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Medicare at Fifty

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Abstract

self-evident: the evolution of the Medicare program, its politics, policy changes and state as of 2017
Medicare at 50
Theodore Marmor and Jonathan Oberlander
When President Lyndon Johnson signed Medicare into law on July 30, 1965, he declared
that “no longer will older Americans be denied the healing miracle of modern medicine.”1 On that
promise, and much more, Medicare has delivered. During the past half-century, it has provided
tens of millions of seniors a major measure of financial security and improved their access to
medical care. A secure retirement would be unimaginable for most Americans without Medicare.
Since 1972, the program has also insured Americans with permanent disabilities and end-stage
renal disease. Medicare has always accepted eligible beneficiaries regardless of their health status,
has never charged persons with pre-existing conditions higher premiums, and has never ended
coverage for someone because they developed an expensive medical condition. Put simply,
Medicare has been a reliable source of health insurance and economic security for many of this
nation’s most expensive, medically complex, and hardest to insure populations.2
As the single largest purchaser of medical services in the United States, Medicare is an
important source of income for hospitals, physicians, and other medical providers. Medicare has
an enormous financial impact on American medical care and on the federal budget. In 2013, the
federal government spent $583 billion on Medicare, amounting to about 20% of total national
health care expenditures and 14% of the federal budget.3 That price-tag includes not just
spending on program enrollees, but Medicare funding for graduate medical education and
supplemental payments to hospitals serving a disproportionate share of low-income patients.
Medicare indisputably occupies a crucial position in the American health care landscape.
1 President Lyndon B. Johnson, Remarks with President Truman at the Signing in Independence of the Medicare
Bill, (1965), http://www.lbjlib.utexas.edu/johnson/archives.hom/speeches.hom/650730.asp
2 Jonathan Oberlander & Theodore R. Marmor, The Road Not Taken: What Happened to Medicare for All? in
MEDICARE AND MEDICAID AT 50, (Alan B. Cohen, David C. Colby, Keith A. Wailoo, & Julian E. Zelizer,
eds., 2015.)
3 Kaiser Family Foundation, The Facts on Medicare Spending and Financing (2014), http://kff.org/medicare/fact-
sheet/medicare-spending-and-financing-fact-sheet/
2
Yet as the program marks its fiftieth birthday, Medicare, like the rest of American medical care, is
surrounded by uncertainty and faces significant challenges. Concerns persist about Medicare’s
financial future. The specter of impending “bankruptcy,” fueled by dire warnings about the fiscal
consequences of population aging, frightens many. Critics charge that Medicare is unsustainable
in its current form and requires major changes such as raising its eligibility age and converting the
program into a voucher or “premium support” system.4 Meanwhile, longstanding gaps in
Medicare coverage leave beneficiaries vulnerable to the financial burdens of both acute and
chronic illness. The fragmentation of Medicare coverage across different program components
fosters confusion among enrollees. And major Medicare policies are embedded within the
Affordable Care Act, whose fate remains unsettled, while partisan conflict over health care reform
produces new (and often false) anxieties over Medicare’s treatment of its beneficiaries.
By examining Medicare’s origins, its history, and its evolution, this chapter seeks to
illuminate how Medicare developed into the program that it is today. We address central issues in
Medicare reform such as the evolution of cost containment policies and benefit changes. We also
explore shifts in Medicare politics, including the rise of pro-market ideas and partisan conflict.
Finally, we discuss what lessons can be learned from Medicare about health care policy and
politics, and what they tell us about Medicare’s potential trajectories in coming years.
The Origins of Medicare
Medicare has complicated historical origins that are difficult to understand in today’s
political environment.5 Perhaps the best way to understand Medicare is to appreciate how
4 Joseph Antos, Medicare Reform and Fiscal Reality, 30 JOURNAL OF POLICY ANALYSIS AND
MANAGEMENT 934 (2011).
5 The first half of this chapter draws on Theodore R. Marmor, Coping with a Creeping Crisis: Medicare at Twenty,
in SOCIAL SECURITY: BEYOND THE RHEOTIC OF CRISIS 177-199 (Theodore R. Marmor & Jerry L.
Mashaw, eds,. 1988).
3
unusual the program is from an international perspective. No other industrial democracy started
national health insurance with compulsory insurance for its elderly citizens alone. Rather, almost
all other rich democracies started with coverage of their workforce, or, as in the case of Canada,
went from special programs for the poor to universal programs for one service (hospitals) and
then to another (physicians). This means that peculiarly American circumstances, rather than
some common feature of modern societies, explain why it is that compulsory government health
insurance began in the United States with the recipients of Social Security cash pensions.
The roots of this particular history lie in the United States’ distinctive rejection of national
health insurance in the twentieth century. First proposed in the years before World War I,
national health insurance fell out of favor in the 1920s. When the Great Depression made
economic insecurity a pressing concern, the social insurance blueprint of 1935 broached both
health and disability insurance as controversial items that should be included in a more complete
scheme of income protection. From 1936 to the late 1940s, liberals recurrently called for
incorporating universal health insurance within America’s nascent welfare state. But the
conservative coalition in Congress, a de facto majority of Republicans and Southern Democrats,
defeated this expansionist aim.6 National health insurance also aroused fierce opposition to
“socialized medicine” from the chief lobbying group for physicians, the American Medical
Association (AMA), which regarded it as a threat to doctors’ professional, clinical, and financial
autonomy.
The leaders of Social Security, well aware of these political obstacles, reassessed their
strategy of expansion after President Harry Truman failed to secure Congressional enactment of
national health insurance. By 1951, they had formulated a plan of incremental expansion of
government health insurance to elderly beneficiaries of Social Security. Medicare became a
6 THEODORE R. MARMOR, THE POLITICS OF MEDICARE, Aldine (1973).
4
proposal to provide retirees with limited hospitalization insurance—a partial plan for the segment
of the population whose financial fears of illness were as well-grounded as their difficulty in
purchasing health insurance at modest cost.
Beyond this substantive case, the proposal for what came to be termed Medicare had a
political rationale. By proposing to cover only 60 days of hospitalization and exclude physician
services, Medicare’s architects sought to soften the AMA’s opposition to federal insurance. And
by limiting coverage to elderly beneficiaries of Social Security, reformers hoped to capitalize both
on the political appeal of the aged as a sympathetic group deserving of government assistance and
on the popularity of Social Security. Truman administration officials presumed that focusing
coverage on the elderly and locating such coverage within Social Security would make federal
health insurance harder to oppose and dismiss as socialized medicine, thereby improving its
chances of passing through Congress.
These origins have much to do with the initial design of the Medicare program and the
expectations of how it was to develop over time. The incrementalist strategy assumed that
hospitalization coverage was but the first step in benefits and that more would follow under a
common pattern of Social Security financing. Likewise, the strategy’s proponents assumed that
eligibility would be gradually expanded to take in the rest of the population, extending first,
perhaps, to children and pregnant woman. All the Medicare architects took for granted that the
rhetoric of enactment should emphasize the expansion of insurance coverage, not the regulation
and reform of American medicine. The clear aim was to reduce the risks of financial disaster for
the elderly and their families, and the clear understanding was that Congress would demand a
largely hands-off posture toward the doctors and hospitals providing the care that Medicare
would finance. A half-century after the program’s enactment that vision seems odd; it is now
5
taken for granted that how one pays for medical care affects the care given. But in the build-up to
enactment in 1965, no such presumption existed.
The incrementalist strategy of the 1950s and early 1960s assumed not only that public
concern about the health insurance problems of the aged was widespread. It also took for granted
that social insurance programs—which relied on contributory financing via payroll taxes,
conferred a sense of entitlement on their benefits, and were universally available regardless of
persons’ income—enjoyed vastly greater public acceptance than did means-tested assistance
programs.7 Social insurance in the United States was more acceptable to the extent that it sharply
differentiated its programs from the demeaning world of public assistance. “On welfare,” in
American parlance, is a term of failure, and the leaders within Social Security made sure that
Medicare fell firmly within the tradition of benefits that are “earned,” not given. The aged could
be presumed to be both needy and deserving because, through no fault of their own, they had on
average lower earning capacity and higher medical expenses than any other age group. The
Medicare proposal avoided a means test by restricting eligibility to persons over age sixty-five
(and their spouses)—contributors to the Social Security system during their working life.
Once this incrementalist proposal was outlined, who and what shaped its fate? The
Medicare debate itself was cast in terms of class and ideological conflict: “socialized medicine”
versus the voluntary “American way,” private enterprise and local control versus the octopus of
the federal government. Despite the turn to incrementalism, the dispute over Medicare recreated
the polarization that had characterized earlier fights over national health insurance. The AMA
was not impressed by reformers’ efforts at conciliation. In 1957, AMA president David Allman
declared the Medicare proposal “at least nine parts evil to one part sincerity” and “the beginning
7 THEODORE R. MARMOR, JERRY L. MASHAW, AND JOHN PAKUTKA, SOCIAL INSURANCE:
AMERICA’S NEGLECTED HERITAGE AND CONTESTED FUTURE, Sage/CQ Press (2014).
