Article

June 4, 2015

Medicare at 50: Is it working?

On the 50th birthday of Medicare, Medical Economics looks back at this landmark legislation and the effect it has had on physicians and healthcare in general.

“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.” With those words, President Lyndon B. Johnson signed Medicare legislation into law 50 years ago.

It was the culmination of a decades-long effort to make healthcare affordable to the nation’s elderly population, and represented the first large-scale government involvement in the nation’s healthcare system-a role that was highly controversial at the time and remains so today.

In the ensuing years Medicare has evolved into a financial and regulatory colossus covering more than 52 million Americans and accounting for 3% of the federal budget, and touching virtually every aspect of healthcare financing and delivery. And while beneficiaries are shouldering more of the cost of their care now compared with the program’s early days, the fact remains that Medicare has significantly reduced the financial burden that healthcare used to impose on the elderly, and given them greater access to healthcare.

In addition to its original target population of those 65 and over, today Medicare covers the disabled, and, since 2006, has included a limited prescription drug benefit. The program introduced concepts such as diagnostic-related groups (DRGs), relative value units (RVUs) and sustainable growth rate (SGR) that have become part of the nation’s healthcare payment lexicon, and it was instrumental in desegregating the nation’s hospitals. Most of the nation’s commercial health insurers now use Medicare’s reimbursements as a benchmark for setting their own.

“The preamble to the Medicare legislation says, ‘Nothing in this title shall be construed to authorize any Federal employee to exercise any supervision or control over the practice of medicine or the manner in which medical services are provided,’” says Stuart Guterman, vice president, Medicare & cost control with The Commonwealth Fund. “And I’ve heard people say that still applies today, except that the word ‘nothing’ should be changed to ‘everything.’”

The signing ceremony on July 30, 1965 took place in Independence, Missouri, the birthplace of former president Harry S Truman. As president from 1945 to 1952 Truman had led the first concerted efforts to establish a national health program, initially one that would cover all Americans, and later a plan that would cover just the elderly. Both failed, due in large part to fierce opposition from the American Medical Association, a role it would reprise later with Medicare.

Medicare was just one element in a torrent of laws and initiatives passed in the mid-1960s that became known collectively as the Great Society legislation and included the Civil Rights Act of 1964, the Economic Opportunity Act, the Voting Rights Act of 1965, Medicaid (which Johnson signed at the same time as Medicare), the National Endowment for the Arts and Humanities, the Immigration and Nationality Services Act of 1965, the Higher Education Act of 1965 (which included the creation of what later came to be called Pell grants), and Head Start, among others.

Still, in terms of longevity and impact, Medicare ranks among the major accomplishments of the Great Society, Joseph Califano, an aide to President Johnson (and later secretary of the U.S. Department of Health, Education and Welfare) said in a telephone interview with Medical Economics.

“In terms of what people remember, and what affects millions of people, it’s right there at the top. It changed everything.”

NEXT: The "original" Medicare

The original legislation

At the time, however, few foresaw the law’s wide-ranging impact. In fact, its initial scope was fairly modest. It consisted of two parts. Part A was for hospital insurance (90 days), as well as 100 days of post-discharge nursing home care, home visits from a nurse, and hospital diagnostic services. There were no premiums, but all covered services included some modest copays and deductibles. It was financed through a payroll tax.

Part A’s design and method of financing was modeled on Social Security.

“It was the idea that people would pay into the system during their working years so they would have the coverage they needed when they retired,” says Tricia Neuman, Ph.D., senior vice president and Medicare policy director at the Kaiser Family Foundation. “It was very important to the designers of the legislation that the program not be just for low-income people, so there was a sense that everyone contributes and everyone benefits.”

“We would laugh at the bills that scared people then, when they might have to pay several hundred dollars for a hospital stay,” says Guterman. “But that was a lot of money then, especially to elderly people without much income.”

