retirement fund monies, is a far simpler way to achieve this than health and social security fund systems that are inevitably under-funded because of the political attractiveness of providing short-term benefits and ignoring long-term costs.

For children, the primary responsibility should of course be on the parents. A Provident Fund, as well as funding late in life healthcare, could also fund healthcare for the participant’s children, with premiums being increased appropriately for each child borne. This increase would have the additional effect of deterring large families among those who cannot afford to support them, an important objective if reverse Darwinian selection is to be avoided.

The one area where society should play a part is in care of the chronically sick or handicapped. In general, genetic screening as early as possible in pregnancy should be used to reduce the burden of this as far as possible. It is however reasonable to expect society as a whole, in cases where a child is born unavoidably handicapped, or an individual suffers damage through accident or illness, to bear the cost of caring for such people. For them, and only for them, a Medicaid program is appropriate. For all others, the rule should be that healthcare is provided only to the extent that private means or Provident Fund savings permit. There will be hard cases, but all experience of social legislation cries out that it is utterly counterproductive to frame a system on the basis of sentimentality towards those; they will always exist, so that “solving” some hard cases will simply distort the system, making it hugely more expensive and less efficient, while leaving other “hard cases” whose vulgar populist appeal is less.

To prevent adverse selection against the self-employed and uninsured, anti-discrimination legislation, so that private patients are not forced to pay more than, say, a 20 percent premium for services above the fees paid by healthcare plans or the government, are necessary to rebalance the playing field between the individual and the organization.

On the supplier side, the principal need is to allow the market to work. Whereas there is a good argument for the state forcing individuals to save towards the cost of their healthcare, there is none whatever for removing the constraints of competition and cost containment from health care providers.

Accordingly, health care savings funds should be clearly identified as the individual’s own property, that can be used to provide a larger or earlier pension, or left to heirs, if not spent. Health care costs should be payable from the fund or private resources and not through insurance schemes.

Conversely, provision should be through the private sector, with providers competing for the health care dollar on the basis of quality of provision and cost, and not through invisible side transactions with insurance companies, let alone through union-dominated government facilities.

Naturally, professional bodies will still have a role to play in licensing, and in quality control generally, but to the greatest extent possible the model should be that of a freely operating market, not a gigantic government program, let alone a “human right.”

While it has certain special characteristics, and an emotional resonance for everybody, healthcare provision should as far as possible be constrained by market mechanisms, and by individual purchase decisions individually negotiated. By getting away from emotionalism, and from the attitude that healthcare is a “human right” the inevitable increase in costs as technology improves will be contained, and the better care available through technology will be spread more widely among the population as a whole.

Which is, after all, the objective to be desired.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.