6
of the end of the private practice of medicine.”8 Ronald Reagan warned in a 1962 AMA
recording that if Medicare passed, then “behind it will come other federal programs that will
invade every area of freedom as we have known it in this country.”9 Beneath the public rhetoric,
though, was much division of interest and opinion, particularly in the health care world. Blue
Cross and the American Hospital Association, for example, had much to gain financially from
Medicare’s coverage of the high-risk aged, but their public testimony before Congress gave little
hint of the extent to which they differed from the AMA.
Medicare advocates also had to contend with opposition of Arkansas Democrat Wilbur
Mills, who chaired the crucial House Ways and Means committee, and other Southern Democrats
in Congress. After 1961, the Democratic leadership in the House altered the committee’s
composition by replacing some of these opponents with pro-Medicare members. By 1964,
Medicare appeared on the verge of passage and Mills seemed ready to relent, though a bill still
had not made it out of Ways and Means.
The overwhelming Democratic victory in the 1964 elections transformed the politics of
Medicare, practically guaranteeing that hospitalization insurance for the aged would pass in 1965.
The outcome of that election redistributed congressional power in such a way that Medicare’s
opponents both inside and outside of Congress were overruled, breaking the hold of the
conservative coalition on Medicare’s fate. The question was no longer the desirability of federal
health insurance for the aged, but what particular form that insurance would take.
The result was far more complex than expected. After the 1964 elections made
Medicare’s enactment a certainty, Wilbur Mills maneuvered to alter the legislation. Concerned
8 Organization Section: Highlights of A.M.A. Clinical Session 165 JOURNAL OF THE AMERICAN MEDICAL
ASSOCIATION 2090 (1957).
9 JAMES A. MORONE, THE DEMOCRATIC WISH: POPULAR PATICIPATION AND THE LIMITS OF
DEMOCARTIC GOVERNMENT, Basic Books (1990).
7
that Medicare’s limited benefits would disappoint beneficiaries and generate pressures to expand
to cover physician services via payroll tax funding, and aware that Medicare advocates envisioned
it as a first step to national health insurance, Mills sought to build a fence around the program.
With the tacit and hidden support of President Lyndon Johnson, Mills adapted a Republican
alternative plan to Medicare, adding voluntary, but subsidized physicians insurance to
hospitalization coverage.10 Medicare insurance for physicians (what became Medicare Part B)
would be funded by beneficiary premiums and general revenues, not the social insurance financing
of hospital coverage (Part A). This enabled Mills, who worried about the consequences of raising
payroll taxes too high, to preempt the addition of such coverage through Social Security
financing.
Even with the addition of coverage for physicians’ services, Medicare had significant
limitations as insurance protection. The structure of the benefits themselves, providing acute
hospital care and intermittent physician treatment, was not tightly linked to the special
circumstances of the elderly as a group. Left out were provisions that addressed the problems of
the chronically sick elderly—medical conditions that would not dramatically improve and the need
to maintain independent function rather than triumph over discrete illness and injury. Medicare’s
architects presumed that its benefits would be improved over time, but these gaps would persist
for decades; indeed, there are still significant holes in Medicare coverage today.
Mills feared that Medicare would expand into a broader system of national health
insurance. His concern was well founded given the aspirations of Medicare’s designers, for whom
insuring the elderly was never the end goal. Over time, the program would expand, its advocates
presumed, to cover new populations. Medicare for All was what the reform leaders of 1965
10 DAVID BLUMENTHAL & JAMES A. MORONE, THE HEART OF POWER: HEALTH AND POLITICS IN
THE OVAL OFFICE, University of California Press (2009).
8
assumed would be the ultimate, incremental result of their first step. Medicare’s incrementalism
was a means to an end, a political strategy designed to secure the passage of a federal health
insurance program that would expand substantially in coming years. That presumption was never
made public during the Medicare debate, but it was strongly held by program architects. As
Robert Ball, a key participant in crafting the Medicare strategy and head of the Social Security
administration from 1962-1973, later explained: “we all saw insurance for the elderly as a
fallback position, which we advocated solely because it seemed to have the best chance
politically…we expected Medicare to be the first step toward universal national health insurance,
perhaps with ‘Kiddiecare’ as the next step.”11 Despite repeated denials during legislative debates
in the late 1950s and early 1960s, Medicare’s architects expected that after covering the elderly,
Medicare would soon expand to insure children, then workers, and eventually all Americans.
In an effort to forestall that prospect, Mills added Medicaid to the final Medicaid
legislation. Medicaid covered low-income Americans, building on an AMA proposal and the
preexisting Kerr-Mills program that gave states payments to finance care for low-income
residents. By taking another potential target of federal insurance out of the equation, Mills hoped
that including Medicaid would weaken the case for expanding Medicare. Medicaid was enacted
with scant Congressional or public debate, and little sense of how important it would become.
When Lyndon Johnson signed the Medicare bill into law on July 30, 1965, with former President
Harry Truman in attendance to underscore its roots in earlier national health insurance proposals,
he did not mention Medicaid by name in his remarks. Instead, Johnson obliquely noted that the
bill “will improve a wide range of health and medical services for Americans of all ages.”12
In sum, the Medicare bill that passed Congress in 1965 emerged as broader than its
11 Robert Ball, Perspectives on Medicare: What Medicare’s Architects had in Mind, 14 HEALTH AFFAIRS 62
(1995).
12 See Johnson, supra note 1.
9
advocates expected. The “three-layer cake” encompassed Medicare coverage for hospitalizations
funded via payroll taxes (Part A) , coverage of physician services funded by general revenues and
beneficiary premiums (Part B) , and a joint federal-state program to pay for medical services for
certain categories of low-income Americans (Medicaid).13 The 1965 Medicare law thus took a
form that in key respects deviated from the social insurance model that Medicare’s designers had
preferred. Yet even with these unexpected departures from their vision, Medicare advocates still
believed that the program would over time evolve into national health insurance. Their attention
now turned to implementing Medicare, a formidable task they viewed as essential to
demonstrating the viability and desirability of federal health insurance.
Implementing Medicare
Medicare was slated to be fully operational only one year after its enactment. Assuring a
smooth take-off for Medicare entailed enrolling eligible seniors into the program and securing the
broad participation of medical providers. Social Security administrators went to great effort to
maximize beneficiary enrollment, organizing a nationwide sign-up campaign that relied on mass
mailings of Medicare applications and leveraged the over 700 Social Security district offices
around the country.14 The SSA launched an intense promotional campaign in national and local
media, even enlisting the postal and forestry services in publicity efforts, and arranged for door to
door canvassing to reach persons not covered by mailing lists. The social insurance structure of
Medicare, which did not rely on a means test for eligibility, facilitated these efforts; enrollment in
Medicare Part A (hospitalization coverage) was automatic for Social Security beneficiaries.
Nonetheless, the Social Security Administration still had to solicit and process applications from
13 See Marmor, supra note 6.
14 Michael G. Gluck & Virginia Reno, eds., Reflections on Implementing Medicare, National Academy of Social
Insurance ( 2001).
10
about 8 million persons who were age 65 and older, and thus eligible for Medicare, but not
currently receiving Social Security benefits. Moreover, Part B (coverage of physicians’ services)
was a voluntary program that required seniors to sign up and pay premiums.
At the end of Medicare’s first year, the success of the enrollment campaign was evident.
By July 1, 1966, nineteen million beneficiaries, representing virtually all the U.S. population age
65 and over, were enrolled in Medicare Part A, and 93% of those persons had signed up for Part
B.15 Those impressive figures, achieved within one year of Medicare becoming law, seem all the
more extraordinary now given the problems that the Affordable Care Act had with its initial open
enrollment period during 2013, which came over three years after its enactment.
As Medicare’s administrators worked to enroll seniors, they simultaneously sought to
ensure that hospitals and doctors would take part in Medicare so that beneficiaries had broad
access to medical services. Securing provider participation meant, in practice, accommodating
providers’ interests in financial, clinical, and organizational autonomy. There had been strong
provider resistance to Medicare before its enactment. Medicare’s administrative structure and
initial policies reflected that opposition and the desire of program administrators to assure
provider cooperation with federal health insurance.
