A Look at Program's History Can Tell Us How to Save It Medicare at the crossroads PRO


The Medicare program, budget deficits and maneuvering for the next presidential race have once again come into intense and very public conflict. The partisan fight has left the country bewildered by a mix of crisis talk, fact-throwing and ideological name-calling.

In May, President Clinton publicly rejected the suggestion of House Speaker Newt Gingrich that Medicare's forecasted budget be reduced substantially (about $270 billion) to "save" the valued but beleaguered program. The president also has rejected the "remedy" of a bipartisan national commission proposed by Senate Majority Leader Bob Dole, an announced contender for the Republican presidential nomination. The president finds himself on the defensive, criticizing Medicare's "attackers" but not explaining his own position. The Republicans find themselves caught among conflicting promises: to enact tax cuts, to balance the budget and to "protect" Medicare (and Social Security). It is no wonder the debate has been confusing.

Not only is this confusing, but it is familiar. In the 1992 presidential campaign there was a brief but heated flap over a Bush administration proposal to reduce federal spending on Medicare and Medicaid by about $260 billion between 1993 and 1997. Candidate Bill Clinton said the policy would eviscerate Medicare. It also would increase the shifting of medical costs to employment-based health insurance and lead to millions of lost jobs. The Bush campaign, while charging the Democrats with familiar scare tactics, nonetheless distanced President Bush from the flare-up. Mr. Bush called the proposal, which was publicly linked to Budget Director Richard G. Darman, merely one "option." And, with that, Medicare politics faded from public view, blocked for the past three years by the larger debate over health care reform.

To make sense of this debate requires historical perspective on what Medicare was expected to accomplish, some understanding of what its 30-year operational history has

wrought, and some realistic discussion of what its problems really are and what can be done about them.

Perhaps the best way to understand Medicare is to appreciate how peculiar the program is from an international perspective. The United States is the only industrial democracy that has compulsory health insurance for its elderly citizens alone. Even those countries that started national health insurance programs with one group of beneficiaries did not start with the elderly.

Peculiarly U.S. circumstances explain why compulsory government health insurance began with the recipients of Social Security cash pensions. The historical roots lie in this nation's rejection of national health insurance in the 20th century. First discussed before World War I, the idea fell out of favor in the 1920s. When the Great Depression made economic insecurity a pressing concern, the Social Security blueprint of 1935 broached health and disability insurance as items that should be included in a more complete scheme of protection.

From 1936 to the late 1940s, liberals called for incorporating universal health insurance into the emerging American welfare state. But the conservative coalition in Congress defeated this attempt at expansion, despite its great public popularity.

The original leaders of Social Security, well aware of this frustrating opposition, reassessed their reform strategy during President Harry S. Truman's second term of office. By 1952, they had formulated a plan for incremental expansion of government health insurance. Looking back to a 1942 proposal that medical insurance be extended to Social Security contributors, the proponents of what became known as Medicare shifted the category of beneficiaries to elderly retirees while retaining the link to social insurance.

Medicare thus became a proposal to provide retirees with limited hospitalization insurance -- a partial plan for the segment of the population whose financial fears of illness were as well-grounded as their difficulty in purchasing health insurance at a modest cost. With this, the long battle to turn a proposal acceptable to the nation into one passable in Congress began, stretching from its strategic birth in the early 1950s to a fully developed legislative plan by 1958.

A little at a time

These origins have much to do with the initial design of the Medicare program and the expectations of how it was to develop over time. The incremental strategy assumed that hospitalization coverage was the first step in benefits and that more would follow under a common pattern of Social Security financing. Likewise, the strategy's proponents presumed that eligibility would be gradually expanded. Eventually, they believed, it would take in most, if not all, of the population, extending first, perhaps, to children and pregnant women.

All Medicare enthusiasts took for granted that the rhetoric of enactment should emphasize the expansion of access, not the regulation and overhaul of U.S. medicine. The clear aim was to reduce the risks of financial disaster for the elderly and their families, and the clear understanding was that Congress would demand a largely hands-off posture toward the doctors and hospitals providing the care that Medicare would finance. Thirty years later, that vision seems odd. It is now taken for granted that how one pays for medical care affects the care given. But in the buildup to enactment in 1965, no such presumption existed.

The incrementalist strategy of the 1950s and early 1960s assumed that most of the nation was concerned with the health insurance problems of the aged. It also took for granted that social insurance programs enjoyed vastly greater public acceptance than did means-tested assistance programs.

