Today’s 50th anniversary salutes to the enactment of the Medicare program on July 30, 1965 will emphasize how much Medicare changed the world of health insurance coverage and medical care for Americans over age 65. A closer look at the program’s origins and early history certainly confirms its primary accomplishments. However, it also suggests how improving necessary care for older Americans might have proceeded differently without producing some of Medicare’s chronic long-term problems that we continue to avoid dealing with today. (Part two of this post will examine how this history also offers some lessons to would-be repeal-and-replace critics of the five-year-old Affordable Care Act).
The standard history for Medicare’s origins usually begins with highlighting the inadequacies of existing insurance coverage for the elderly in the early 1960s. The most extreme pro-Medicare claims assert that only one-quarter of Americans over age 65 had “meaningful” private health insurance coverage. However, that calculation stacks the deck by setting the coverage bar fairly high. It uses either Blue Cross hospital insurance coverage of the time, or any other insurance paying 75% or more of hospital bills as its minimum threshold for providing adequate “comprehensive” coverage.
A higher, and more frequently cited, measure of insurance coverage for the elderly in the early 1960s comes from the 1963 National Health Survey. It found that 54% of Americans age 65 and above had some type of hospital insurance, compared to 71% for the general population over age 17. Even this difference between access to care for older versus younger Americans in the years immediately before Medicare can be reduced further, to some degree. The federal government’s survey excluded seniors who were covered under various government health and wealth programs. However, a large portion of the potential health care assistance to most older Americans under the Kerr-Mills program (enacted in 1960) or hospitals still under Hill-Burton grant obligations, was needs-based, and it often remained more hypothetical than immediately accessible. Federal assistance for the health care needs of the indigent elderly under Kerr-Mills in particular was implemented very slowly, if at all, by most states in the early 1960s.
Looking at most of these limited coverage numbers 50 years later often fails to place them, and related problems of access to health care for older Americans, in their proper context. First, health insurance coverage for retirees between age 65 and 74 roughly doubled in the 10 years from 1952 to 1962. According to 1965 congressional testimony by H. Lewis Rietz (representing several large insurance associations), by 1962, 60% of the non-institutionalized aged had some form of voluntary health insurance. On the other hand, health coverage for the non-aged also was growing rapidly and it tended to be more comprehensive and less expensive. In any case, health care (and health insurance) of the early 1960s cost much less compared to today in large part because medicine’s capabilities were more limited, and a much larger share of health spending (roughly 45%) was paid for out of pocket rather than through third-party insurance coverage.
The biggest problem for elderly Americans in purchasing health insurance in the early 1960s was their relatively low family incomes. The analytical section of the 1963 National Health Survey noted that the two lowest income groups at the time (under $2000, and between $2000 and $3999, in annual family income) had disproportionately large numbers of elderly persons. After adjusting hospital and surgical insurance coverage rates first by age, and then by income, the Survey’s researchers concluded that “income is a more important factor than age in determining health insurance coverage.”
Subsequent decades of much more generous social security benefits, along with improved private retirement benefits and appreciation of home values, substantially changed the relative income distribution ranking of the elderly and freed many seniors from poverty, even without the additional income enhancements provided by Medicare’s protection against large medical costs.
In a series of influential research articles about a decade ago, MIT economist Amy Finkelstein provided a more nuanced analysis of Medicare’s effects on the health care economy, as well as the health and economic well-being of seniors. One of her most notable findings was that, at least in its first 10 years of operation, Medicare and the near-universal coverage it provided to seniors somewhat surprisingly played essentially no role in the dramatic decline in mortality rates for the elderly that began in the late 1960s. One reason for this lack of any discernible impact on this most basic measure of health outcomes was that, prior to Medicare, individuals with life-threatening, and treatable, health conditions sought care even if they lacked insurance, as long as they had legal access to hospitals. Individuals without insurance paid out-of-pocket, or relied on charity care.
However, this issue of legal access to care highlights the seminal importance of Medicare as an essential national program administered by the federal government during the 1960s struggles over civil rights. It must be saluted in particular for achieving substantial progress in extending access to hospitals for non-whites in segregated parts of the South.
In one study with co-author Robin McKnight of the University of Oregon, Finkelstein focused more on the economic risk-protection benefits (in other words, its value as “insurance”) that Medicare provided to the elderly during its initial years. They estimated that Medicare was associated with a substantial reduction in the elderly’s exposure to the financial risks of out-of-pocket health spending. The greatest such effects were for the top 25% of the out-of-pocket health spending distribution among seniors. Medicare’s introduction was associated with a 40% decline in their personal out-of-pocket spending.
Of course, those economic benefits to seniors produced both gains in expanded health care services and higher costs to finance them. Medicare’s introduction in 1965 represented the single largest change in health insurance coverage in American history. It triggered substantial new entry into the hospital sector, leading to a 37% increase in hospital spending within its first five years. Medicare powered much more rapid and extensive adoption of new medical technologies, and it fundamentally altered the practice of modern medicine. Finkelstein’s broader conclusion is that evidence from the early effects of Medicare’s enactment and implementation suggests that the overall spread of all health insurance coverage in the US between 1950 and 1990 may explain half of the six-fold increase in real per capita spending over this period.
Enthusiastic boosters of Medicare may view the massive expansion in health spending due to Medicare as a historic legacy worth saluting on its 50th anniversary. It certainly has relieved much suffering, extended lives, and protected the financial resources of millions of seniors. If you value health care highly and believe we haven’t reached a point of diminishing returns at the margins of its highest spending levels, light up some more birthday candles and look forward to more decades of such growth.
But the more elusive calculation involves balancing the most visible gains claimed by Medicare advocates against the less visible offsetting costs Medicare also produced. They include medical inflation that caused health care spending to consistently outpace growth of the overall economy for most of the years since the program’s introduction (with the exception of a few recent ones). Other long-term costs include the mounting overhang of Medicare’s long-term unfunded liabilities still ahead to be underwritten by younger and future generations, as well as the program’s already sizable and growing claims on societal resources that might be directed toward other competing priorities. By one accounting measure, built on unrealistically favorable policy assumptions, the present value of the additional non-dedicated resources that would be necessary to meet projected Medicare expenditures from a 75-year “budget” perspective amounts to at least $27.8 trillion.
Aside from the basic numbers of budgetary imbalances and continuing fiscal pressures, Medicare’s institutionalization as the dominant payer in US health care also has locked in the worst features of a costly and inefficient fee-for-service delivery system that still rewards providing more volume, instead of better value, in most health care decisions. The mismatch between Medicare’s claims on the economy and our political willingness to pay for them in turn has produced an ever-more complex web of reimbursement rules and health care regulations in response that are far more successful in hiding or transferring costs than in reducing them. Moreover, although elderly Americans achieved substantial gains in insurance coverage and financial security through Medicare, younger ones fared far less well.
More on what this implies for where Medicare might have developed instead, and the future course of the Affordable Care Act, is ahead in part two.
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