Faced with intense resistance from the AMA, including threats of a doctors’ boycott, and
striving to avoid the stigma of socialized medicine and demonstrate that federal health insurance
could succeed, program leaders took steps to conciliate the health care industry. The Medicare
law itself contained an explicit vow that the federal government would not intervene in the
practice of medicine. Private insurers were authorized to handle claims processing for Medicare
so hospitals and doctors would not have to deal directly with the federal government. And
15 Id.
11
Medicare adopted permissive payment policies for medical care providers that contained no cost
controls. Vague definitions of key legislative terms—“reasonable costs” and “customary charges”
in particular—proved significant loopholes that allowed energetic gaming strategies on the part of
providers. Unusual allowances for depreciation and capital costs (such costs were taken into
account in determining hospital reimbursement) contributed a built-in inflationary impetus.16 The
use of private insurance companies as financial intermediaries preserved physician and hospital
autonomy and weakened government controls on reimbursement. It was left to these
intermediaries, who had closer than arm’s length relationships with many providers, to determine
the reasonableness of hospital costs under Part A and physician charges under Part B.
Medicare’s impressive takeoff reflected the Social Security Administration’s
administrative excellence, political skills, flexibility, and extraordinary preparation. In case
demand from new Medicare enrollees overwhelmed hospital capacity—a major concern in the
run-up to the program’s start date—there were even plans to use Army and Veterans
Administration hospitals as backups to serve Medicare patients (in reality, no such overcrowding
occurred). Once underway, though, Medicare proved far more complex to administer than its
parent pension programs within the SSA. Medicare expenditures varied with the use its
beneficiaries made of the program and with the charges and costs providers submitted.
Technological changes in medicine added costs unpredictably, whereas pensions were based on a
formula that related present benefits to past social insurance payments. Medicare had to
accommodate both providers and beneficiaries; the pension program could focus on recipients and
internal administration. These differences in organizational tasks, coupled with the program’s
16 JUDITH M. FEDER, MEDICARE: THE POLITICS OF FEDERAL HOSPITAL INSURANCE, Lexington Books
(1977).
12
two-part insurance hybrid, produced a historically unprecedented level of complexity for Social
Security’s administrative elite.17
The truth is that in the early years of Medicare’s implementation, the program’s
administrators were not organizationally disposed to face the confrontations with providers
necessary to restrain costs, SSA administrators prided themselves on their history of successful
implementation of social insurance. They needed the cooperation of all parties for Medicare’s
implementation to proceed as smoothly, and vigorous efforts at Medicare cost control threatened
this cooperative disposition.18 Medicare’s designers, early on aware of the need to build cost-
control mechanisms into the program, were reluctant to make strong cost-control efforts for fear
of enraging Medicare providers.
With the benefit of hindsight, it is easy to criticize the accommodationist posture of
Medicare’s early administrators. At the time of the program’s enactment, however, Medicare’s
legislative mandate was to protect the nation’s elderly from the economic burdens of illness
without interfering significantly with the traditional organization of American medicine. With this
aim in mind the original Medicare administrators sought to accommodate providers and thereby
ensure a smooth, speedy start for the program. Not until later did Medicare come to be seen as a
powerful means to control the costs and delivery of health care.
There was, however, one area where federal officials aggressively challenged the status
quo: civil rights. Many U.S. hospitals, predominantly in the South, were segregated in 1965, and
either operated separate wards by race or refused to admit any black patients. But as a condition
of receiving federal Medicare payments, hospitals had to certify that they were not discriminating
on the basis of race in order to comply with Title VI of the 1964 Civil Rights Act. As Medicare’s
17 Lawrence D. Brown, Technocratic Corporatism and Administrative Reform in Medicare, 10 J. HEALTH POL.
POL’Y & L. 579 (1985).
18 See Brown supra note 17 and Feder supra note 16.
13
July 1, 1966, launch approached, the Johnson administration had to decide whether to look past
segregationist practices in order to assure that Southern hospitals participated in the new
program. The Johnson administration, led by the Office of Equal Health Opportunity, instead
chose to aggressively enforce the civil rights requirement, sending field inspectors to hospitals to
assess their compliance and pressing hospital administrators to comply with Title VI lest they lose
federal funds.19 The results were impressive; discriminatory practices in hospitals dropped
substantially during 1966 as “more than 1,000 hospitals quietly and uneventfully integrated their
medical staffs, waiting rooms, and hospital floors in less than four months.”20 Medicare thus
played a crucial role in helping to desegregate hospitals in the South.
Apart from Civil Rights, though, Medicare’s initial implementation was solicitous of the
medical care industry in the ways noted above. The late 1960s witnessed efficient administration
of an inflationary design, with predictable results. Medicare expenditures swelled, as did the
health outlays of the nation as a whole. In the first year of Medicare’s operation, the average
daily service charge in American hospitals increased by an unprecedented 21.9 percent.21 The
average compound rate of growth in this figure over the next five years was 13 percent.
Medicare’s definition of “reasonable charges” paved the way for steep increases in physician fees.
In the eleven months between the time Medicare was enacted and the time it took effect, the rate
of increase in physician fees more than doubled, from 3.8 percent in 1965 to 7.8 percent in 1966.22
The average compound rate of growth in physician fees remained a high 6.8 percent over the next
five years. In the first five full years of Medicare’s operation, total Medicare reimbursements rose
19 DAVID BARTON SMITH, HEALTH CARE DIVIDED: RACE AND HEALING A NATION, University of
Michigan Press (1999).
20 David Barton Smith, Eliminating Disparities in Treatment and the Struggle to End Segregation,
Commonwealth Fund (2005).
21 See Marmor, supra note 6.
22 Id.
14
72 percent, from $4.6 billion in 1967 to $7.9 billion in 1971.23 Over the same period, the number
of Medicare enrollees rose only 6 percent, from 19.5 million in 1967 to 20.7 million in 1971.
Medicare’s rising costs made it much more difficult to realize the aspirations of its
designers who believed the program would expand incrementally into national health insurance.
After Medicare’s successful launch, Wilbur Cohen, Secretary of Health, Education and Welfare,
and allies in the Johnson administration proposed, for example, adding coverage for mothers and
newborn children to Medicare during 1967-68. But the plan to expand Medicare to encompass
“Kiddycare” never came to fruition. Opposition from Johnson administration officials over
Kiddycare’s costs, in the context of concern over the growing costs of the Vietnam War and their
implications for domestic fiscal policy, led to its abandonment.24
The 1970s: Grand Ambitions, Incremental Progress
By 1970, there was a bipartisan consensus that the United States faced a cost crisis in
medicine, a crisis fueled in large part by Medicare’s inflationary payments.
The result was a
reawakening of the drive for national health insurance, with
Medicare reform subordinated
to grander designs. The most influential Democratic voice in Congress on health reform,
Massachusetts Senator Ted Kennedy, proposed a national health insurance plan, with the federal
government providing “identical insurance to all Americans for all essential health care.”25 In
terms of both philosophy and policy, Kennedy’s plan embraced the aspiration of universalizing
Medicare. Yet Kennedy did not explicitly call for Medicare for All, choosing instead to label his
plan the Health Security Program. Kennedy believed that the problems of American medical care
23 Id.
24 See Edward D. Berkowitz, Robert Ball and the Politics of Social Security, University of Wisconsin Press (2005);
Lawrence R. Jacobs, The Medicare Approach: Political Choice and American Institutions, 32 J. HEALTH POL.
POL’Y & L 172 (2007).
25Edward M. Kennedy, IN CRITICAL CONDITION: THE CRISIS IN AMERICA’S HEALTH CARE, Simon and
Schuster (1972).
15
required enacting a new health insurance program, one that would subsume rather than build on
Medicare.
Other Democratic party reformers in Congress offered no shortage of proposals to remake
health care during the early to mid- 1970s, including a widely discussed plan for catastrophic
health insurance by Senators Russell Long (D-La.) and Abraham Ribicoff (D-CT).26 Republican
president Richard Nixon also offered a comprehensive plan to expand coverage by building on
employer-sponsored insurance. None of these plans, though, envisioned achieving universal
coverage incrementally by expanding Medicare group by group as program architects had
assumed during the 1960s. And, ultimately, none of the proposals for universal coverage passed
Congress. The 1970s thus marked a turning point, with Medicare no longer the cornerstone of
plans that envisioned universal health insurance.
A second consequence of the cost crisis was the realization in Congress that something
had to be done to restrain Medicare spending.
Medicare, thanks to its rapidly growing outlays,
acquired a reputation among some prominent policymakers in Congress and in the executive
branch as an uncontrollable burden on the federal budget. By 1969, Russell Long, chairman of
the Senate Finance Committee, was warning that Medicare had become a “runaway” program,
and in 1970 his committee issued a landmark report detailing problems with Medicare’s payment
policies and offering recommendations for its reform.27
The Senate Finance report became a foundation of the 1972 Social Security Amendments,
which contained the first significant policies aimed at controlling the rate of growth in Medicare
spending. The measures included the establishment of organizations to review hospital care
provided to Medicare patients, limits on hospital payments, and the authorization of
26 JUDITH FEDER, JOHN HOLAHAN, AND THEODORE MARMOR, eds., NATIONAL HEALTH
INSURANCE: CONFLICTING GOALS AND POLICY CHOICES, Urban Institute (1980).
