The history of Medicare and its influence on American health care

Originally published on MedPage Today

by Emily P. Walker, MedPage Today Washington Correspondent

As Congress stands poised to make the most sweeping change to the U.S. healthcare system since the creation of Medicare, a look back at the incremental growth in that program may serve as a harbinger for the progress of healthcare reform.

The program — which provides insurance for some 43 million elderly and disabled people — is considered both a huge success that has markedly improved the health of the nation’s elderly and an unbelievably complex, unsustainable program that accounts for an ever-increasing portion of the federal budget.

“It’s a bizarre program that is absolutely essential to American healthcare,” said Theodore Marmor, a professor of public policy at Yale, and author of the book The Politics of Medicare.

Feelings about Medicare vary from interest group to interest group.

Most patients who are enrolled in Medicare like the program. “It’s been very successful in getting seniors access to care that they hadn’t had before the program,” explained Gail Wilensky, an economist at the Galen Institute and administrator of the Health Care Financing Administration in the early ’90s.

Before Medicare was created in 1965, only about 55% of seniors had health insurance, said Stuart Guterman, an economist at the Commonwealth Fund.

Physicians, however, have had a love/hate relationship with the program. The onus has fallen on them to attempt to keep medical costs down, and yearly over at least the last decade they’ve had to fight proposed draconian cuts in reimbursement. But for some physicians, Medicare has proven to be their most reliable payer.

Republicans worked hard to stop the program from becoming law in the 1960s, and still use Medicare as an example to illustrate how Congress can legislate the country into an unsustainable fiscal path. But, at the same time, they decry proposed cuts to the privately-run Medicare Advantage plans in the healthcare reform bill.

Democrats generally consider Medicare one of the most successful social programs in history, and even briefly entertained a notion to allow younger people to buy in to the program under this most recent round of healthcare reform discussions.

Big Changes 25 Years Ago

Medicare underwent its first major overhaul when “diagnosis related groups” — DRGs — entered the medical lexicon in 1983. By 1984 hospital payments were determined prospectively on the basis of a patient’s diagnosis rather than on daily charges.

DRGs were developed at Yale by economists as a way to do quality comparison by creating codes to cover different hospital procedures. DRGs were an economic theory — a way of comparing hospitals and the services they provided — but were not intended to be translated into a major form of financing, Marmor said.

But Medicare officials hoped to cut program costs, creating a new payment system that would encourage hospitals not overutilize medical resources. Instead of paying for each medical service and what it costs the hospital, Medicare began paying for what it deemed the “average” cost to treat a patient with a particular diagnosis.

“If you were paying for bundled diagnoses, then that would give the hospitals some good reason to be attentive to the cost of taking care of diagnosis,” Marmor said. “There was a lot of hope this would be the panacea.”

But instead, Marmor said, some hospitals “cleverly unpacked” the diagnoses, to make the most bang for each patient treated at a hospital.

DRGs did have a noticeable effect on hospitals, said Guterman, who has worked for the Congressional Budget Office (CBO), the Medicare Payment Advisory Commission, and the Centers for Medicare and Medicaid Services.

Hospital lengths of stay decreased — the longer a patient stayed in the hospital, the more it cost the hospital, costs that would not necessarily be recouped by billing Medicare, which was paying on a fixed rate. And, contrary to what some predicted, hospital admissions did not decrease.

While it would seem intuitive that hospitals would have a financial incentive to admit more patients — after all, they were getting paid per patient — it’s the physicians who are in charge of making the call on whether to admit a patient, and they were not seeing a financial incentive to do so, Guterman explained.

That realization led to an increased focus on physicians as the central feature to reining in healthcare spending, Guterman said. So, in 1992, Medicare adopted the resource-based relative value scale (RBRVS) on which to base physician payments. This method of payment attempted to pay based on work effort and practice expenditures, rather than on historic charges.

“The central preoccupation in the early part of the ’90s was with medical inflation; the changes in the DRGs and the relative value scale were an American answer to doing the obvious: To pay attention to what you were doing — the number of activities times the cost you pay,” explained Marmor. “It’s so obvious and straightforward, the fact that it is still an issue in 2009 is absurd,” he said.