Part B covered doctors’ services, diagnostic x-rays and laboratory tests, and various home health agency services. Enrollees paid a $3 monthly premium, with the remaining cost of covered services subsidized by the federal government. Although nominally optional, Part B was (and remains) such a bargain compared with commercial healthcare insurance policies that the vast majority of eligible seniors use it.

The two-part design of the program was in deference to the political realities of the time, explains Edward Schumacher, Ph.D., chairman of the Department of Health Care Administration at Trinity University in San Antonio, Texas.

“Part A was basically hospital insurance that everyone would have to buy [through the payroll tax], and the Part B side would be funded differently so it wouldn’t look like a complete income transfer. The idea was to that people would have some skin in the game,” he says.

Califano says that including premiums in Part B was also intended to deflect criticism from the AMA, which was denouncing Medicare (as it had earlier proposals for government-financed healthcare programs) as “socialized medicine.”

“It gave the AMA the ability to say ‘we’re being paid by the patient. We’re not working for the government,” he recalls.

Impact on the elderly

Medicare’s popularity among the elderly was quickly apparent. A million people enrolled in the first week, and the percentage of Americans over 65 with hospital insurance grew from 50% in 1965 to 96% by 1970, according to the Kaiser Family Foundation.

According to The Commonwealth Fund, the hospital admission rate for older Americans rose from 18% to 21% between 1963 and 1970, and the percentage seeing a physician rose from 68% to 76%. Moreover, according to a 2015 paper from the National Bureau of Economic Research, Medicare was associated with a 40% reduction in spending among those with the largest out-of-pocket expenditures.

An important side benefit was the rapid desegregation of the nation’s hospitals, which had to comply with recently-enacted civil rights legislation in order to receive Medicare dollars.

NEXT: Medicare and payment

Medicare and payment reform

Along with providing access to healthcare for greater numbers of Americans, Medicare’s most significant impacts have been in payment reform and quality improvement, both of which have been driven by the program’s ongoing struggle to control costs.

“The program is intended to help people. And finding the right balance between considerations of cost, and considerations of the missions of the program is really the core issue of the challenges it faces,” says Guterman.

The first step in that direction occurred in 1983 when Medicare instituted pre-determined payment amounts, known as diagnostic-related groups (DRGs) for hospital stays. Before the advent of DRGs, Medicare reimbursed hospitals for their costs, and physicians according to the “usual, customary and reasonable” (UCR) rates of the time. “That basically meant that physicians and hospitals got to decide what their Medicare reimbursements were going to be, and as a result, federal spending on Medicare blew through the budget projections,” says Chapin White PhD., senior researcher with the RAND Corp.

The use of DRGs had two consequences, experts say-one intended and one unintended. Their introduction “encouraged hospitals to change the way they thought about their product and broaden their perspective so that they looked at the whole patient for the hospital stay,” rather than individual procedures and services, says Guterman.

The unintended consequence was a rise in the number of specialty hospitals. “People realized that some of the DRGs were overpriced,” Schumacher explains. “So you saw a proliferation of hospitals in areas like hearts and orthopedics, honing in on those DRGs where the government was in a sense overpaying.”

Moreover, many of the new specialty hospitals were physician-owned, Schumacher says, enabling doctors to partake of the hospital profits while also charging for their own services. “Once the government started setting those prices it really affected the incentives of the whole industry,” he says.

Medicare subsequently extended the fee schedule approach to payment to most of the other services and facilities the program covers, from dialysis centers to skilled nursing facilities, says White. “Across the board Medicare has moved from letting providers basically write their own check to setting the payment amounts in tighter and tighter ways.”

Payment reform came to individual physicians in the early 1990s in the form of relative value units (RVUs) and the accompanying physician fee schedule. Instead of UCR rates, henceforth the government would reimburse doctors using a formula that incorporated the amount of time, skill, and training required to perform a service, practice expenses, and malpractice costs.