27 JONATHAN OBERLANDER, THE POLITICAL LIFE OF MEDICARE, University of Chicago Press (2003).
16
demonstration projects in alternative payment methods.28 T
hese reforms were destined to fail
at controlling Medicare costs because they left the basic inflationary structure—retrospective
payment without budgetary limits—intact. Congress was not yet willing to confront the power of
the medical care industry and federal budgetary pressures were not at that time sufficiently strong
to compel more decisive action. Indeed, while Congress took incremental steps to slow Medicare
expenditures, it simultaneously expanded Medicare eligibility to cover persons with permanent
disabilities and end-stage renal disease. In retrospect, these expansions represented not the next
step to Medicare for All, but rather both the beginning and end of significant efforts to widen
Medicare’s base of beneficiaries. By the mid-1970s, reformers had turned away from the original
strategy of securing Medicare for All through incremental expansions of the program to new
populations.29
Still, the 1972 reforms represented a milestone.
The focus of Medicare policy was shifting;
the question of how to contain program spending would come to dominate Medicare policies in
coming years. The establishment in 1977 of a new Health Care Financing Administration (HCFA)
within HEW to administer both Medicare and Medicaid removed Medicare from the Social
Security Administration and its organizational orientation of accommodation. Medicare
became
“one element in the broader universe of federal health care financing programs,” rather than a
freestanding component of the nation's social insurance system.30 With this change, Medicare
administrators, now within HCFA, soon became more concerned
with health care policy and
spending than with broader issues of social insurance.
Other measures passed by Congress to control spending in mid-1970s—including the
establishment of Health System Agencies to oversee area-wide health care planning—would
28 See Brown, supra note 17.
29 See Oberlander and Marmor, supra note 2.
30 See Brown, supra note 17.
17
prove ineffective in ensuing years. Stronger initiatives to control health care costs more broadly
across American medical care either failed to pass Congress, as with the Carter administration’s
1978 hospital cost containment proposal, or were only temporary, such as the Nixon
administration’s 1971 wage and price controls.31 As the 1970s ended, with health care costs
continuing to rise, the prospects for national health insurance and broader cost controls having
faded, and federal budget deficits increasing, policymakers’ interest in reforms to moderate
Medicare spending growth was reaching a crucial threshold.
The 1980s: Medicare in the Reagan Era
Medicare, after nearly fifteen years of relatively quiet controversy in the specialized
politics of health finance, acquired a greater salience in the Reagan era. Always of interest to
those in the health care industry, Medicare was a second-order topic in the mass politics of the
late 1960s and the 1970s. The oil crisis of 1973-1974 and the consequent stagflation joined with
Social Security finance as the other high-priority items on the national agenda. This is not to say
that Medicare was uneventful, but simply that it was a program of ordinary interest group politics,
specially protected under the mantle of social insurance entitlement theories and the elderly's
reputed political influence. That protected status was what the 1980s were to challenge.
Medicare’s original if tacit bargain with the medical care industry—permissive regulation
and generous payments in exchange for participation in the program—ended in the 1980s. Three
major developments led to its demise: rising program spending, rising federal budget deficits, and
the ascendance of conservatism in national politics.
Medicare payments for hospital care rose 22 percent from 1979 to 1980 and 21 percent
31 KAREN DAVIS, GERALD E. ANDERSON, DIANE ROWLAND, &EARL P. STEINBERG, HEALTH CARE
COST CONTAINMENT, Johns Hopkins University Press (1990).
18
from 1980 to 1981. Payments for physician services increased at a similarly staggering rate, rising
22 per cent from 1979 to 1980 and 23 percent from 1980 to 1981.32 Medicare, indeed all health
care, was consuming a larger and larger piece of the economic pie, seeming to crowd out
spending on other goods and services. Meanwhile, the federal budget deficit, which had not been
an issue at Medicare’s enactment, was quickly rising and moving onto the national agenda. In
1965, the federal deficit had been $1.4 billion. By 1980, it stood at $73 billion, or 2.6% of Gross
Domestic Product (GDP), and by 1983, driven upwards by the recession as well as the Reagan
administration’s policies of tax cuts and defense spending increases, had soared to $208 billion or
5.9% of GDP.33 The emergence of the federal deficit as a national political issue, coupled with
rising health care costs, made Medicare a prominent target for deficit reduction during the 1980s.
The 1980 election of Ronald Reagan as president and the simultaneous election of a GOP
Senate majority fundamentally changed Medicare’s political environment. Reagan’s victory
culminated a shift in American politics away from liberalism, one that had begun in the 1970s
amidst economic stagflation and rising disenchantment with the government following the
Vietnam War and Watergate. The Great Society and expansion of the American welfare state
now gave way to an agenda of tax cuts, deregulation, and welfare state retrenchment. National
health insurance, or any comprehensive plan to expand access to health insurance for the
uninsured or contain medical care spending across all of American medical care, was off the
political radar screen.
Instead, the Reagan administration and Congressional policymakers turned their attention
to deficit reduction and restraining the costs of Medicare and Medicaid. The administration
sought to achieve savings in federal expenditures by shifting costs to beneficiaries in the form of
32 Ross H. Arnett III, David R. McKussick, Sally T. Sonnefeld, & Carol S. Crowell, Health Spending Trends in the
1980s: Adjusting to Financial Incentives , 6 HEALTH CARE FINANCING REVIEW 1 (1985).
33 Office of Management and Budget. The Budget: Historical Tables (2015).
https://www.whitehouse.gov/omb/budget/Historicals
19
higher premiums, deductibles, and co-insurance, trimming benefits, and reducing payments to
hospitals.34 But the political popularity of Medicare constrained the administration’s options and
it was only able to secure modest increases in the costs shifted to beneficiaries. It was politically
more attractive to target the medical care industry for savings—hospitals, doctors, and other
service providers—than to impose major benefit cuts on elderly Medicare enrollees. That political
calculus, which has shaped Medicare policy for the past three decades, left health care providers,
with hospitals the leading target since their services comprised the single largest component of
Medicare expenditures, squarely in the sights of both administration and Congressional
policymakers looking for budget savings. The projection of an impending shortfall in Medicare’s
hospital insurance trust fund further emboldened Washington to act.35 The stage was thus set for
a transformation of Medicare payment policy.
In 1983, Congress, with the support of the Reagan administration, adopted the Medicare
Prospective Payment System for hospitals.36 Medicare no longer would pay hospitals
retrospectively with little limit on the costs; under prospective payment, the federal government
would set a fixed payment per diagnosis (based on diagnosis-related groups or DRGs). Hospitals
now faced incentives to restrain costs for Medicare patients. Ironically, the most consequential
health initiative of the Reagan period—Medicare’s prospective payment method—was an
exceedingly sophisticated, highly regulatory form of administered pricing.37 Searching for ways to
contain Medicare spending and produce budgetary savings that would reduce the deficit, the
conservative, anti-government, anti-regulatory Reagan administration ended up with a policy that
substantially expanded the federal government’s power to regulate health care spending. For the
34 Robert Pear, Reagan Medicare Proposals Are Broadly Criticized , N.Y. Times, February 3, 1983.
35 See Oberlander supra note 27.
36 DAVID G. SMITH, PAYING FOR MEDICARE: THE POLITICS OF REFORM, Aldine de Gruyter (1992).
37 James A. Morone and Andrew B. Dunham, Slouching Towards National Health Insurance: The Unanticipated
Politics of DRGs. 62 BULL NY ACAD MED 646 (1986).
20
first time, Washington sought to impose significant limits on Medicare payments to the medical
care industry.
The advent of prospective payment for hospitals was just the start. Physicians were the
next targets of Medicare’s suddenly aggressive payment regime. After a freeze on increases in
Medicare fees to physicians during 1984-1986, Congress enacted the Resource Based Relative
Value Scale (RBRVS) in 1989 during the George Bush administration. Payments to doctors for
each service were to vary based on measurements of their complexity, the time required, and
practice expenses.
