Out of Balance: Medicare, Interest Groups, and American Politics

By Jacob S. Hacker

Medicare was born of interest group politics. The hostility of the American Medical Association (AMA)—the fiercest lobby in Washington from the 1930s to the 1960s—convinced advocates of public health insurance to start with the most vulnerable and difficult-to-insure segment of the population, the elderly. It also convinced Medicare’s advocates and early administrators to foreswear serious instruments for cost control that were in use in other rich democracies, such as fee schedules and restrictions on capital expenditures.

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Once Medicare became law, however, its relationship to interest groups changed dramatically. As the great political scientist E. E. Schattschneider (1935) observed three decades before Medicare’s passage, “New policies create a new politics.” Medicare pulled hospitals and doctors into its orbit, making them both recipients and implementers of a vast new stream of federal spending. Even more fateful, Medicare essentially created the modern interest-group organization of older Americans. Prior to Medicare’s creation, older adults were a sympathetic constituency, but not an organized force. After its establishment, they became formidable players in the scrum of organized interests surrounding federal health policy.

Medicare’s relationship with interest groups has followed a long arc from accommodation to constructive engagement and back toward accommodation of a different sort. The early years of Medicare witnessed passivity in the face of interest-group claims that gelled perceptions of the program as unaffordable. But for roughly two decades, Medicare grew stronger and more autonomous, implementing payment changes that diffused throughout the private sector and slowed cost growth.

These positive developments reflected a balanced politics—balanced between beneficiaries and providers, and between Medicare and its claimants. An observer who had cut into Medicare’s interest-group history around 1990 would have concluded that the program was on track to become increasingly effective at controlling costs and managing the overlapping but distinct interests of Medicare beneficiaries, Medicare providers, and American taxpayers. In a word, Medicare looked “corporatist”—a system of patterned, stable bargaining among relatively equal partners, with the interests of taxpayers brought in through the growing focus on overall budget constraint.

Today, however, the interest-group politics of Medicare looks far less favorable. The last two decades of Medicare’s development have weakened the program’s independence from the concentrated interests that profit from it, including interests that had little role within Medicare at its inception. What was once a relatively stable corporatist arrangement now looks like a messy scrum of ever more competing interests, deploying ever more money and lobbyists (ever more of whom are former public officials). At the same time, the program’s main constituency, older Americans, has fragmented. Growing inequality among beneficiaries, the increasing availability of private insurance options, and the overall movement of Medicare’s beneficiaries to the right—all have made it more difficult for the groups representing older Americans to speak with a relatively unified voice. Medicare’s interest-group politics have, in short, become deeply imbalanced. The closing section of this article considers where this “new new politics” of Medicare may take us.

How Medicare Reshaped Interest Groups

The role of interest groups in Medicare’s passage was mostly negative. With the AMA and large business associations fiercely opposed to what they decried as “socialized medicine,” the main outside group pushing for action was organized labor. As the bill’s passage transited from impossible in the 1950s, to improbable in the early 1960s, to inevitable with Lyndon Johnson’s landslide victory in 1964, a few previously skeptical groups climbed on board. The hospital insurance giant Blue Cross, for example, quietly bought in after brokering a central role in administering the new benefits. Yet by then, Medicare was certain to pass. The main role of interest groups before 1965 was to limit coverage to older adults—an approach to expanded government insurance no other country had taken (Marmor, 1970).

After 1965, however, Medicare radically changed the interests that had supported and fought it. The most profound effect was on the political representation of older adults. Groups representing older Americans existed before Medicare, but they were either small or ephemeral. The American Association for Retired Persons—commonly known as AARP, now its official name—emerged out of an organization for retired teachers (Campbell, 2005). It had fewer than 50,000 members in 1959. By the early 1970s, it had 5 million. On its fiftieth anniversary in 2008, it had 40 million. Key to its meteoric growth was its provision of supplemental insurance to cover Medicare’s significant gaps. AARP provided a direct benefit to members and, in turn, fought for a generous and resilient program.

The political organization of older Americans is among the most dramatic counterexamples to the common lament that interest groups mostly represent the affluent and business and professional interests. Older Americans have much greater influence in politics than younger Americans. Moreover, this influence is much more equal across income and education than it is for younger citizens. A major reason why is the mobilization of older adults by interest groups oriented around public programs (Campbell, 2005). One recent study finds that the AARP is among the groups whose positions are most consistently aligned with the opinions of middle- and low-income Americans (Gilens, 2012). Business and professional associations, by contrast, tend to pursue goals more consistent with the opinions of those higher up on the income ladder.

