Reforming Medicare: Options, Tradeoffs, and Opportunities

1. Medicare Reform: The Stakes

Now in its fifth decade, Medicare provides health coverage to virtually all of the nation’s elderly and a large share of people with disabilities, a population of some 44 million. The program has brought large benefits.1 With dramatically improved access to health care, its beneficiaries have enjoyed longer, healthier lives.2 It contributed to the desegregation of southern hospitals. And it is one of the most popular government programs, rivaling Social Security. Despite Medicare’s achievements and popularity, the program has always been controversial. In the bitter partisan dispute preceding its enactment, Democrats supported mandatory, payroll-tax-financed hospital care while Republicans sought voluntary , premium-, and tax-financed coverage of doctors’ services . Physicians opposed both ideas, fearing government intrusion into medical practice. To appease them, the final plan required the government to pay all reasonable hospital costs and customary physician fees. That policy mollified providers but fueled rapid increases in hospital spending and doctors’ fees. Soon, program outlays far outpaced original projections, and 1 Medicare Reform: The Stakes 1 2 Medicare Reform: The Stakes Medicare was blamed for causing health care inflation. So, starting in the early 1980s, Congress required Medicare to pay health care providers in new ways designed to hold down spending. In the 1990s Congress enacted additional major payment cutbacks, but angry protests from aggrieved hospital and private plan administrators, among others, forced it to reverse many of these cuts. More recent concerns have focused on physician fees, rising expenditures, and overpayments to managed care plans. Some of the debate also focuses on benefit limits imposed to hold down projected costs. To circumvent these limits, most Medicare enrollees have bought supplemental insurance to cover deductibles, cost sharing, and such excluded services as outpatient prescription drugs and long-term care. In 1988 Congress moved to fill the prescription drug gap. However, the law was so unpopular with beneficiaries that Congress repealed it little more than a year after enactment. Not until 2003 did Congress succeed in adding this service, long a feature of private health insurance plans. That bill also aroused intense controversy because of its design, administration, and manner of passage. It will be a source of debate for years to come. Another looming issue is whether and how to change Medicare to deal with population aging and the proliferation of beneficial but costly interventions . These trends guarantee that Medicare spending will far outpace the growth of federal revenues and thereby increase the burden for those who pay for most of the program’s costs—namely, taxpayers. Beneficiaries will face mounting challenges too, for they shoulder roughly one-fifth of the cost of the care they use. To complicate matters, the quality of services provided to all Americans, including Medicare beneficiaries, is deficient in important respects: as is well documented, errors are too common, and recommended care is frequently not rendered.3 Rising costs, limited access, and deficient quality are not the only problems . Considerable confusion arises in debates about health care policy in general, and Medicare in particular, because they combine issues from economics , politics, psychology, and medical science. Moreover, the stakes for all parties—patients, providers, insurers, and taxpayers—are high. The outcome will affect millions of people and involve trillions of dollars. To aid in understanding Medicare’s complexities and assessing major policy proposals , this book offers a program “primer,” describing its history, principal goals, operation, and future challenges. Medicare Reform: The Stakes 3 Born in Turmoil Medicare and Medicaid became law on the afternoon of July 31, 1965, at a signing ceremony in Independence, Missouri. President Lyndon B. Johnson had decided a few days before to move the event from Washington to Independence, the site of the library of former president Harry S. Truman. Johnson wanted to honor Truman for trying to win passage of national health insurance. Although that effort was entirely without success, it started the lengthy political process that led to congressional approval of Medicare and Medicaid. Explaining the move to Wilbur Cohen, the administration ’s point man for crafting the legislation, Johnson said: “Don’t you understand? I’m doing this for Harry Truman. He’s old and he’s tired and he’s been left all alone down there. I want him to know that his country has not forgotten him. I wonder if anyone will do the same for me.”4 The signing...