Also predictably, I have to throw my two cents in.
The problem with such dire predictions is that they are nearly always wrong because they assume that trends are stagnate. If you separate the problem into separate components - Government Insulation and Private Insulation it should be clear that one is certainly unsustainable and one is self-correcting.
Governments cannot continue to pay pensions and health insurance indefinitely - I don't think that is controversial. California's bill for these benefits is going to approach $30 billion (from $160 million in 2000) within about a decade.
On the private provider side the case isn't quite so clear. Yes, insurance rates are rising. Yes, medical care is getting more expensive. Yes, employers are balking at picking up more of the bill. But you can already see the market starting to correct for some of these factors.
Deductibles are getting higher. Employers are passing more of the costs to employees. Employers are starting to offer high deductible plans. All of these responses to high costs are going to set the market in motion to find more attractive alternatives.
I think Kling falls into the Central Planner trap by thinking he must come up with a solution to get us from where we are to where he thinks we need to be. He should really know better - Central Planners are nearly always wrong.
The correct approach is to let the market do what it does best - adapt. Perhaps remove some regulatory barriers to innovation - up to and including rigid rules around what does and what does not constitute insurance. Relaxing FDA rules to make drug development cheaper would be nice. Perhaps lifting the AMA's monopoly on medical school accreditation.
Arnold is right that the current system of insulation doesn't work. Fortunately, the market "knows" that it doesn't work and is adjusting to the failure. The best that politicians can do is stay out of the way so that they don't prevent the correction and to pay attention for opportunities to roll back almost a century of regulations, tax breaks and market distortions.
The market will eventually make these government interventions obsolete - lets just sit back and watch with amazement at the innovation that happens by the invisible hand.