By Jonathan Oberlander
When President Lyndon Johnson signed Medicare into law on July 30, 1965, he declared, “No longer will older Americans be denied the healing miracle of modern medicine” (Johnson, 1965). On that promise, and much more, Medicare has delivered (Oberlander and Marmor, 2015). Over the past fifty years, Medicare has provided tens of millions of older Americans with a crucial measure of financial security and access to medical care. Moreover, since 1972, Medicare has provided coverage to persons with permanent disabilities and end-stage renal disease.
Medicare is a program that almost all American families come to rely on. At the same time, so too has the medical industry come to rely on Medicare. As the single largest purchaser of medical services in the United States, Medicare is an important source of income for hospitals, physicians, home health agencies, and other medical care providers. Changes made in Medicare policy reverberate through American medical care. Medicare spending currently comprises about 20 percent of all national healthcare expenditures and 14 percent of the federal budget, giving the program a central role in debates over deficits and healthcare spending (Kaiser Family Foundation, 2014).
American healthcare is today unimaginable without Medicare. But why did the United States create a separate health insurance program for seniors? How did the political legacies of Medicare’s enactment shape its subsequent development? And how have Medicare politics changed over time?
Medicare’s story begins with the failed campaign for national health insurance during the first half of the twentieth century (Oberlander, 2013). In 1915, reformers introduced a model health insurance bill to submit to state legislatures, but it failed to gain traction. After fading during the 1920s, health reform returned as an issue during the New Deal (Starr, 1982). The 1935 Social Security bill initially contained a single line authorizing the study of health insurance, prompting vigorous protests from the American Medical Association (AMA), which believed government health insurance threatened the organizational, financial, and clinical autonomy of physicians. President Franklin Delano Roosevelt, fearing the controversy would jeopardize Social Security’s enactment, refrained from pushing health insurance and ordered the line removed from the Social Security Act. His successor, Harry Truman, in 1945 became the first American president to formally endorse universal health insurance, though he fared no better in winning its passage.
National health insurance was stymied by the AMA’s unrelenting opposition, the stigma of “socialized medicine” that resonated strongly during the Cold War, a conservative coalition of Southern Democrats and Republicans that formed a voting majority in Congress, and President Truman’s reluctance to fight harder for reform (Marmor, 1973; Starr, 1982; Blumenthal and Morone, 2009).
Advocates of national health insurance within the Truman administration sought a new strategy. Wilbur Cohen and I. S. Falk, advisers to Federal Security Agency Administrator Oscar Ewing, formulated a plan to provide federal health insurance to beneficiaries of Social Security payments for Old Age and Survivors Insurance. In June 1951, Ewing announced a proposal for sixty days of hospital insurance a year for the 7 million elderly retirees receiving Social Security. Having failed to win passage of universal health insurance, reformers narrowed their aspirations to establishing government coverage for one population group—the elderly (Ball, 1995).
There was a compelling case for federal health insurance for “the aged” (as older adults were then commonly termed). Although seniors required more medical services than younger Americans, they were more likely to be uninsured and had much lower incomes. In 1962, 47 percent of elderly families had incomes below the poverty line (Moon, 2006). Once retirees left employer-sponsored insurance, they had a hard time obtaining affordable coverage because private insurers saw them as bad risks. Before Medicare’s enactment, only about half of older Americans had any health insurance coverage at all, and many of those policies had limited benefits (Marmor, 1973). Still, the primary rationale for focusing on the elderly was political. Medicare advocates wanted to capitalize on the sympathetic reputation of the elderly as a group deserving of government help and in need through no fault of their own.
Reformers additionally sought to leverage political associations with Social Security. Social Security paid out benefits as an earned right to retirees who had contributed payroll taxes to the program during their working lives. It was a social insurance program, characterized by required payroll taxes, federal administration, and universal eligibility, its benefits available to all Americans regardless of income. Medicare’s architects attributed Social Security’s political success and popularity to these social insurance arrangements, and they wanted to enact federal health insurance along the same lines. “Health insurance through Social Security” became reformers’ slogan (Ball, 1995). The proposal for what came to be called Medicare was built on the Social Security model in its eligibility rules, financing, and administration. By making Medicare a universal program open to all seniors, with eligibility for benefits earned through working, its advocates wanted to avoid the stigma associated with welfare and the political weaknesses, including underfunding and tepid public support, often seen in government programs that serve only the poor.