Another reason for moving to the RBRVS, according to Wilensky, was to help primary care physicians get paid more.

“It may have helped a little,” Wilensky said. “It clearly did not in any way resolve the problem.”

Indeed, the issue of paying primary care doctors more has resurfaced in the current debate. Politicians on both sides of the aisle agree it isn’t fair that primary care physicians don’t see a dime for the cognitive parts of their specialties, including things like calling patients to follow-up, or sitting and discussing a wide range of health concerns.

Under the current Senate healthcare reform bill, primary care doctors will see a 5% payment boost under Medicare. Because of lobbying from the American Medical Association, that pay increase is not going to have to come out of the reimbursements for specialists.

SGR Hassles Complicate Physicians’ Lives

In 1997, the sustainable growth rate (SGR) formula applied to figuring yearly increases in physicians’ Medicare reimbursements went into effect. It was intended to keep medical spending in line with changes in the gross domestic product.

The formula would cut Medicare reimbursements for doctors if their spending was growing much faster than the GDP, and reward them by paying higher fees if the economy was growing faster than medical spending.

In the first few years, doctors loved the formula, Wilensky said. The economy was booming and fees for Part B Medicare services were increasing.

Wilensky said she pleaded with Congress not to enact the “unreasonable” formula.

“It was only a matter of time before we hit a bump in the road and we’d hit a mild recession or deep recession,” Wilensky said. “It’s hard to get people to remember when life is good that life isn’t always good.”

Indeed, Guterman said he doesn’t remember much concern about the formula when it was enacted.

“We were feeling kind of like the economy was going to grow regularly forever,” Guterman said.

But, of course, it didn’t. As the nation moved into the new century and the economy began to sour, the SGR formula started to add up to cuts in physician pay. Every year since 2002, Congress has voted to stall these cuts and push them down the road, which has resulted in billions of dollars of accumulated “debt,” with no clear plan on how to pay it off.

The formula that was intended to keep Medicare Part B spending under control is universally acknowledged to be a failure.

Several months ago, it appeared that Congress would tackle the issue of correcting the formula in its healthcare reform legislation, but then senators announced they were going to bring up a standalone bill that would overhaul the formula, replace it with a new one, and erase the accumulated cuts in pay. But that bill failed a procedural vote in the Senate, indicating that an SGR bill that offers no way to pay for itself would not be able to earn support from senators who were on the verge of passing trillion-dollar healthcare legislation in the midst of an economic recession.

A similar bill did pass the House a month later. It would replace the SGR formula with an annual payment increase equal to 1% more than the growth in the GDP — 2% more for primary and preventive care physicians. But in order for the bill to become law, the Senate would also have to approve the measure.

Meanwhile, the House and the Senate both passed stop-gap measures to delay 21% cuts in physician pay that were scheduled to go into effect in Jan. 1. Instead, the cuts are now planned for March 1, 2010. So Congress must act fast when it returns in January to overhaul how doctors are paid under Medicare Part B.

Medicare reimburses at lower rates than private insurance plans, and many physicians say they can’t afford to take Medicare patients because the reimbursements are too low.

However, Marmor doesn’t buy that line of reasoning.

“[Doctors] often engage in absolutely silly conversations about they can’t take Medicare patients,” Marmor said.

He said that if the average patient costs $50 to treat, and Medicare will pay $30, then doctors figure they can’t afford to treat the Medicare patient.

“What they’re confusing is that they may have another patient that can pay them more than a Medicare patient,” Marmor said. “Either they don’t understand marginal and average costs or they’re using this as a slogan to try to argue for higher rates.”

Guterman said there isn’t much evidence that doctors’ unwillingness to treat Medicare patients is causing an access issue.

“There have been a lot of anecdotes about [new Medicare patients] who have trouble finding physicians to see, but, in general, access seems to be okay,” he said.

Drug Benefit Added to Medicare

In 2003, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act (known as Medicare Part D) which created a drug benefit for Medicare beneficiaries — a crucial piece of the healthcare picture that was missing from the intricate puzzle that is Medicare. