When President Lyndon B. Johnson signed the bill on July 30, 1965, creating the Medicare and Medicaid programs, it was the culmination of a decades-long effort, marked by political infighting, false starts and near misses to create a national health-insurance program.
In the four decades since, the two programs-which together cover approximately 90 million Americans-have evolved to meet the demands of an aging and medically needy society. Though both programs have critics, who say they have become bloated and a financial albatross for the government, many more praise Medicare and Medicaid for providing health coverage to Americans who otherwise would not be able to afford it.
When Medicare was first devised, its mission was to protect the elderly from hospital costs, says Uwe Reinhardt, a professor of health policy and economics at Princeton University. "It has done that job splendidly. Without Medicare, the American elderly would be devastated." He adds that hospitals have also greatly benefited. Hospitals received $136.3 billion in Medicare reimbursements in 2004, according to the CMS.
Richard Davidson, president of the American Hospital Association, calls Medicare "the most successful federal program ever. Medicare has done a heck of a job fulfilling its mission."
Medicaid was essentially a last-minute inclusion in the bill that created Medicare. Because many states already had programs to help the indigent with healthcare expenses, the sense was that the healthcare needs of the elderly at that time were a more urgent matter. But since then, Medicaid, a state and federal government partnership covering an estimated 53 million Americans, has surpassed Medicare in size. Medicare covers 41 million beneficiaries. Similarly, combined state and federal spending on Medicaid is now an estimated $329 billion, compared with $325 billion for Medicare, a solely federally financed program.
Because of the size of both programs and changing demographics that will increase the needs for healthcare services in the near future, the fiscal challenges to Medicare and Medicaid are daunting. Medicare trustees anticipate that in less than two decades the Medicare hospital trust fund will go bankrupt unless action is taken to shore it up.
Medicaid faces even more immediate dangers as Congress prepares to cut $10 billion from it. Ideas are being thrown around to keep Medicaid financially alive, but the proposals serve more as talking points than plans of actions.
Despite all the doomsday prognostications, some say that any talk of the death of either program is just rhetoric. "It's never going to happen," says J.B. Silvers, a professor of health systems management at Case Western Reserve University and former member of the predecessor of the Medicare Payment Advisory Commission. "They're too important-Congress won't allow it."
In the beginning
While Medicare and Medicaid officially came to life 40 years ago, the beginnings of the programs trace even further back. According to The Evolution of Medicare . . . From Idea to Law, a comprehensive study of the program by Peter Corning, the first attempt at a government-run health insurance program in this country was made by the American Association for Labor Legislation. Formed in 1906 by economists at the University of Wisconsin as a private reform organization, the group included lawyers, businessmen, politicians and labor leaders.
In 1915, the group released a "standard" health insurance bill to be used by state legislatures as a model for state-run health insurance programs. Among the proposals in the 1915 bill were protection for all low-income workers and broad hospital and medical benefits for workers and their benefits. That idea, however, died and despite scattered attempts at starting a national health insurance program, they all met with defeat.
The next great push didn't occur until after Franklin D. Roosevelt assumed the presidency. In the effort to create Social Security during the 1930s, there was serious thought given to including health insurance as a benefit. That proposal, however, was bitterly opposed by the medical community. Indeed, despite its initial openness to a national health insurance program, the American Medical Association quickly reversed position and, up to the creation of Medicare and Medicaid, it opposed federal involvement in health insurance. While Roosevelt favored including health insurance in Social Security, he eventually recognized that doing so could scuttle the entire program and chose not to pursue the matter.
After World War II, efforts at a national health insurance program came in fits and starts. It wasn't until 1960-when President Dwight Eisenhower signed into law a bill by Rep. Wilbur Mills (D-Ark.) and Sen. Robert Kerr (D-Okla.) to provide federal funding to states to help pay for the healthcare of the elderly-that movement on a national health insurance program made any significant progress.
In 1961, the bill that would eventually lead to the creation of Medicare was introduced and for the next three years Congress held hearings on it, but no action was taken. The bill was reintroduced in early 1965 and the House passed a revised version 313-115. On July 9, the Senate passed the bill 68-21. Three weeks later, President Johnson signed the bill into law: Medicare and Medicaid were born. Former President Harry S. Truman was the first to enroll in Medicare.
Since their inception, the greatest challenge to the programs has been spiraling healthcare costs, stemming largely from innovations in medical technology and pharmaceuticals. Now, as baby boomers advance toward senior citizenry, concerns about the financial sustainability of the programs frame any discussion about Medicare and Medicaid.
According to the Congressional Budget Office, Medicare spending is projected to reach $325 billion for the current fiscal year, ending Sept. 30. By 2015, spending on the program is expected to total $766 billion. Federal spending on Medicaid is estimated to reach $186 billion for fiscal 2005, climbing to $392 billion in 2015. In 2005, combined federal and state spending on Medicaid will total $329 billion, according to the National Governors Association.