By focusing on the elderly and linking federal health insurance to Social Security, Medicare’s proponents were attempting to mobilize public and congressional support (Jacobs, 1993). Reformers were acutely aware, though, that the AMA’s intense opposition had contributed to the defeat of national health insurance during the Truman administration. The original Medicare proposal included only hospital insurance, omitting benefits for physician services in an effort to placate the AMA.
Medicare embodied the politics of incrementalism. By restricting eligibility to the elderly, narrowing benefits to hospital care, and linking health coverage to Social Security, Medicare’s architects hoped to achieve a goal that had eluded the Truman administration and previous reformers: enactment of federal health insurance.
The Medicare strategy worked, but not immediately. Medicare’s enactment came only after a contentious debate. The AMA was not impressed by reformers’ efforts at conciliation. AMA president David Allman declared that the Medicare proposal “is at least nine parts evil to one part sincerity” and “the beginning of the end of the private practice of medicine” (Journal of the American Medical Association, 1957). Ronald Reagan famously 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” (Morone, 1990).
Although Medicare attracted substantially more support in Congress than prior national health insurance proposals had—in 1964, it came within one vote of passing the crucial House Ways and Means Committee—it still fell short of garnering enough votes to pass Congress (the chair of Ways and Means, Arkansas Democrat Wilbur Mills, initially opposed Medicare). The 1964 elections—Democrat Lyndon Johnson won the presidency in a landslide and Democrats gained wide majorities in both the House and Senate, thereby breaking the hold of the conservative coalition—ended the impasse over Medicare, leading to its 1965 enactment (Marmor, 1973).
The 1965 Medicare law was substantially broader than the original proposal. Wilbur Mills engineered an unexpected compromise, with the hidden approval of Lyndon Johnson, which added insurance for physicians’ services to the bill (Blumenthal and Morone, 2009). Medicare Part A, reflecting the original social insurance vision, would cover hospitalization costs and would be funded via payroll taxes. Medicare Part B would cover physician and outpatient services. Instead of payroll taxes, its financing would come from a combination of beneficiary premiums and general revenues. Mills, along with Johnson, feared that a Medicare program that covered only hospital stays would disappoint seniors. Mills also was concerned about raising Social Security taxes, so he sought to preemptively expand Medicare on his terms, insuring against the costs of physician services without relying on payroll taxes.
Mills had another concern. Medicare, he feared, would expand from its modest beginnings into a broader national health insurance program for all Americans. In order to forestall that possibility, he added a program to pay for the medical costs of low-income persons to the Medicare legislation: Medicaid. By providing coverage for the poor, thereby taking another potential target for federal health insurance out of the equation, Mills hoped to weaken the case for later expanding Medicare. Medicaid built on an AMA proposal and the pre-existing Kerr-Mills program that gave states payments to finance care for low-income residents. Unlike Medicare, Medicaid would be jointly administered and financed by both state and federal governments. The Medicare debate thus ended with a surprising “three-layer cake,” encompassing Medicare Parts A and B, and Medicaid (Marmor, 1973).
Legacies of 1965
Decisions and compromises made at Medicare’s enactment shaped program politics over the ensuing five decades. Medicare policy today still reflects the legacies of 1965, as Washington grapples with dilemmas that were built into Medicare’s architecture.
Permissive payment policies
Medicare’s original mission was to bring the elderly into the mainstream of American medicine, not to reform how medical services were delivered or paid for. The 1965 Medicare statute declared, “Nothing in this title shall be construed to authorize any federal officer or employee to exercise any supervision or control over the practice of medicine or the manner in which medical services are provided . . . ” Medicare administrators’ initial priority was to assure a smooth takeoff for the program and prove that federal health insurance could work. Medicare consequently contained policies for paying doctors and hospitals that contained few limits on reimbursable costs (at that time, private insurance, too, had few cost controls). Medicare additionally relied on private intermediaries for claims processing and reimbursement as a buffer between the government and medical providers (Feder, 1977; Brown, 1985).