The other set of interests affected by Medicare was much narrower. Medical providers discovered that “socialized medicine” was also extremely lucrative. In yet another concession, Medicare began without the authority or capacity to push back against providers’ demands. To ensure passage and the subsequent participation of providers, key officials within the Johnson administration promised that they would pay “usual and customary charges,” which meant essentially whatever doctors and hospitals wanted to charge.

The predictable result was rapidly rising payments across American healthcare. Economists Amy Finkelstein and Robin McKnight (2008) estimate that between 1965 and 1970, Medicare increased total hospital expenditures (for all age groups) by almost a quarter. Physician incomes soared as well. Because Medicare covered the portion of the population with the greatest need for specialty care, it was a particular boon to specialists drawing on the medical advances that federal spending was also promoting. Increasingly, the AMA waned in clout, relative to the various emerging and expanding specialist societies in this costly new world of high-tech care.

So Medicare did what Social Security had done before it—it created a new interest-group environment that made it virtually impossible to turn back the clock. A controversial achievement passed at the high-water mark of American liberalism, Medicare quickly became a sacred cow. Indeed, it enjoyed even deeper interest-group support than Social Security because providers now saw it as a major source of income. But this entrenchment was founded on a passive orientation toward spending that would eventually prove unsustainable. The new interest-group politics of Medicare was about to enter its second—and healthiest—phase.

Checks and Balances

Policy compromises emerge when antagonists recognize their second-best option is the best they can get. By the 1980s, it was clear that neither Medicare advocates who hoped it would expand into universal insurance nor opponents who wished it would just go away had any real chance of getting what they wanted. In this case, the second-best option was a series of rationalizing reforms to rein in Medicare’s spending growth without challenging its fundamental premises or core benefits. Cast as technical fixes, carefully calibrated to focus the pain on providers rather than patients, these adjustments transformed Medicare from an inflationary emulator of the private sector into an increasingly efficient pioneer of payment innovations.

The second best worked pretty well. From the fastest growing part of the health system in the 1970s, Medicare soon became the slowest, and its edge grew over time. Figure 1 (below) compares per person spending growth for the same set of benefits between Medicare and private plans between 1969 and 2012. Medicare’s strong comparative performance is all the more remarkable because over this period, its beneficiaries were growing older as life expectancy increased. In addition, Medicare outperformed the private sector despite private plan adoption of many of its payment modalities, including, most notably, the DRG (diagnosis-related group) approach to paying hospitals.

Figure 1

Two balancing acts made Medicare’s newly assertive role possible. The first, already mentioned, was the construction of a coalition incorporating providers as continuing claimants on Medicare’s resources, but limiting that claim to better reflect overall budget limits. That coalition, in turn, rested on the unusually powerful role of broad constituency interests in Medicare’s politics, which ruled out a response to these limits that would impose significant new burdens on older adults. AARP proved a countervailing force in crucial cases. It supported the ill-fated 1988 Medicare Catastrophic Coverage Act (MCCA), which placed it at odds with both corporate lobbies and a significant chunk of its affluent members who would have to pay higher taxes. (Later it would support the Affordable Care Act [ACA] despite opposition from beneficiaries.) The MCCA debacle saw the formation or expansion of competing older adult groups with a more conservative stance, fragmenting the unified beneficiary population.

It was a sign of things to come.

Things Fall Apart

With the 1994 Republican capture of Congress under the leadership of Newt Gingrich, interest-group politics changed again. For starters, the new breed of Republicans was far less committed to the old bipartisan formula of spending reductions (and tax increases) within the framework of existing programs. They wanted to eliminate or reduce the scope of programs, not just rationalize their spending. While their biggest plans for transforming Medicare crashed and burned, they nonetheless put their distinctive stamp on the program by incorporating private insurance plans as direct providers of insurance, not just as intermediaries administering public payments.

Medicare’s inclusion of private plans predated Gingrich’s ascent. But enrollment was limited, and focused on tightly managed health maintenance organizations (HMO), which had the best chance of delivering better outcomes at a lower cost. Beginning in the 1990s, however, Republicans offered private plans as an all-purpose tonic, and successfully pushed to expand enrollment. By 2012, more than a quarter of all beneficiaries were in private plans, and the share was still rising (Frakt, 2014).

