As boomers ease into Medicare, battle rages over health-care costs
The first baby boomers came of age in a political whirlwind: African Americans marched for equal rights, and Southerners attacked them. Anti-war protesters squared off against tear gas, nightsticks and bullets. Feminists pounded on the nation’s boardroom doors, demanding opportunities for women. Environmentalists demanded cleaner air and water.
Federal government responded, with historic reforms: Voting rights. Civil rights. Environmental protection laws. Withdrawal from Vietnam. The resignation of a president.
The fight for a more humane society led to one more reform, not as high on the priority list for the era’s young activists – though they have reason to feel differently about it today: On July 30, 1965, President Lyndon B. Johnson sat down at a table in Independence, Mo., and signed Medicare into law. Looking on was former president Harry Truman. Johnson handed Truman a card, making him the first client of a federal program that raised payroll taxes and guaranteed medical coverage for Americans 65 and older.
For Truman it was a moment of political triumph. As president, in 1945, he had proposed a national health care system – for all ages. The American Medical Association, representing the nation’s doctors, called it “socialism” and fought him off. President John F. Kennedy revived the idea, but focused it on the elderly. The medical establishment fought that proposal too, with help from an up-and-coming conservative named Ronald Reagan. Southern whites opposed Medicare, as well, enraged that it would end the racial segregation of hospitals.
After a fierce battle, Johnson won.
And so did elderly Americans.
In those days, U.S. health insurance was linked to the workplace. When Americans retired, many lost their coverage – and could not purchase new coverage, because health insurance companies would point to the ailments that go along with age and would refuse to issue policies on the ground of pre-existing conditions. As a result, especially among low-income elderly, illness meant impoverishment and an early death.
When Johnson signed that law, a majority of elderly Americans had no health coverage. Within a few years, 97 percent had Medicare. By 1975, the number of elderly Americans living in poverty had fallen by half.
Meanwhile, the leading edge of the baby boom generation left youthful activism behind, trading tie-dyed shirts for three-piece suits. Many voted for Reagan, who portrayed “big guvmint” as their enemy.
But today, if boomers look in a mirror they will see, more clearly than they did in 1965, a reason to care about Medicare.
Once again, health care for the elderly is in the eye of a political whirlwind. In the nation’s capital, a pitched battle rages over federal spending – including Medicare, which signed up the first baby boom beneficiaries in 2011.
Medicare attracts attention, due to its growing share of federal outlays: 8 percent in 1990, 12 percent in 2000, 15 percent in 2010, and a forecasted 18 percent in 2020. There lies the problem: A bigger share for Medicare would mean smaller shares for the federal government’s other responsibilities.
Reasons for the rising cost?
• Rising longevity increases the population of elderly people, as well as the cost of their care.
• The large boomer generation is leaving the work force. Smaller generations must shoulder some of the cost of keeping Medicare’s commitment to the aged. In 2010, 13 percent of the U.S. population received Medicare benefits and there were 3.4 tax-paying workers per Medicare beneficiary. By 2030, 20 percent of the population will be receiving Medicare benefits, with only 2.3 tax-paying workers per beneficiary.
• Spending forecasts also cite health-care cost inflation as one of Medicare’s problems. But the rise in medical costs has slowed in recent years – particularly for the government-run Medicare system.
According to the U.S. Department of Health and Human Services, between 2010 and 2012, Medicare spending per capita grew an average of 1.9 percent per year, with only 0.4 percent growth in 2012.
In private health-insurance systems, on the other hand, costs between 2010 and 2012 grew more than 7 percent a year, according to PriceWaterhouseCoopers.
Unlike Medicare, private health insurance plans spend money on profit margins, and on deliberate battles with providers and patients over what bills are covered.
Under Medicare, coverage is not exactly an insurance policy. Rather, it’s a social guarantee. The program rests on a commitment from one generation to the next: payroll taxes on working people, plus federal income taxes, plus the premiums paid by most Medicare beneficiaries, provide Medicare with its funding. From this funding, retirees get the promised coverage.
