The elephant (or donkey) in the room: Part 2 on the fiscal crisis facing Medicare and Medicaid

In Part 1, I wrote about the extent of the trouble that the United States finds itself in when it comes to financing Medicare and the “dual eligibles” who also receive Medicaid benefits for the future. (Social Security is a problem too, but Medicare and Medicaid are even more pressing.)

Now that we’ve established just how deep the hole is, let’s talk about how we got in the hole in the first place.

How we got here

Medicare and Medicaid were created by the Social Security Act Amendments of 1965. Although you might understandably think of these as just do-gooder progressive programs from President Lyndon Johnson’s “Great Society,” part of the motivation for creating Medicare was a push from the business community for a bailout from their retiree health benefit plans.

For the arithmetically impaired, 1965 was 50 years ago. So, unless you’re old enough to be eligible for AARP membership (I’m not), you weren’t around for what life was like before the first enrollees joined Medicare on July 1, 1966. And, chances are even if you were around back then, you were just a kid or maybe a young adult. As of the time of this writing, there are only seven living Americans who had reached age 65 before the Medicare program took effect. So it’s a little hard for the rest of us to imagine life before Medicare.

Before Medicare, most older Americans did not have health insurance coverage. As a result, poverty rates among the elderly were high, and access to health care was poor. According to the U.S. Centers for Disease Control and Prevention (CDC), in 1960, the average life expectancy at age 65 was 14.3 years. In 2010, it was 19.1 years. Those extra 4.8 years of life can be attributed at least in part to Medicare, and those extra 4.8 years of life are also one reason why Medicare is in so much trouble.

Among the minority of the elderly who were fortunate enough to have health coverage before Medicare, most of them received that insurance as a retiree benefit through their former employers. Even then, rising health care costs and life expectancy due to technological advancements were costing these companies plenty.

Strange bedfellows

If there were any group you would think of as supportive to Medicare, it would be physicians, right? After all, they get nearly 1/3 of their income from government sources today.

Physician income by source, 2004

Take the red pill: Share of physician’s outpatient revenues from various payers, by physician specialty, 2004. Box identifying the line bars: Medicaid (blue), Medicare (red), Other Government (yellow), Private Insurance (light blue), Out-of-Pocket (purple).

Source: Lasser, K. E., Woolhandler, S., & Himmelstein, D. U. (2008). Sources of U.S. Physician Income: The Contribution of Government Payments to the Specialist–Generalist Income Gap. Journal of General Internal Medicine, 23(9), 1477–1481. doi:10.1007/s11606-008-0660-7

But this was not always the case. Indeed, the American Medical Association was so scared of Medicare (because they thought they would lose money) that they hired screen actor Ronald Reagan to record some scary speeches that demonized Medicare as “socialized medicine” in order to sway public opinion. (That’s where the phrase originated.)

Despite the opposition from the AMA, Medicare became law anyway. The program has ironically been a huge boost for the pocketbooks of physicians.

Inaccurate forecasting

It would be impossible to overstate just how disastrously wrong the initial budget forecasts were about Medicare’s costs, but it was about like predicting mostly sunny skies with a 20% chance of rain showers in New Orleans on the day Hurricane Katrina hit.

In 1965, the House Ways and Means Committee estimated that the hospital insurance program of Medicare – the federal health care program for the elderly and disabled – would cost $9 billion by 1990. The actual cost that year was $67 billion.

In 1967, the House Ways and Means Committee said the entire Medicare program would cost $12 billion in 1990. The actual cost in 1990 was $98 billion.

Editorial, The Washington Times, November 18, 2009

In Part 3, I’ll explore why Medicare has blown away its initial costs and what can be done to fix it.

One thought on “The elephant (or donkey) in the room: Part 2 on the fiscal crisis facing Medicare and Medicaid

  1. Pingback: The elephant (or donkey) in the room: Part 3 on the fiscal crisis facing Medicare and Medicaid | The Health Policy Wonk

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