Medicare’s implementation was smooth—a reflection in part of the skill of its administrators (Gluck and Reno, 2001). However, Medicare’s permissive payment policies helped fuel rising costs in the program as well as in the broader U.S. medical care system. In 1970, Senator Russell Long (D-LA) warned that Medicare had become a “runaway program” (Oberlander, 2003).
In 1972, Congress adopted the first significant policies aimed at slowing Medicare spending growth, though these measures proved ineffective largely because federal policy-makers were not yet prepared to take on the medical care industry. As federal budget deficits soared, though, healthcare costs became a prominent national issue, and the program’s hospital insurance trust fund ran low on funding—Medicare’s accommodation of medical providers proved untenable. During the 1980s, Congress adopted prospective payment systems for hospitals and physicians; Washington would no longer pay whatever providers charged, instead setting fixed payments in advance (Jost, 1999; Marmor, 2000; Mayes and Berenson, 2006; Morone, 1990; Oberlander, 2003; Smith, 1992). The era of the blank check in Medicare was over.
In subsequent decades, Congress and presidents seeking major budget savings would repeatedly look to Medicare. The payment reforms adopted in the 1980s and thereafter did successfully slow Medicare spending growth (Moon, 2006). Provider lobbies sometimes successfully pressed to weaken cost control measures and to secure favorable payment terms for particular providers, specialties, and specific geographic locations (Vladeck, 1999).
Nonetheless, the trajectory in Medicare continues to be toward more robust cost containment. Medicare spending growth has been particularly slow since 2007—per person Medicare spending is expected to be $1,200 lower in 2014 than had been projected in 2010—and the Affordable Care Act (ACA) is expected to produce additional savings in coming years (Kaiser Family Foundation, 2014; White and Ginsburg, 2012). Still, with enrollment growing significantly as the baby boomers retire and medical care costs continue to rise, albeit presently at a more modest rate, additional efforts to contain Medicare spending are likely. Medicare politics is, above all, budget politics.
Medicare initially provided a limited benefits package focused on protecting the elderly against the acute costs of medical care rather than providing comprehensive insurance for all medical costs or covering care for chronic illness. The 1965 Medicare law omitted coverage of crucial services such as outpatient prescription drugs and long-term nursing home care. Moreover, Medicare required significant beneficiary cost-sharing without any cap on how much enrollees could pay in a given year.
These limited benefits stimulated the growth in Medigap and employer-sponsored supplemental health insurance policies that many Medicare beneficiaries carry to fill the program’s sizable holes, and set the stage for subsequent fights over expanding Medicare benefits. Given the political popularity of seniors, their high turnout rates in elections, and the reputed influence of elderly advocacy groups like AARP, it might have been expected that Medicare’s history would be replete with benefit expansions.
But as fiscal concerns and cost containment proposals dominated the Medicare policy agenda, benefit expansions proved to be the exception rather than the norm. The emergence of private supplemental policies also complicated the politics of expanding Medicare benefits. The first major expansion of Medicare—the Medicare Catastrophic Coverage Act of 1988—came more than two decades after the program’s enactment, but Congress repealed the law only sixteen months later because of controversy surrounding its financing mechanisms (Himmelfarb, 1995). The next significant expansion—the 2003 Medicare Modernization Act—extended Medicare to cover outpatient prescription drug expenses, however, the coverage contained a “doughnut hole” that left some beneficiaries with high medication costs financially exposed (Oliver, Lee, and Lipton, 2004). Even with the 2010 ACA’s expansion of Medicare benefits, including clos ing that infamous “doughnut hole,” Medicare benefits remain limited in key respects and program enrollees are susceptible to high out-of-pocket costs (Moon, 2006).
A hybrid program
Medicare initially was divided into two programs: Medicare Part A, primarily covering hospitalization, and Medicare Part B, primarily covering physician services. That division was born of political circumstances and divergent histories. Part A, funded by payroll taxes, represented the original 1951 Medicare proposal built on principles of social insurance. Part B, funded by general revenues and beneficiary premiums, reflected the efforts of Wilbur Mills in 1965 to satisfy anticipated beneficiary expectations by extending Medicare benefits without further increasing payroll taxes.