Here, too, there were unexpected consequences, notes Schumacher. “It (the RVU system) creates a huge incentive for doctors to do stuff. Because if I talk to you and tell you you’ve got diabetes and need to do this and this, I don’t really get paid for that. But if I have to amputate your foot because of diabetes, I get reimbursed really well. So no one wants to be a primary care doctor because the reimbursements for specialists are so much higher.”

NEXT: Medicare quality initiatives

Quality initiatives

Medicare’s efforts to monitor and improve the quality of care it pays for has drawn the attention-and ire-of physicians in recent years due to its flurry of initiatives such as the Physician Quality Reporting System and Value-based Modifier. But Medicare’s concern with quality goes back decades.

“There is renewed, intensified interest in in quality improvements, which in many respects has been intensified by the Affordable Care Act, but Medicare has a long history of setting standards with a goal of improving quality of care provided to people covered by the program,” Neuman says. For example, when concerns about the quality of nursing homes arose in the 1980’s, Congress passed a law saying that any nursing facility accepting Medicare (or Medicaid) funds would have to comply with federal quality requirements.

Payment reform and quality improvement have come together in the effort to nudge the nation’s healthcare system away from fee-for-service reimbursement, which virtually everyone agrees is both costly and counterproductive to good outcomes. The Centers for Medicare & Medicaid Services (CMS), which administers the program, has been attempting to jumpstart alternative models such as the accountable care organization and the patient-centered medical home.

Earlier this year Sylvia Burwell, secretary of the U.S. Department of Health and Human Services (the parent organization of CMS), announced twin goals of having 50% of Medicare provider payments to be in alternative payment models, and 90% of Medicare fee-for-service payments tied to quality and value, by 2018.

Weaning Medicare and other payers from fee-for-service “makes a lot of sense” but will be a significant challenge, says Trinity University’s Schumacher. “It’s been hard enough setting prices on a fee-for-service scale, but now not only do we have to set the price, we have to set quality and patient satisfaction and all these other metrics. It’s like having to turn eight different dials,” he says.

NEXT: The future of Medicare

Whither Medicare?

Almost from its launch, Medicare’s long-term financial outlook has been a topic of concern, and debate, among program administrators, members of Congress, and presidents. Those concerns have grown more acute in the last few years as the first wave of baby boomers-the huge cohort born between the late 1940s and mid-1960s- has begun enrolling in the program. The Medicare trustees 2014 report puts the estimated “depletion date” of the hospital insurance trust fund-the part that finances Part A-at 2030, and says the trust fund for Part B is “adequately financed” for the next 10 years.

While 2030 may seem fairly close for a program of Medicare’s size and importance, it is four years further out than was projected only a year earlier. That difference highlights a phenomenon that has become apparent in the last few years: the rate of increase in Medicare spending has been slowing, averaging just over 3% since 2009, according to a 2014 Kaiser Family Foundation study co-authored by White and Neuman. “Both the magnitude and duration of the slowdown in Medicare spending growth have no precedent in Medicare’s nearly 50-year history,” the authors write.

Among the reasons for the slowdown cited in the study are provisions in the Affordable Care Act, such as the so-called “productivity adjustments” and reductions in payments to Medicare Advantage plans, cuts in payments to physicians resulting from sequestration at the start of 2013, and heightened efforts to combat fraud.

Because of the spending slowdown, “the sense of urgency (about Medicare’s finances) has been diminished,” Neuman says. “But there is a long-term challenge ahead with the number of people aging onto Medicare.”

Neuman and other experts say Medicare is unlikely to undergo any major expansions either in benefits or covered populations for the foreseeable future. Some of the changes policymakers have discussed include caps on out-of-pocket spending for beneficiaries, offering greater premium and out-of-pocket payment support to low-income individuals, and using Medicare and adding some form of long-term care benefit.

“But the big question remains, how could benefit improvements be paid for, and who will pay?” Neuman says. “There really are no easy answers.”