Since their birth in 1965, Medicare and Medicaid have significantly influenced the size and shape of U.S. healthcare. The public insurance programs, initially blasted by critics as “socialized medicine,” have precipitated the vast expansion—and even the creation—of many profitable industry sectors including hospitals, physician groups, managed-care insurers, home health, drug manufacturers, devicemakers and others.
One big reason the two programs powerfully seeded healthcare expansion is that political forces—ideologically and economically motivated—blocked the government from establishing effective cost controls. That meant taxpayers essentially wrote providers, insurers, suppliers and beneficiaries a blank check. This quieted initial opposition to the establishment of Medicare and Medicaid by making the programs profitable for private-market players. But the lack of cost controls, such as the global budgets used in other advanced countries, has created long-term financial headaches.
The two programs initially paid providers based on usual and customary fees. That led to “the vast enrichment” of providers, particularly physician specialists, Paul Starr, a Princeton University healthcare historian, wrote. The programs later moved to prospective payment models, but providers made up for that by boosting the volume of services for which they billed.
Over time, Congress has expanded Medicare and Medicaid to cover more services and products, including home healthcare, kidney dialysis, skilled nursing, rehabilitation, hospice, preventive services, and most recently, prescription drugs. That has led to a sharp rise in the number of for-profit providers. “You have this huge Medicare thing that is like a big barrel with money that flows out,” said Uwe Reinhardt, a Princeton University health economist. “It has all of these spigots—a hospital spigot, a physician spigot, etc. Every so often, a new spigot gets put into the barrel.”