Over time, Medicare added another component, Part C, which enables beneficiaries to enroll in insurance plans sponsored by private companies that contract with the federal government. In its original conception, Medicare was a government insurance program. However, Medicare Part C—currently known as Medicare Advantage—brings private plans into the mix and their share of program enrollees has been expanding significantly. Today, about 30 percent of Medicare beneficiaries receive coverage through private plans that stand alongside traditional Medicare. The balance between public and private insurance, between traditional Medicare and these new plans, has in turn become a recurrent source of controversy as Democrats and Republicans debate what kind of program Medicare should be and whether or not to adopt a voucher or premium support model that would further boost the role of private plans (Oberlander, 2003; Vladeck, 2004).
Since 1995, political conflicts over Medicare have become increasingly visible and Republican congressional majorities have pushed for more pro-market Medicare policies. In 2009, the House Republican majority voted to eliminate the traditional Medicare program and instead provide beneficiaries with subsidies to purchase private insurance, though the legislation failed to clear the Senate. Medicare’s Part D prescription drug benefit relies exclusively upon private plans and generous payment rates have been adopted to help private plans attract more beneficiaries (Morgan and Campbell, 2011). Changes in private insurance—namely, the spread of managed care during the 1990s—also have rever-berated in Medicare and helped stimulate the growth in Medicare Part C. As private plans gain a larger foothold in the program, their political influence in Medicare policy increases. In short, the programmatic character of Medicare has changed radically since 1965. Medicare increasingly is a hybrid mixture of public and private insurance that reflects two contrasting political philosophies within the same program (Schlesinger and Hacker, 2007).
A vision unfulfilled
Medicare was envisioned as a beginning, not an end. Medicare’s focus on insuring the elderly was a political strategy designed to secure the passage of a federal health insurance program that would expand substantially in coming years. As Robert Ball, a key participant in crafting the Medicare strategy and head of the Social Security Administration from 1962 to 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” (Ball, 1995). Despite repeated statements to the contrary during legislative debates in the late 1950s and the early 1960s, Medicare’s architects anticipated that after covering the elderly, Medicare soon would expand to insure children, then workers, and eventually all Americans.
The strategy was incrementalism, and the ultimate goal, universalism. But Medicare did not expand as planned, and the initial expansion to children never happened, though Medicare, in 1972, did add coverage for end-stage renal disease patients and persons receiving Social Security disability insurance (Jacobs, 2007). A changing political environment, eroding faith in government, the ascendance of conservatism, economic strains, budgetary pressures, and decisions made by health reformers to move away from the Medicare model—all of these factors help to explain why Medicare never developed into a broader national health insurance system (Oberlander and Marmor, 2015).
Medicare instead paved the way for decades of demographic incrementalism as public programs, including Medicaid, expanded to insure different slices of sympathetic populations, contributing to the fragmentation of U.S. health insurance. When a Democratic president and Congress moved away from such incrementalism to pass the 2010 Affordable Care Act, the law’s coverage expansion relied on private insurance and Medicaid, rather than Medicare, a symbol of how much health politics has changed since 1965.
Medicare has been, in key respects, a model of stability since 1965. Medicare still primarily covers older Americans, it remains a social insurance program, much of its original benefit package is intact, its major financing mechanisms still exist, and the separation between Medicare hospital and physician insurance endures. The relative stability of these programmatic arrangements underscores the lasting impact of the choices made in 1965, which continue to shape Medicare policy and politics today.
Yet the past half-century also has seen major changes in Medicare. The program’s payment policies have been transformed and the political power of the medical industry has eroded. Medicare benefits have expanded in important ways. Medicare beneficiaries now pay differentiated premiums according to their income. Medicare politics have become more partisan and ideological. And private insurers have gained a major foothold in the program.
As Medicare’s journey continues in coming years amidst a polarized political environment, ongoing controversy over healthcare reform, an aging population, and imposing budget pressures, the question is not whether Medicare will change, but how. Fifty years after its enactment, the Medicare debate is not over.
Jonathan Oberlander is a professor of Social Medicine and Health Policy & Management at the University of North Carolina at Chapel Hill.
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