The Medicare Monster

A Cautionary Tale

Steven Hayward & Erik Peterson from the January 1993 issue

The scene is Capitol Hill. It’s the year 2035. Thousands of elderly protesters assemble outside the Capitol building. Inside, the House Ways and Means Committee meets to enact huge cuts in both Medicare and the national health-insurance program. Members are reluctant to take this step, but there’s no choice. Although Congress raised the Medicare payroll-tax rate to 15 percent a decade ago, the Medicare program is still woefully insolvent, consuming 40 percent of the $10-trillion federal budget. Because the total burden of payroll taxes for all social programs has reached 45 percent, the Congressional Budget Office estimates that half of the U.S. economy has gone "underground," like Latin American economies in the 1980s. Another hike in payroll taxes would only drive more of the economy underground. But elderly voters, who now make up a majority of the electorate, have swarmed to Washington demanding "fairness," since they have paid into the system for so many years.

Sound farfetched? The numbers suggest that this scenario could actually come to pass as soon as the next decade, not way off in 2035. The Medicare program is heading for a smashup, yet our political leaders speak only of instituting new federal health-insurance programs that would cover everyone.

The rhetoric and specific policy claims being made on behalf of the various universal government health insurance reforms today are remarkably similar to the promises made on behalf of Medicare a generation ago. Indeed, when Medicare became law, many of both its supporters and opponents predicted that it was the first step toward universal health care provided by the federal government. When Medicare finally passed in 1965, Rep. Phil Burton (D-Calif.) expressed the sentiments of many among its Great Society enthusiasts when he said, "I am equally certain that before many years Congress will choose to extend comprehensive medical care as a matter of right to every man, woman, and child in this country."

So the history of Medicare and the outlook for the program over the next generation provide a sobering lesson for today’s would-be designers of national health insurance. Unfortunately, no one seems to be paying attention to what the Medicare experience has to teach.

Today’s proposals for a universal national health-care policy typically divide into either a government-run "single-payer" system like Canada’s or a "play or pay" scheme that would require employers to provide health insurance for every worker or pay a payroll tax into a government insurance program. Advocates of such policies claim these programs won’t cost much because significant savings can be had through cost containment and other efficiencies of scale. The experience of 25 years of Medicare says otherwise.

The two primary lessons of Medicare are the chronic problem of woefully underestimating program costs and the impossibility of genuine cost control. A closer look at Medicare shows why these two problems are certain to plague a government-administered universal health-care plan.

The cost of Medicare is a good place to begin. At its start, in 1966, Medicare cost $3 billion. The House Ways and Means Committee estimated that Medicare would cost only about $ 12 billion by 1990 (a figure that included an allowance for inflation). This was a supposedly "conservative" estimate. But in 1990 Medicare actually cost $107 billion.

This is a mere bagatelle compared with "conservative" projections for the next generation. The Congressional Budget Office estimates that Medicare will cost $223 billion by 1997. Constance Homer, deputy secretary of Health and Human Services, warns that "by the year 2003, at the current rates, we will be spending more on Medicare than we do on Social Security."

The news gets even worse for the "out years" after that. The Health Care Finance Administration has given up making long-range projections of budget outlays of Medicare. Instead, HCFA makes calculations about the "actuarial balance" of the program–how much of the nation’s payroll will be required to pay for the program.

The 1992 annual report of the Federal Hospital Insurance Trust Fund, which pays for the hospital-insurance portion of Medicare, warns that the Medicare program "is severely out of financial balance" and could go bust as soon as the year 2000. The report says expenditures from the hospital fund represented 1.3 percent of the nation’s gross domestic product in 1991 and will grow to 4.7 percent by 2065. To cover the cost, the Medicare payroll-tax rate will have to more than quadruple, from the current rate of 2.9 percent to 13.79 percent.

The full narrative of Medicare’s enactment in 1965, a classic tale of legislative and interest-group infighting, is too long to recount in detail here. Proposals for Medicare-style programs began surfacing in Congress during World War 11 but didn’t have a serious prospect of passage until the Kennedy administration.

Repeatedly in the early 1960s a coalition of Republicans and conservative Democrats defeated Medicare. The key figure in this perennial drama was Wilbur Mills, the legendary chairman of the House Ways and Means Committee. Mills refused to pass a Medicare bill out of that key committee, supposedly out of concern that Medicare would threaten the integrity of the Social Security program (to which Medicare is attached).

Following the Democratic landslide in the election of 1964, which gave Democrats a 2-to-1 majority in both houses of Congress, President Lyndon Johnson exerted his influence to stack the Ways and Means Committee with new Democrats sympathetic to Medicare. Wilbur Mills changed his mind and embraced Medicare. "Mills can count" was the explanation given for his flip-flop. This new political landscape virtually assured that Medicare would sail through Congress with huge majorities.

When it became apparent after the 1964 election that Medicare’s passage was likely to be a slam dunk, the American Medical Association and Republicans scurried to put forward an alternative. The AMA foolishly tried to exploit public confusion over the fact that the Medicare proposal covered only hospital expenses but not costs for doctors, surgeons, dentists, and other outpatient services.

Arguing now that Medicare didn’t go far enough, the AMA sought to outflank Medicare with an alternative program that would include outpatient services as well as hospital expenses. "Eldercare," as it was called, provided for a voluntary comprehensive insurance program, administered through the states and financed through means-tested premiums from recipients and federal matching funds. Not to be outdone by the AMA, House Republicans, under new leader Gerald Ford, offered their own alternative, which was similar to Eldercare except that it would be administered by the federal government.

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