Nonetheless, many of today’s congressional Republicans have demonstrated a philosophical opposition to government safety nets, such as Medicare. Instead, they would refer the needy to the private sector.
U.S. Rep. Paul Ryan, for example, has proposed replacing Medicare with a voucher, which the elderly then would apply toward the cost of buying private health insurance. According to the nonpartisan Kaiser Family Foundation, Ryan’s voucher plan would increase a typical 65-year-old’s annual out-of-pocket spending by $6,240. Given President Barack Obama’s opposition, the voucher concept might be dead for now.
But vouchers are only one among many Medicare reforms under consideration in the nation’s capital.
How Medicare works
To put reform proposals in context, it is necessary to understand how Medicare works.
The Medicare program has several components. Most Americans sign up when they turn 65.
• Part A covers hospitalization. This is funded largely by the Medicare payroll tax on working people, plus a small amount from Part A’s hospital insurance trust fund. Much has been made, in the political realm, of forecasts that Part A’s trust fund will be depleted in 2026. If that happened, payroll tax revenue still would provide enough to cover 87 percent of the hospitalization benefit’s cost.
• Part B covers physicians and other outpatient services. Its funding: 73 percent from general tax revenue and 25 percent from the monthly premiums Medicare recipients must pay.
• Part D covers drugs. It allows seniors to sign up for a federally subsidized, private insurance policy to cover prescription pharmaceuticals. Its funding: 80 percent from general tax revenue, 11 percent from the monthly premiums Medicare recipients must pay, and 9 percent from states that pay the Part D premiums for impoverished Medicaid clients.
• Supplemental “MediGap” insurance . Medicare covers roughly 80 percent of medical bills, leaving beneficiaries responsible for 20 percent. But health problems are unpredictable and a 20 percent share of a six-figure bill can bankrupt all but the super-rich.
For this reason, many Medicare recipients choose to buy supplemental insurance, which they pay out of pocket, in addition to their Medicare premiums. Due to a long history of fraudulent sales practices by supplemental insurance companies, the federal government tightly regulates what these policies cover and how they’re sold.
• Medicaid . For elderly people with incomes below the poverty line, Medicaid pays the Medicare premiums and the deductibles, filling the role that private MediGap insurance pays for higher-income people. The cost of Medicaid is split between federal and state government.
• Medicare Part C is a regulated, private-sector alternative to Parts A, B and sometimes D. It’s sold by private health insurance companies and paid for by a combination of federal funds and beneficiary premiums. Nationwide, only 27 percent of seniors choose a Part C plan, also known as Medicare Advantage. It’s illegal to sell MediGap insurance to someone who has a Part C policy.
In a successful push to reduce waste and extend Medicare’s financial viability, the Affordable Care Act of 2010 clamped down on Part C’s spending. In 2012, administrative costs in Medicare Parts A and B totaled 1.5 percent of benefits. Overhead in private insurance is higher – so much so that the 2010 law requires a rebate to consumers from health insurers whose overhead costs exceed 20 percent.
To evaluate reform proposals, it is essential to consider the people the reforms would affect:
Among all Medicare beneficiaries, median income is $22,502. Among African Americans, it’s $15,252. Among Hispanics, $13,805. And as people age, savings dwindle: For beneficiaries over 85, median income is $17,410.
Beneficiaries’ out-of-pocket spending on Medicare has grown. The cost of premiums and copays for Medicare amounted to 6 percent of the average Social Security benefit in 1970, 12 percent in 1990, and 27 percent in 2010.
Forty percent of Medicare recipients have three or more chronic health conditions, and 23 percent suffer from cognitive or mental impairments.
Options for reform
Proposed reforms fall into these categories:
• Delay Medicare eligibility to age 67. The Kaiser Family Foundation found this would increase the cost of both private health insurance and Medicaid, by driving high-cost older people into their beneficiary pools. Result? A cost shift, not a real savings, and at the bottom line spending would rise.
• Increase seniors’ out-of-pocket costs. Some who favor this approach assume seniors are over-using care and should face a financial deterrent for seeking medical help. The idea takes several forms. One would increase beneficiaries’ deductibles.