Contrary to the rhetoric of private-sector efficiency, the expanding role of private plans increased, not lowered, Medicare spending by almost $300 billion between 1985 and 2012, according to a recent calculation (Hellander, Himmelstein, and Woolhandler, 2013). Some of these excess payments were plowed into better benefits, which made those who enrolled in the plans another source of pressure for continued overpayments. But most of the excess reimbursements—as much as 86 cents for each dollar (Frakt, 2009)—went to the plans, rather than the patients. Not surprisingly, private insurers became a powerful new player in the interest-group politics of Medicare.

Drug companies shared in the largesse. With AARP pushing to expand Medicare to include prescription drug coverage in the early 2000s, Republicans took advantage of their control of the House, Senate, and White House to pass their own plan. Republicans sought to poach older voters from the Democrats. But, as former Reagan adviser Bruce Bartlett (2013) frankly explained, there were other interest-group motives, too:

Republicans were keen to make sure that the legislation enacted was theirs, because the Democrats were certain to include cost containment for drugs in their legislation. It was widely believed that if the federal government used its buying power to pressure drug companies to cut drug prices, the cost of providing drugs to Medicare recipients would be substantially reduced.

But forcing down drug prices would diminish the drug companies’ profits and Republicans were adamantly opposed to that. Consequently, despite their oft-repeated opposition to new entitlement programs, they got behind the new drug benefit, now known as Medicare Part D, and made sure there was no cost-containment provision.

Once again, Medicare’s beneficiaries had proved a powerful organized force. But without more balanced politics, the legislation prevented Medicare from offering its own drug benefit and reduced its capacity to control drug costs. Though the drug benefit ended up costing less than projected, these lower-than-expected expenditures mainly reflected Part D enrollment that was below expectations and the growing market share of low-cost generics. For brand-name drugs, Medicare’s private plans generally paid more than the Veterans Administration, or even Medicaid.

These struggles were indicative of the more general drift of Medicare policy. As the parties moved apart, interest groups moved into the void. And there were more and more such groups—pharmaceutical manufacturers, private insurers, medical device makers, and new and expensive medical specialties. Every one of them seemed to have its association and team of lobbyists. Once providers and beneficiaries enjoyed some degree of parity. Now a whole new set of health-industry claimants had entered the fray, and politicians increasingly were drawn to the lucrative positions they offered. By the late 2000s, roughly half the members of Congress became lobbyists, up from just 3 percent in 1974 (Gerson, 2012), and the healthcare sector employed more of these “revolving door” lobbyists than any major industry besides Wall Street.

As medical lobbyists beefed up, Medicare increasingly was starved of the administrative resources it needed to push back against providers. The program’s responsibilities increased; its staffing levels declined. Though partisan gridlock was the major cause, interest groups understandably showed no desire to improve Medicare’s ability to police fraud or control its spending. And the fragmentation of groups made it harder and harder for any part of the medical sector to speak with a clear voice about Medicare’s declining capacity, even where it hurt providers—such as with information technology and claims processing. Medicare spent more and more, but it administered less and less.

Medicare officials from both parties argued this was foolish. A dollar spent to reduce fraud and abuse yielded about $17 in savings (Office of Inspector General, 2010). But bipartisan action on anything—especially anything that involved making government stronger—proved increasingly elusive. In the absence of such policing, a small group of specialists made out like bandits. In 2012, the thousand doctors who received the most from Medicare collectively billed the program more than $3 billion (Weaver, McGinty, and Radnofsky, 2014).

The New New Politics?

Can Medicare remain an effective program with sufficient autonomy from interest-group demands? Some signs are promising. Since the financial crisis, health costs have done something unusual: they have stopped rising, or at least rising at the meteoric rates that have made the United States the highest spending nation in the world. Initially, the slowdown could be attributed to the downturn. But it has persisted, even as the economy has gradually recovered. To be sure, insurers have shifted more costs onto patients. But no changes of this sort have happened in Medicare, and Medicare has seen the greatest deceleration of any payer. From 2011 until 2014, the real growth of spending per beneficiary was essentially zero. In 2014, it fell into negative territory (Furman and Fiedler, 2014).