Social insurance was acceptable to the extent that it sharply differentiated from the demeaning world of public assistance. "On welfare," in American parlance, is a term of failure, and the leaders within the Social Security Administration made sure that Medicare fell firmly within the tradition of benefits "earned," not given. The aged could be presumed to be both needy and deserving because, through no fault of their own, they had lower earning capacity and higher medical expenses than any other age group.

The Medicare proposal avoided a means test by restricting eligibility to persons over age 65 (and their spouses) who had contributed to the Social Security system during their working life. The initial plan limited benefits to 60 days of hospital care; physician services were originally excluded in hopes of softening the medical profession's hostility to the program.

Viewed as a first step, of course, the Medicare strategy made sense. Now, after 30 years, with essentially no serious restructuring of the benefits, Medicare deserves a sober review -- not a panicky one driven by the misleading notion that the program is doomed to insolvency and requires a dramatic transformation.

To view the crisis-ridden debate about Medicare's finances as misleading is not to suggest that the program is free of problems. But it is important to understand that Medicare can be adjusted in ways that fully preserve the national commitment to health insurance for America's elderly and disabled.

What should be done? One place to start is the reduction of the growing gap between the benefits Medicare offers and the obvious needs of its beneficiaries. What Medicare pays for should be widened to include the burdens of chronic illness; that means incorporating prescription drugs and long-term care into the program, which is precisely what the Clinton administration hoped to do in connection with the ill-fated health insurance overhaul.

Widening the benefit package does not mean, contrary to what many claim, that total expenditures must rise proportionately. Expenditures represent both the volume of services and their prices. Many other nations have not only universal coverage and wider benefits than Medicare, but spend less per capita than we do for their elderly.

Canada, for example, is able to do this because it pays its medical providers less, spends less on administration and uses expensive technology less often. Medicare's expenditures should be restrained below the current projected growth rate of 10 percent a year. There is no reason that the program's outlays need rise at twice the rate of general inflation -- or more. To achieve lower rates of increase in Medicare's expenditures need not require change in the program's status as a universal entitlement. What does have to be changed is the amount of income medical providers of all sorts receive from Medicare. The restraint of costs necessarily means reductions in payments to those in the medical industry. The real question is whether the reduction comes from fewer needed services, fewer unneeded services or lower payments for services, needed or not.

Medicare's financing also could use some overhauling. Raising payroll taxes will have to be part of the answer. This option appears to be ruled out of the current debate, a good example of fearfulness defeating common sense. But the breadth of public support for Medicare suggests it is possible to mobilize popular opinion in favor of tax increases where the problem is clearly defined and the justification convincingly offered. As for beneficiaries, it is time to reconsider the idea of charging wealthier beneficiaries more for Medicare's Part B physician insurance program, another idea likely, if explained, to have popular support. (Part B, itself a hastily arranged benefit in 1965, was supposed to draw its financing equally from general revenues and premium payments by beneficiaries. Over time, general revenues came to account for 80 percent of Part B's financing, a result no one really chose. There is thus a case for adjustments in progressivity of Medicare's financing without eroding its universal coverage).

No need to scare

We need to debate over how Medicare should be improved. What we do not need is debate that scares the country about its future by disseminating false claims about Medicare unaffordability. True, it would indeed be a "crisis" if the legitimate health costs of our aged and disabled were unaffordable. And it is true that a pattern of health expenditures increasing at twice the rate of national income growth is unsustainable over the long run. But there is no reason to believe we must tolerate this future.

Medicare's early implementation stressed accommodation to the medical world of the 1960s. Its objective was to keep the economic burden of illness from overwhelming the aged or their children. Today, 30 years later, the setting is radically different. The difficulties of Medicare are those of American medicine generally, not the program's administration alone. We pay too much for some procedures and we do too many things that either do some harm or do little good in relation to their costs. In the world of private American health insurance, cost control has now arrived with a vengeance. Medicare is unsettled and is likely to remain so in the context of budget deficit politics unless we accept that limiting what we spend on Medicare need not mean transforming it. The costs of cost control will undeniably have to be borne, but that burden should be borne by those -- payers and payees -- whose incomes are highest.

Theodore R. Marmor is a professor of politics at Yale University's School of Management. He is the author of "The Politics of Medicare."

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