As with DRGs for hospitals, Medicare’s new payment system for physician services,
which began in 1993, rested on a highly technical formula. It appealed both to the goal of
encouraging medical care providers to become more efficient and reflected the aspiration of
formulating health care policy on the basis of scientific, objective measures developed by experts,
not politicians. Beneath its technical veneer, though, the new method for paying physicians
constituted administered pricing, with the federal government establishing a Medicare Fee
Schedule that set, in advance, standard, fixed payments for services.38 As with hospital payments,
Congress could control increases in Medicare per service payments to doctors by adjusting an
annual update factor during the budget process. In ensuing years, Congress and presidential
administrations in search of budget savings would do just that. Medicare policy was now largely
budget policy, with the politics of deficit reduction driving recurrent efforts to slow down
increases in program spending. Taken together, the advent of the Prospective Payment System
for hospitals and the Medicare Fee Schedule for physicians amounted to a revolution in federal
health policy.39 The era of permissive payment policy in Medicare was over, replaced by
38 See Oberlander supra note 27.
39 RICK MAYES & ROBERT A. BERENSON, MEDICARE PROSPECTIVE PAYMENT AND THE SHAPING
OF U.S. HEALTH CARE POLICY, Johns Hopkins University Press (2006).
21
prospective payment.
The emergence of an administered pricing regime was not the only surprise during the
Reagan years. Another was the first major expansion of Medicare benefits since the program’s
enactment in 1965. Medicare was never designed to cover all of its beneficiaries’ medical care
expenses. Medicare offered insurance protection against the costs of hospital care, which
represented the largest component of medical care spending and potentially the most catastrophic
threat to persons’ finances. It insured beneficiaries for physician visits and provided partial
coverage for post-hospital and other outpatient services.
Yet there were sizable gaps in Medicare’s benefit package. Beneficiaries had to pay a
significant deductible for each spell of illness before hospitalization coverage kicked in. They
could be forced to pay multiple deductibles in one year, and the number of days of Medicare
inpatient hospitalization insurance was capped, placing the small percentage of beneficiaries with
extraordinarily long stays in major financial jeopardy. Medicare reimbursed 80% of the charges
for outpatient physician services, leaving enrollees responsible for the other 20%, as well as for
premiums, and mental health and home health benefits were quite limited. There was no coverage
of long-term nursing home stays (a responsibility that fell instead to Medicaid), most dental care,
or outpatient prescription drugs. And there was no “stop loss” cap that limited Medicare
beneficiaries’ annual costs, an omission that put at financial risk beneficiaries with expensive,
prolonged illness.
As health care costs marched upward, compelling higher cost-sharing payments from and
exerting a greater financial strain on Medicare beneficiaries, and as employer-sponsored private
insurance plans expanded to cover benefits such as prescription drugs, the gaps in Medicare
coverage became more glaring. By the 1980s, most Medicare beneficiaries had secondary
22
insurance coverage, either in the form of supplemental policies sponsored by their former
employer, or directly purchasing Medigap plans that covered some of the holes in Medicare
coverage, or, for low-income beneficiaries, from Medicaid.
Still, the limits in Medicare coverage and rising costs paid by its beneficiaries for medical
services spurred efforts to improve Medicare’s insurance protection. In 1988, Congress passed
the Medicare Catastrophic Coverage Act. It expanded hospitalization coverage to an unlimited
number of days, established an annual limit of out-of-pocket expenses for Medicare outpatient
services, created an outpatient prescription drug benefit, and loosened restrictions on home health
and skilled nursing facility care. The 1988 law passed with overwhelming bipartisan support. The
Reagan administration initially had proposed a limited expansion of Medicare to cover
catastrophic expenses and Democratic majorities in Congress enlarged that proposal to
encompass a broader array of benefits.40
But within sixteen months, another strong bipartisan majority had repealed catastrophic
insurance. The program’s financing arrangements—which departed from established precedent
by having Medicare beneficiaries bear all the costs of the new program without subsidy from the
rest of the population and requiring higher-income beneficiaries to pay much higher costs for the
new benefits—led to its undoing. Widespread confusion about the law’s provisions, spread in
part by groups opposed to the program, grew among seniors, and the support of Medicare
enrollees for the program fell markedly.41 In 1989, Congress responded to mounting opposition
to catastrophic coverage by cancelling the program entirely, a remarkable turnabout that would
leave longstanding gaps in Medicare coverage intact even as health care costs continued to rise.
40 See Oberlander supra note 27.
41 RICHARD HIMMELFARB, CATASTROPHIC POLITICS: THE RISE AND FALL OF THE MEDICARE
CATASTROPHIC COVERAGE ACT OF 1988, Pennsylvania State Press (1995).
23
The 1990s: Changing Politics, Changing Program
At no time during the 1980s did national health insurance have even a remote chance of
becoming law. During the Reagan years, as prospects for universal coverage and system-wide
cost containment faded and federal deficits ballooned, policymakers focused on restraining the
spending growth in Medicare. But a deep recession during 1990-91, surging health care costs
and rising premiums for employer-sponsored insurance, concern over the impact of rising costs on
the competitiveness of American business, and a surprise victory in a Pennsylvania Senate election
by Harris Wofford vaulted health care reform back onto the national agenda. America’s
uninsured population had grown substantially during the 1980s and the confluence of a sharp
economic downturn and resurgence of medical inflation fueled a growing sense of medical
insecurity.42
In 1992 Bill Clinton became the first Democrat since Jimmy Carter in 1976 to win a
presidential election. He campaigned on a promise to revitalize the American economy, and
health care reform figured prominently in his agenda. Medicare itself played only a modest role in
the Clinton health reform plan. Projected savings from Medicare spending were used to help pay
for the costs expanded coverage (the administration also proposed establishment of a Medicare
prescription drug benefit). The Clinton plan’s vision of universal insurance built not on
Medicare’s social insurance roots, but on employer-sponsored insurance and a regulated
marketplace of competing plans.43 That model embodied the rise of neoliberal thinking among
many Democrats who believed that the achievement of liberal ends (promoting access to health
insurance) depended on the embrace of conservative means (relying on a competitive, regulated
market as the source of insurance). This thinking would in turn come to have a profound impact
42JACOB S. HACKER, THE ROAD TO NOWHERE: THE GENESIS OF PRESIDENT CLINTON’S PLAN FOR
HEALTH SECUIRTY, Princeton University Press (1997).
43 PAUL STARR, THE LOGIC OF HEALTH CARE REFORM: WHY AND HOW THE PRESIDENT”S PLAN
WILL WORK, Penguin Books (1992)
24
on Medicare policy in later years.
With broad Democratic majorities in Congress, in 1993 the stars seemed aligned for
enactment of universal health insurance. But the administration’s Health Security Act never came
close to passage. In 1994, only a year after its introduction, the Clinton plan lay dead.44
The demise of the Clinton reform effort once again redirected American health policy away from
comprehensive proposals and towards controlling the budgetary costs of public insurance
programs. In the 1994 elections, Republicans won their first Congressional majorities in both the
House and Senate in forty years. New Speaker of the House Newt Gingrich saw entitlement
reform as crucial to the GOP revolution. In 1995, Congress passed sweeping legislation to
overhaul Medicare as well as Medicaid. Those reforms included substantial reductions in
projected Medicare spending—savings that were crucial to the GOP’s plans to balance the federal
budget. Republicans also proposed introducing an annual cap on Medicare spending and new
options for beneficiaries to leave traditional Medicare for private insurance plans. Their aim was
to transform Medicare into a more conservative programmatic model, injecting competition,
consumer choice, and market forces into the program while redefining the meaning of its
budgetary entitlement status. Speaker Gingrich predicted that the GOP proposal would cause
traditional Medicare to “wither on the vine.”45 Democrats fiercely resisted the plan, and President
Clinton ultimately seized the mantle of protector of Medicare and Medicaid, vetoing the GOP
legislation with the same pen Lyndon Johnson had used to sign Medicare into law. Clinton would
recover from the 1994 Congressional elections to win the White House again in 1996, a campaign
during which he emphasized his support for Medicare.
44 See THEDA SKOCPOL, BOOMERANG: CLINTON’S HEALTH SECURITY EFFORT AND THE TURN
AGAINST GOVERNMENT IN US POLITICS, W.W. Norton & Company (1996); HAYNES JOHNSON &
DAVID S. BRODER, THE SYSTEM: THE AMERICAN WAY OF POLITICS AT THE BREAKING POINT,
Little, Brown and Company (1996).
45 See Oberlander supra note 27.
25
This conflict presaged the emergence of dynamics in Medicare politics that today are
common. After the 1994 elections, for the first time, a Republican-majority Congress governed
Medicare. In its first three decades of operation, both Democrats and Republicans had accepted
Medicare’s core structure. Reforms were adopted to strengthen the federal government’s
purchasing power and to improve Medicare benefits, but there was no effort to fundamentally
remake Medicare. Moreover, in this period Medicare policymaking was often bipartisan, as both
parties supported efforts to rationalize Medicare through prospective payment systems and tighter
controls on payments to providers that generated budgetary savings. After 1995, though, partisan
divisions on Medicare would become commonplace. Debates over the program would more
regularly revolve around fundamental issues of program restructuring rather than
incrementalism.46 The character of Medicare politics was shifting.