A proposal from Sen. Bob Corker, R-Tenn., would add deductibles to the most popular MediGap policies, which now cover 100 percent of what Medicare doesn’t. Another method would apply a surtax to the MediGap premiums seniors pay.
The least regressive technique, found in Obama’s 2013 budget proposal, would increase the Part B and Part D premiums, but mainly on higher-income seniors rather than the poorest.
Critics of increases to seniors’ deductibles point to research which has found that low-income people postpone medical care if it would place in jeopardy their ability to purchase food, heat and other essentials. This, in turn, causes chronic illnesses to worsen and triggers expensive medical emergencies.
• Raise taxes. According to the Congressional Budget Office, an increase of 1 percentage point in the Medicare payroll tax would delay by several decades the exhaustion of the Part A trust fund. Other types of tax-increase proposals, such as attempts to rescind Reagan- and Bush-era tax cuts for the rich, trigger opposition from Republicans in Congress.
• Reduce payment rates for drugs. Under pressure from the powerful pharmaceutical industry, Congress has inhibited Medicare from demanding lower prices for prescription drugs – as is done by Medicaid, the government health care program for the poor. Several reform proposals would allow Medicare to begin doing what Medicaid does to get lower prices.
• Reform the medical industry – its incentives, its inefficiencies, and its health outcomes. Today, Americans live shorter lives and in poorer health than adults in other industrialized democracies. Within the U.S. health care system, organizational barriers and incompatible computer systems make it difficult for providers to coordinate care of the chronically ill and avoid redundant diagnostic testing.
Also, Medicare is a fee-for-service system. The more procedures physicians and hospitals perform, the more money they get. This creates an incentive, for example, to perform futile but lucrative medical procedures in the final months of a dying person’s life.
To address these issues, the Affordable Care Act of 2010 encourages physicians and hospitals to launch pilot programs, aimed at better care. The most popular concepts include formation of “Accountable Care Organizations.”
Under way at scores of medical centers, such as the University of Michigan, these organizations strive for consolidation of patient medical records; coordination of care among specialists, hospitals and family doctors; prevention-oriented management of chronic illness; and, within a few years, a payment system based on the number of patients rather than the number of procedures. A new payment system, reformers hope, might give providers an incentive to focus on successful health outcomes, rather than on the number of procedures performed.
So far, no one from Spokane’s large medical industry has formed an Accountable Care Organization.
In their 2012 report on Medicare’s long-term viability, Medicare’s trustees enumerated the medical reforms encouraged in the 2010 law, and they said, “Such changes have the potential to reduce health care costs and cost growth rates and could, as a result, help lower Medicare cost growth rates to levels compatible with the lower price updates payable under current law.”
Implementation of medical reforms would not require approval, the trustees noted last year, from the politically deadlocked Congress.
The trustees have warned, repeatedly, that Medicare must change. The only question, when reformers pick up their knives, is who gets hurt, and who gets protected.
In 1965 when he signed Medicare into law, President Johnson said this: “No longer will older Americans be denied the healing miracle of modern medicine. No longer will illness crush and destroy the savings that they have so carefully put away over a lifetime so that they might enjoy dignity in their later years. No longer will young families see their own incomes, and their own hopes, eaten away simply because they are carrying out their deep moral obligations to their parents, and to their uncles, and to their aunts.”
It took a fierce political battle, by advocates for the vulnerable, to achieve the social reforms of 50 years ago. The baby boom generation helped win some of those reforms. Will it fight now, to preserve them for another generation?
• Medicare.gov is federal government’s official information source about the program.
• A government booklet ( www.medicare.gov/Pubs/pdf/02110.pdf) provides consumer-oriented information about how to select MediGap policies, and how to recognize deceptive sales practices by insurance companies.
• A May 15 article on the Wall Street Journal’s Marketwatch web site analyzed proposals to make Medicare beneficiaries pay more for their care.
• The Social Security Administration has published a detailed history of the battle for Medicare’s enactment, at www.ssa.gov/history/corning.html