In 1983, in an attempt to rein in Medicare costs, reimbursements to hospitals were changed from a cost-based system to a prospective payment system under which hospitals were paid set rates based on DRGs. By paying set rates, the idea was that hospitals would have to become more efficient, saving Medicare money.
Soon, though, says Silvers of Case Western, providers learned how to manipulate the system by upcoding and billing Medicare for multiple DRGs for a single incident of patient care. When the CMS' predecessor, the Health Care Financing Administration, caught on, it cracked down on such practices and tightened its grip on hospital billing of Medicare.
Also as a result of the earlier experience with hospitals, when physician reimbursements were switched to a prospective payment basis as well in 1992, HCFA set DRG rates for doctors comparatively low in anticipation that they would inappropriately bill for higher Medicare rates, Silvers says.
For some doctors, the change drastically hurt their practices, says AMA President J. Edward Hill, including his own. At the time, he and a group of other doctors ran a 42-bed hospital in rural Mississippi, but after the switch to PPS, the facility had to be closed because of a lack of funding.
"We just couldn't keep up (with the costs) of advancing technology," he says. With a 4.3% cut in physician reimbursements scheduled to take place next year, the physician community is hoping for legislative help in averting the cuts, Hill says.
Severe cuts from Balanced Budget Act
The ax really fell with the Balanced Budget Act of 1997, which enacted severe rate cuts to providers. The intent of the act was to slow the growth rate of Medicare spending and extend the life of the program's trust fund. But for many providers, the legislation brought on a fiscal nuclear winter that lasted for years. "It took billions and billions out of the system . . . a lot of our institutions are just recovering" says the AHA's Davidson. "The history of the program has been that as costs have grown, reimbursements have gone down." According to the AHA, from 1998 to 2005, cuts in Medicare payments to hospitals totaled $139.8 billion.
Cost concerns similarly plague Medicaid, and throughout the decades, states strapped for dollars have reluctantly cut funding for the program or made it more difficult for people to qualify. These days, the focus is on a possible cut of $10 billion in federal funding from the program as outlined in the budget resolution reached in April. In September, Congress will have to report from where those cuts, to begin in fiscal 2007, will come. In recent weeks, it has become clear that legislators are looking at every part of the program for savings, but in particular Congress and the White House are looking at cracking down on perceived fraud and abuse.
So where do the programs stand now? Most of the heavy lifting on Medicare was done with passage of the Medicare Modernization Act of 2003, which created outpatient prescription-drug benefits, and the emphasis has shifted to implementing that benefit, which takes effect on Jan. 1, 2006. In an effort to control costs while improving quality, the CMS is also is in the midst of a pay-for-performance initiative offering bonuses to providers who can provide better care at cheaper costs.
With the Medicare hospital trust fund estimated to go broke in 2019, observers say the program still needs major structural changes. With the MMA, the private insurance market could have an unprecedented presence in Medicare, and some say that if the program succeeds, that trend could continue.
In the case of Medicaid, besides impending cuts, efforts are under way to revamp the program to ensure it will remain afloat in the long term. A recently appointed HHS Medicaid Commission must report recommendations in December 2006 on steps to guarantee the financial sustainability of the program.
The National Governors Association in June called for prescription-drug pricing improvements, more restrictions on transfer of assets and greater cost-sharing by beneficiaries. But many lawmakers and consumer advocates have questioned the wisdom of raising beneficiary costs, saying increasing copayments and deductibles would lead to patients skipping necessary care, which in turn would result in greater patient acuity and higher costs.
For states, Medicaid's future is especially urgent. In its biannual budget report issued earlier this month, the governors association said that while states' overall budget picture is improving, Medicaid spending continues to outpace revenue growth. In fiscal 2005, 24 states will report Medicaid shortfalls, up from 20 a year ago. Raymond Scheppach, executive director of the association, says that if the economy were to take another downturn, there would have to be cuts in higher education to fund Medicaid.
As part of changing Medicaid, many state officials are looking at changes to the financing of long-term care. About half of all long-term-care spending is paid for by Medicaid, and nearly two-thirds of all nursing home spending is paid for by the program, according to the governors association. Along with other proposals, such as incentives to purchase private long-term-care insurance and allowing states greater flexibility to make changes in their Medicaid programs to encourage home and community-based care, some are calling for Medicare to pick up a greater share of long-term-care expenses.
"I think the will is there more now than ever" to push for greater federal funding for long-term care, says Hal Daub, president and chief executive officer of the American Health Care Association and National Center for Assisted Living, lobbying groups for the long-term-care industry. "It's not just the cost implications. It's the tsunami of old age that's coming that has gotten the lawmakers' attention."
Despite the swirl of activity surrounding Medicaid reform, there is no consensus that any significant reform will happen this year or anytime soon. "If it doesn't happen this year, I don't think it will happen for a few years," Scheppach of the governors association says.
Regardless of the future of both Medicare and Medicaid and in spite of criticisms, there is little difference of opinion that they have protected the health of millions of Americans and made it easier for them to stay healthier.
"Despite some of the doubts many of us had, there's no question of the critical role the programs have had in the health of Americans," said the AMA's Hill.
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