Bipartisanship re-emerged temporarily in 1997 with enactment of the Balanced Budget
Amendments (BBA). Despite the earlier defeat of GOP Medicare plans, both Democrats and
Republicans agreed on the need for sizable Medicare savings to help reduce the federal budget
deficit and address another projected impending shortfall in Medicare’s hospital insurance trust
fund. The 1997 BBA contained significant reductions in Medicare’s payments to hospitals and
doctors, broadened prospective payment to encompass inpatient, rehabilitation, skilled nursing
facilities, and home health services, and strengthened provisions aimed at reducing fraud and
abuse. The law also promoted new private plan options in Medicare under the label of Medicare
+ Choice (what came to be known as Medicare Part C).47
The adoption of Medicare+Choice signaled both the emergence of growing Congressional
support for a greater role for private insurers in Medicare and the influence of changes in the
46 Id.
47 Id.; THEODORE R. MARMOR, THE POLITICS OF MEDICARE, second edition, Aldine de Gruyter (2000).
26
broader insurance market on public programs. Medicare had, since 1982, allowed private
insurance plans (typically HMOs) to enroll program beneficiaries and receive fixed, capitated
payments from the government. While the program started modestly, beneficiary enrollment in
private plans took off in the 1990s as what was called managed care spread throughout American
medical care. The number of beneficiaries obtaining Medicare coverage from private plans grew
from 467,000 in 1986 to 2.5 million in 1993, with enrollment accelerating to 7 million by 1999.48
Medicare represented a new, relatively untapped market for private insurers who recruited
enrollees with the promise of extra benefits, benefits that were funded in part through federal
formulas that give these plans excess payments. Although the BBA’s efforts to accelerate private
insurance’s hold in Medicare did not succeed—enrollment in such plans would actually decline
during 2000-2004—its enactment represented a new direction in Medicare policy.
Indeed, the 1997 BBA reflected an important new political reality as pro-market ideas of
competition and private insurance would increasingly shape Medicare policy and find adherents in
both parties. The law established a National Bipartisan Commission on the Future of Medicare,
co-chaired by Republican Congressman Bill Thomas and Democratic Senator John Breaux.
Reporting in 1999, the commission initially recommended converting Medicare into a premium
support or managed competition system, but it failed to reach the required supermajority to
officially forward its recommendations to Congress.49 Nonetheless, the commission’s majority
conclusions underscored the growing appeal of such ideas within Washington. Medicare’s
political environment was changing, and so was the assumptive world of many policymakers, both
Republicans and Democrats.
48 See Alma McMillan, Trends in Medicare Health Maintenance Organization Enrollment, 1986-93, 15 HEALTH
CARE FINANCING REVIEW135 (1993):; Kaiser Family Foundation, Total Medicare Advantage Enrollment
1992-2014, http://kff.org/medicare/slide/total-medicare-advantage-enrollment-1992-2014/ Advantage Enrollment.
49 Theodore R. Marmor & Gary J. McKissick, Medicare’s Future: Fact, Fiction, and Folly, 26 AM. J. L. & MED
225 (2000).
27
The Medicare Modernization Act
In 1998, the federal government ran its first budgetary surplus in three decades, and by
2000 the surplus stood at $236 billion.50 Budget deficit politics had driven Medicare policy for
two decades, and as fiscal pressures to restrain program spending receded, the availability of a
surplus transformed the politics of Medicare, creating conditions ripe for benefit expansion. The
rising costs of prescription drugs and the absence of program coverage for outpatient prescription
costs caught policymakers’ attention. In 1999, the Clinton administration proposed a new
Medicare prescription drug benefit and Democrats argued that the surplus should be used, in part,
to help Medicare beneficiaries pay for the costs of medications. The issue figured prominently in
the 2000 presidential election between Al Gore and George W. Bush, with both candidates
offering plans to expand Medicare benefits.
Once in the White House, Bush pushed ahead with plans for a Medicare drug benefit,
urging GOP majorities in Congress to pass such a plan, even after the projected surplus
disappeared amidst the 2001 recession. The administration saw Medicare reform as having
crucial political benefits; if Republicans could enact a Medicare prescription drug program, they
would neutralize an issue that favored Democrats and potentially win over more senior voters.
Bush adviser Karl Rove believed that passing a new Medicare benefit would not only aid the
president’s 2004 reelection bid, but could also help to realign American politics by facilitating a
“permanent” Republican majority.51
There was, then, a strong political impetus for expanding Medicare coverage to
encompass prescription drugs. The question was what form that expansion would take.
50 See Office of Management and Budget, supra note 33.
51 Jonathan Oberlander, The Bush Administration and the Politics of Medicare Reform, in BUILDING
COLAITIONS, MAKING POLICY: THE POLITICS OF THE CLINTON, BUSH & OBAMA PRESIDENCES,
(Martin A. Levin, Daniel Disalvo, & Martin M. Shapiro, eds., 2012).
28
Republicans predictably favored provision of a benefit by private plans with subsidized coverage
limited to lower-income beneficiaries. In contrast, Democrats unsurprisingly preferred that
traditional Medicare operate a program that would be universally available to beneficiaries
regardless of income.52
Ultimately, what became Medicare Part D ended up combining Democrats’ belief in
universal, non-means tested benefits (drug coverage would be available to all Medicare enrollees)
with Republicans’ faith in private insurance and competition and a limited financial commitment
that produced a bizarre programmatic structure. The Part D benefit contained an odd gap or
“doughnut hole” where coverage for prescription drug costs stopped after a certain expenditure
threshold had been reached by beneficiaries only to restart again when expenses reached a higher
level. This byzantine structure was the result of self-imposed budgetary constraints that limited
the amount of money that Congress and the Bush administration were willing to spend on the
program. Even as Medicare benefits were slated for expansion, the generosity of those benefits
remained limited. Additionally, the MMA required wealthier Medicare beneficiaries to pay higher
premiums for Medicare Part B starting in 2007—an important precedent in varying Medicare
according to beneficiaries’ income that both parties would look to expand in subsequent years.53
When Congress enacted the Medicare Modernization Act in 2003, for the first time a
major component of the Medicare program would be entirely privatized, with prescription drug
benefits provided exclusively by private plans that contracted with the federal government.54
52See Thomas R. Oliver, Philip. R. Lee, & Helene L. Lipton, A Political History of Medicare and Prescription
Drug Coverage 82 THE MILBANK QUARTERLY 283; Douglas Jaenicke & Alex Waddan, President Bush and
Social Policy: The Strange Case of the Medicare Prescription Drug Benefit , 121 POLITICAL SCIENCE
QUARTERLY 217 (2004); Jonathan Oberlander, Through the Looking Glass: The Politics of the Medicare
Prescription Drug, Improvement, and Modernization Act, 32 J. HEALTH POL. POL’Y & L 187 (2007).
53 Theodore R. Marmor and Jacob S. Hacker, Medicare Reform and Social Insurance: The Clashes of 2003 and
Their Potential Fallout, 5 YALE JOURNAL OF LAW, HEALTH POLICY & ETHICS 475 (2005)
54 KIMBERLY J MORGAN & ANDREA LOUISE CAMPBELL, THE DELEGATED WELFARE STATE:
MEDICARE, MARKETS AND THE GOVERNENACE OF SOCIAL POLICY, Oxford University Press (2011).
29
Medicare would not regulate the price of prescription drugs; instead the scheme relied on
competition between plans to contain spending. The MMA additionally reconfigured the private
insurance option within the program into Medicare Advantage, and increased federal payments to
these plans. The MMA thus aimed both to expand Medicare benefits and to alter the program’s
structure and philosophy by increasing the role of private plans, promoting competition, and
emphasizing the virtues of individual choice of plan. Medicare was increasingly a hybrid program,
with traditional insurance sponsored by the federal government operating alongside a growing
private market. By 2009, over 10 million Medicare beneficiaries, comprising 23% of all program
enrollees, had joined the private insurance plans as part of Medicare Advantage; in 2014, nearly
one out of every three Medicare beneficiaries was enrolled in a private plan.55 The market has
come to Medicare.
