Jane Gault at Asymmetrical Information is on a roll with a series of posts about the problems with the Medicare system. Check out her posts on the rising costs of the prescription drug benefit, the media bias when programs are cut, and the rising cost of Medicaid.
The problem in the world of health care costs is actually very simple: patients have the incentive to over-consume services and providers have the incentive to over-provide services. Patients consume as many services as possible because some other entity is generally footing the bills, such that the marginal cost to the patient of extra services is generally nil (if you don't believe this, imagine a world where a 3rd party paid for your car - would you choose the same care you drive today?) Providers tend to over-provide in part for the same reason, and in part as a defensive response to the threat of torts. As a result, costs go through the roof, and those who pay (government, insurance companies, employers) respond by rationing, which pisses everyone off.
This disconnect between the entity paying the bills and the entity selecting the care cannot endure. The fix in the future is guaranteed to be one where the decision maker on the selection of care is the same person who is paying for the care. The only choice we have in designing the system is whether that entity making the decisions is the government (as preferred by statists of all stripes) or the patient.
We need a system where people pay their own everyday medical bills, with insurance in place for catastrophic needs (which is basically how we take care of our cars). You could probably incentivize this tomorrow by making personal medical expenses tax deductible while at the same time making employer-provided medical insurance taxable just like every other kind of compensation. Not only would this fix the incentives problem in the system, but would also eliminate the portability issue associated with employer-provided coverage.
Unfortunately, people have a huge mental block where paying for their own medical care is concerned. My wife is a great example. When I became self-employed, she was shocked that I did not get dental insurance. I tried to explain that we would just use the insurance to pay for checkups and a filling here-or-there, and it would probably cost more than just paying the expenses ourselves. But for her, medical bills are paid by insurance, not by individuals, and it actually felt wrong for her to pay her own doctor's bill (we have a big annual deductible on our medical insurance too so it acts mainly as catastrophic coverage). This is not an isolated attitude - it is why many people equate "not insured" today with "not getting medical care".
Postscript: There is nothing magical about the system of employer-paid medical insurance we have today. Many large employers implemented paid health benefits as a way to evade government wage freezes during the NRA of the 30's and later in World War II. In the tight labor market of WWII, government mandated maximum wages could not lure enough workers, so free health benefits were thrown into the compensation mix since only cash wages were frozen. The system is perpetuated today by a tax code that does not tax health insurance as it does all other parts of the compensation package.
UPDATE: Or, we could just try this
UPDATE#2: A small example of the mindset: Carly Fiorino get $42 million as a parting gift from HP, but still insists that HP privide her medical insurance. With $42 million, she couldn't pay for it herself? (via gongol)