Yet no one should be excessively sanguine about Medicare’s future. Even if Medicare spending per person remains stable, the share of the population on Medicare is growing quickly. Starved of bureaucratic capacity for years, the program is administratively taxed. The interest-group juggernaut, meanwhile, is better organized than ever. The two years between 2008 and 2010—from the financial crisis, through the passage of the ACA, to the Republican capture of Congress—were an exceptional departure from business as usual. The pressure to return to interest-group logrolling will be strong.

The biggest risks concern the interest group that has done the most to protect Medicare so far: organized older Americans. Though AARP supported President Obama’s reform drive, its members are much more hostile to the ACA. A major chunk of the ACA’s financing comes from ratcheting down Medicare payments to providers and private plans. Though none of these changes reduce Medicare benefits, the ACA remains highly vulnerable to GOP attacks. Since 2009, Republicans have successfully courted older voters by claiming that Democrats threaten their cherished program (remember the “death panels”?). In the watershed 2010 midterm elections, older Americans favored Republicans by a twenty-one–point margin after essentially splitting their vote between the parties four years prior (Tau, 2010).

The irony is that Republican leaders also would like to transform Medicare, and in ways that are likely to have greater consequences. Since 1994, Republicans have retreated from the bipartisan rationalizing reforms their leaders once brokered or supported. Instead, they have sought to cut Medicare’s benefits directly, limiting eligibility or the level of support for patients. In 1995, Gingrich tried, unsuccessfully, to cut the share of beneficiary spending that Medicare would cover. Fifteen years later, the centerpiece of the GOP budget proposals developed by House Budget Chair Paul Ryan was a proposal for turning Medicare into a fixed payment to private health plans. Congress’s official scorekeeper, the Congressional Budget Office (2011), calculated that the plan would shift hundreds of billions in health costs from the federal government onto Medicare beneficiaries—without lowering overall health spending.

Republicans hope they enjoy enough of a political edge with older adults that they will be trusted to make such sweeping changes. They also believe that the increased role of private plans within the program has divided the unified constituency of beneficiaries enough to make a much more privatized program possible. Responding to the reality of Republican congressional power, older adult groups—notably, AARP—have sought to work more closely with the GOP, while also maintaining their historical commitment to a regnant federal program. This balancing act may well prove increasingly difficult, as growing inequality among older adults and the expanded role of private plans fragments beneficiaries. On the core issue of whether Medicare should continue to offer a defined set of publicly guaranteed benefits through a large public plan, older Americans remain skeptical of the GOP vision. But in the new interest-group environment, it is harder for AARP, or any one group, to maintain a consistent vision, much less convince politicians that this vision is correct.

No program can operate in a political vacuum. But there is a difference between constructive interest-group bargaining and every-interest-for-itself struggles to extract as much as possible from government policies. Paradoxically, Medicare needs to have more independence from individual interests if it is to respond effectively to the broad demands of the major groups that now depend on, or are affected by it: beneficiaries, providers, insurers, and taxpayers. The sum of many small demands by lobbyists is not balance, but imbalance. The breakdown of the quasi-corporatist era risks driving up costs where they should be controlled, squeezing them where they should be loosened, and making Medicare’s priorities and capacities hostage to the blocking and loophole-seeking activities of narrow medical interests. The problem affords no easy solution; it is, in many ways, the problem of American politics today. But the chances of fixing it will be much higher if the biggest stakeholders in Medicare recognize the threat.

Jacob S. Hacker, Ph.D., is the Stanley B. Resor Professor of Political Science and director, Institution for Social and Policy Studies, at Yale University in New Haven, Connecticut. He can be contacted at jacob.hacker@yale.edu.

Editor’s Notes:

The entire Summer 2015 issue of Generations is available on AgeBlog thanks to the generous support of The Benjamin Rose Institute on Aging, Compassion & Choices and Robert Wood Johnson Foundation President's Grant Fund of the Princeton Area Community Foundation. Click here to read more.

This article is taken from the Summer 2015 issue of ASA’s quarterly journal, Generations, an issue devoted to the topic, “Medicare at 50.” ASA members receive Generations as a membership benefit; non-members may purchase subscriptions or single copies of issues at our online storeFull digital access to current and back issues of Generations is also available to ASA members and Generations subscribers at Ingenta Connect. For details, click here.


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