Obamacare
In 2009, universal health insurance returned to the agenda as President Barack Obama
pushed for enactment of major reform legislation. Democrats sought to cover the uninsured by
establishing new purchasing pools where those without insurance could obtain subsidized private
insurance, regulating private insurers to prevent them from discriminating against persons with
pre-existing conditions, expanding Medicaid to reach Americans below the federal poverty line,
and requiring most persons to obtain coverage or pay a fine. Many reformers also argued for
inclusion of a so-called “public option,” a Medicare-like insurance program operated by the
federal government that would be available to the uninsured in purchasing pools (insurance
“exchanges”) alongside private plans.56 The public plan was explicitly modeled on Medicare and
its emergence as a reform option meant that Medicare was once again shaping Democratic
55 See Kaiser Family Foundation, supra note 48.
56 Jacob S. Hacker, Healthy Competition: The Whys and How of Public Plan Choice, 360 NEW ENG. J. MED.
2269 (2009).
30
thinking about health reform. However, while a plan for a public option passed the House it
could not muster a majority in the Senate, and subsequent compromise proposals to instead offer
Americans aged 55-64 the option of buying into Medicare also failed to win enactment.
The defeat of the public option and Medicare expansion proposals showed just how far
American health politics has moved away from the original Medicare strategy. A Democratic
administration and Congressional majorities succeeded in winning passage of the most important
health care reform since 1965. Yet not even a modest expansion of Medicare could pass
Congress. “Near” universal insurance had finally arrived in the United States, but when it did,
Medicare had been marginalized, playing no role in this major expansion of health insurance.57
Obamacare rested less on the Medicare strategy and social insurance principles than on
conservative and neo-liberal conceptions of health care reform’s appropriate shape.58 Indeed,
Obamacare’s partial reliance on private insurance and health plan competition resembled, in key
respects, the 2003 Medicare prescription drug program supported by the Bush administration.
That resemblance largely reflected a political calculus; many Democrats believed that only a health
reform model that relied on private insurance could pass Congress.59
The 2010 Affordable Care Act (ACA) did have significant implications for Medicare.60 It
expanded Medicare limited prescription drug coverage and enhanced other program benefits,
including coverage for preventive screenings. Medicare also served as a source of projected
savings to help finance the ACA’s insurance expansion, primarily through reducing the expected
57 See Oberlander and Marmor, supra note 2.
58 Jonathan Oberlander, Between Liberal Aspirations and Market Forces: Obamacare’s Precarious Balancing Act ,
42 J.L. MED. & ETHICS 31 (2014).
59 See Theodore R. Marmor, Book Review: Critical: What We Can Do About the Health-Care Crisis, 25 notre
dame J.L. ETHICS & PUB PLC’Y 481 (2011); Jonathan Oberlander and Theodore R. Marmor, The Health Bill
Explained At Last, N.Y. Rev. Books, August 19, 2010 at 61; Theodore Marmor and Jonathan Oberlander, The
Patchwork: Health Reform, American Style, 72 SOCIAL SCIENCE & MEDICINE 125 (2011).
60 Karen Davis, Stuart Guterman & Farhan Bandeali, The Affordable Care Act and Medicare: How the Law is
Changing the Program and the Challenges that Remain, Commonwealth Fund (2015).
31
rate of growth in payments to hospitals and private Medicare Advantage plans. Obamacare
additionally raised Medicare payroll taxes on higher-income Americans and subject investment
income to a surtax, while expanding the use of income-related premiums among Medicare
beneficiaries. The ACA more broadly treated Medicare as a platform to test a range of new
initiatives—including Accountable Care Organizations (ACOs) and bundled payment—that aim to
reform the delivery of medical services and control its spending. The law also established the
Independent Payment Advisory Board (IPAB), a commission charged with developing plans to
slow Medicare expenditures if they rose faster than a defined threshold. In that circumstance, if
Congress did not pass an alternative plan to produce the required Medicare savings, IPAB’s
proposals would be implemented by the Secretary of Health and Human Services.
The ACA reignited partisan conflict over Medicare. Republicans charged that Democrats
were “raiding” Medicare funds to cover the uninsured.61 In fact, the slowdown in Medicare
spending growth produced by the ACA would strengthen the program’s financial condition and
help program beneficiaries by restraining increases in the cost-sharing that Medicare requires.
The ACA debate gave rise as well to a series of consequential myths about Medicare—that
Obamacare would “pull the plug on grandma,” create “death panels,” and stop chemotherapy for
older Americans. None of these allegations, of course, had a shred of truth. But their spread
demonstrated how controversial changes in Medicare can be, the high political stakes associated
with program reform, and the anxiety that many older Americans feel about their insurance
coverage.
Lessons from Medicare’s First Fifty Years
What have the past 50 years taught us about Medicare politics? In some respects,
61 Robert Pear, Reshaping Medicare Brings Hard Choices, N.Y. Times, April 12, 2011.
32
Medicare has been a remarkably stable program. Medicare still primarily covers seniors, it
remains a social insurance program, much of its original benefit package is intact, its major
financing mechanisms still operate, and the separation between Medicare hospital and physician
insurance endures. The relative stability of these arrangements underscores the lasting impact of
the choices made in 1965, which continue to shape Medicare policy and politics today.
Notwithstanding these elements of stability, another important theme is that the politics of
Medicare can shift substantially. At Medicare’s enactment in 1965, policymakers were solicitous
of the AMA and health care industry. Medicare administrators sought to ensure a smooth
beginning for the program, and permissive reimbursement policies that generated generous
payments to medical providers prevailed. Over time, though, the medical care industry’s hold on
the program weakened. As pressures for deficit reduction intensified, federal policymakers
adopted stronger cost containment policies in Medicare. Therein lies another lesson: while
Medicare’s political world encompasses numerous powerful interest groups that influence federal
policy, those groups do not always get what they want.62
Another crucial lesson is that Medicare does not live on an island, and consequently its
politics are shaped by broader political currents. Changes in American political alignments,
governing philosophies, private health insurance and medical care delivery—all had substantial
repercussions for Medicare’s development. In 1965, American liberalism was ascendant.
Medicare’s design—a social insurance program operated by the federal government and open to
all Americans regardless of income—reflected the preferences of its liberal architects and the
prevailing political order. Medicare was to be the cornerstone of national health insurance. Yet
as American politics moved rightward beginning in the 1970s, Medicare’s political environment
62 See Timothy Stoltzfus Jost, Governing Medicare, 51 ADMIN. L. REVIEW 39 (1999); Bruce C. Vladeck, The
Political Economy of Medicare 18 HEALTH AFFAIRS 22 (1999).
33
fundamentally changed. Not only would Medicare be governed at times by Republican presidents
and GOP Congressional majorities, but there was a profound shift in policymakers’ assumptions
about the best way to organize health insurance programs. Competition, choice, and reliance on
private insurers became influential ideas in U.S. health care policy, with Republicans and some
Democrats supporting changes in Medicare to promote market forces.
As a result both of policy initiatives and market developments, Medicare’s programmatic
structure, its identity, and the boundary between public and private within the program have
changed substantially.63 The rise of pro-market ideas and policies in Medicare, and the growing
footprint of private insurers within the program, underscores how wider political and economic
developments can alter a government program like Medicare. These market advances in
Medicare constitute a creeping privatization of federal health insurance. The question of how far
that privatization should go has triggered intense debates in Washington over Medicare reform, a
subject we return to in the next section.
Comparing Medicare’s early experience to that of the Affordable Care Act further
illustrates how much U.S. politics have shifted in the last half century, and the implications for
health care programs. Despite a long, heated debate over its enactment, once it was law the
Medicare debate receded. Medicare immediately gained legitimacy, and there were no serious
political or legal efforts to overturn it. In contrast, five years after its passage, Obamacare was
still fighting for its survival, and trying to overcome legal and legislative efforts to derail its
implementation. In large part, the contrasting experiences reflect the growing partisan
polarization of American politics, a dynamic that impacts not just the ACA but Medicare as well.
A final lesson has to do with the character of Medicare politics. Medicare is periodically
the subject of intense political debate, marked by exaggerated claims that the sky will flaw unless
63 See Morgan and Campbell, supra note 54.
34
some fundamental change is made in the financing, benefits, or administration of the program.64
That political attention often has had less to do with legitimate concerns about Medicare’s real (if
usually overstated) faults. Instead, it has been principally fueled by alaramist rhetoric of those
ideologically opposed to Medicare’s social insurance structure.65 Unfortunately, this rhetoric of
crisis clouds what is fundamentally at issue in Medicare reform and distorts the program’s actual
fiscal condition. Episodic warnings that Medicare is “going bankrupt” or facing insolvency are
exploited by would-be reformers to promote adoption of their preferred policy ideas.66 The
frightening specter of bankruptcy is used to justify immediate, and at times, radical policy
adjustments. But Medicare is in no danger of going bankrupt or becoming insolvent. There is
absolutely no chance that the federal government would ever let a program with tens of millions
of elderly beneficiaries run out of funds so that it had to stop paying for their medical care.
The dynamics of earmarked financing—the program’s hospital insurance trust fund is
financed almost exclusively from payroll taxes dedicated to that fund—is the only reason that talk
about future insolvency arises in Medicare. Programs that are instead funded out of general tax
revenues, such as Medicaid or defense, do not trigger such bankruptcy rhetoric.67 These political
dynamics of Medicare financing are not well understood by the public or often clearly explained
by the media, adding to the confusion and the misleading sense of crisis that regularly
accompanies debates over program reform.
64 See Marmor and Hacker, supra note 53.
65 JOSEPH WHITE, FALSE ALARM: WHY THE GREATEST THREAT TO SOCIAL SECURITY AND
MEDICARE IS THE CAMPAIGN TO “SAVE” THEM, Johns Hopkins University Press (2005).
66 See Oberlander, supra note 27.
67 See PAUL PIERSON, DISMANTLING THE WELFARE STATE:REAGAN, THATCHER AND THE
POLITICS OF RETRENCHMENT, Cambridge University Press (1995); ERIC PATASHNIK, PUTTING TRUST
IN THE US BUDGET: FEDERAL TRUST FUNDS AND THE POLITICS OF COMMITMENT, Cambridge
University Press (2000); Oberlander supra note 27; Marmor supra note 47.
35
The Future of Medicare
After a half century of operation, Medicare’s centrality to American medical care is
indisputable. What is in dispute, though, is whether and how Medicare should change in coming
years. For the reformers who yearn for Medicare for All, the program remains a model that
should be emulated and expanded. For critics, Medicare is instead a symbol of what is wrong
with government-run insurance and it should embrace market competition and privatization.
Charges that Medicare is unsustainable in its current form and cannot afford to absorb the baby
boom generation continue to figure in the Medicare debate. That Medicare has in fact sustained
for five decades, despite perennial worries about its fiscal future, has evidently not given critics
much pause.68 Moreover, over several decades costs have risen slower in Medicare than in
private insurance as Medicare’s cost containment measures have generated substantial savings.69
These results suggest three crucial—and frequently overlooked—policy lessons from
Medicare. First, private insurers are not, as is often assumed, inherently better than the
government at controlling medical care spending. Both American public and private insurers have
struggled to restrain costs, yet Medicare has fared significantly better than the private sector since
1985. Second, price regulation, often derided in the U.S. as a crude form of cost control, has in
fact worked. Much of the savings achieved in Medicare spending since the 1980s has been a
function of controlling the prices that the program pays for services. And third, the rate of growth
in medical care spending is amenable to policy intervention and not simply a function of changes
in technology and demography that produce immutable growth in costs. Policymakers are indeed
able to implement changes to Medicare that substantially slow down the rate of increase in
program expenditures, changes that can drastically alter long-term projections about Medicare
68 Jonathan Oberlander, Voucherizing Medicare, 39 J. HEALTH POL. POL’Y & L 470 (2014).
69 MARILYN MOON, MEDICARE: A POLICY PRIMER, Urban Institute Press (2006).
36
spending.70 That is one important reason why long-term projections of Medicare spending and
program financing shortfalls should be treated with significant caution.
Nonetheless, the conviction that Medicare is financially unsustainable and must be
restructured is today widely held by many policymakers and analysts. They often cite population
aging, the retirement of the baby boomers, and the resulting substantial increase in Medicare
enrollment that is expected over the next two decades as “evidence” that Medicare is
unsustainable and requires far-reaching changes.71 Among the conventional options for reform
that promise to reduce federal expenditures are two that regularly appear in discussions of
Medicare policy: converting Medicare into a full-fledged voucher or premium support program,
and raising the eligibility age for Medicare from 65 to 67, both designed to reduce federal
spending on the program (not national health care spending/cost shifting).72
The popularity of these options among many policymakers and analysts is testament to the
confused state of thinking about Medicare.73 Medicare spending has grown over many decades at
a lower rate than that of private insurance.74 Since 2006, there has been a pronounced slowdown
in the annual rate of increase in Medicare expenditures.75 What’s more, the ACA is projected to
generate additional Medicare savings in coming years. In short, Medicare is not in any immediate
financial crisis and there is no critical need to transform it into a voucher system or anything else.
The increased number of Americans aging into Medicare during the next two decades will require
more revenues, not radical program restructuring. Moreover, raising the Medicare eligibility age
70 See Chapin White, Why did Medicare Spending Growth Slow Down? 27 HEALTH AFFAIRS 793 (2008); White
supra note 65.
71 See Antos, supra note 4.
72 Theodore Marmor, Jonathan Oberlander, & Joseph White, Medicare and the Federal Budget: Misdiagnosed
Problems, Inadequate Solutions, 30 Journal of Policy Analysis and Management 928 (2011).
73 Id.
74 See Oberlander supra note 68.
75 Chapin White, Juliette Cubanski, & Tricia Neuman, How Much of the Medicare Spending Slowdown Can Be
Explained? Insights and Analysis from 2014, Kaiser Family Foundation (2014).
37
would save the federal government little money and raise costs for states, private insurers, older
Americans, and other parts of the federal government that would have to pay for alternative
sources of insurance to replace Medicare for 65 and 66-year olds. This is a strategy of cost-
shifting rather than serious cost containment.76
Proposals to limit the supplemental insurance that Medicare beneficiaries can buy and
increase their deductibles would similarly shift costs to beneficiaries. Such proposals reflect the
myth, prevalent in the United States, that patient cost-sharing (“skin in the game”) is essential to
containing medical care spending. These proposals also ignore the reality that Medicare
beneficiaries, because of persistent gaps in program coverage, already pay a significant share of
their medical care costs. In 2010, enrollees in traditional Medicare “spent $4,745 out-of-pocket
for health care,” including premiums and the costs of medical and long-term care services, with
beneficiaries in poorer self-reported health paying much more than healthier beneficiaries.77
No other rich democracy—and all of them spend much less on medical care than the U.S.
—relies on patient cost-sharing as a primary strategy of cost control. For that matter, other rich
democracies such as those in Northern Europe have populations significantly older than the U.S.
while spending far less on medical care in their national health insurance systems. That reality
belies the assumptions that demography is destiny and population aging requires the adoption of
market solutions to moderate growth in health care spending.78
Other Medicare reform options are less controversial but unproven. It is unclear, for all
the hype, if the aforementioned payment and delivery system reforms like ACOs will produce
substantial savings. The current bipartisan enthusiasm for replacing traditional fee-for-service
reimbursement with payments based on outcomes and quality is another case of searching for
76 See Marmor, Oberlander, & White supra note 72.
77 Juliette Cubanski & Cristina Bocutti, Medicare Coverage, Affordability, and Access, 39 GENERATIONS 26.
78 See Marmor, Oberlander, & White supra note 72.
38
panaceas in health policy. Bipartisan legislation in 2015 replaced Medicare’s troubled Sustainable
Growth Rate formula for paying physicians with a new methodology that purports to rewards
value. But there is scant evidence that value-based payments will save much money, nor clarity
on what constitutes value in medical practice. The Independent Payment Advisory Board, which
was to provide a check outside of Congress on Medicare spending, has yet to get off the ground
in a polarized partisan environment not conducive to independent commissions.79
The debate over controlling Medicare spending, then, is dominated both by ideological
and aspirational agendas, neither of which provides a reliable foundation for containing medical
care expenditures. In the short run, implementing the ACA’s reductions in Medicare’s payments
to medical providers is the surest way to slow spending growth. In the long run, adoption of all-
payer cost controls—setting limits not just on Medicare but private insurance spending as well—
would, if politically feasible, strengthen the program’s capacity to contain costs.
How Medicare should change is, of course, a different matter than how it will change.
Some reforms to Medicare—more tightening of payments to medical providers, a greater reliance
on charging higher-income beneficiaries more for Medicare coverage, and continued
experimentation with new payment methods—are likely to occur no matter which party holds
Congress and the White House. The fate and character of major reform of Medicare, though,
depends largely on external political and economic circumstances. Fiscal conditions, including
pressures from federal budget deficits that would be exacerbated by another recession, could pave
the way for bolder reforms to Medicare’s benefits and financing arrangements. Ambitious
changes to Medicare that push it further to the market are more likely to occur if a Republican
president with GOP majorities shapes its agenda. A government controlled by Democrats would
79 Jonathan Oberlander & Marisa Morrison. Failure to Launch: The Independent Payment Advisory Board’s
Uncertain Prospects 369 NEW ENG J. MED. 105 (2013)
39
likely pursue more incremental reforms. Following a quarter-century of intermittent partisan
conflict over Medicare, it remains to be seen whether Democrats and Republicans can overcome
their polarization and agree on a bipartisan package of changes—and bipartisan agreement is no
guarantee that such a reform package would be sensible. Fifty years after its enactment, then, the
Medicare debate continues.
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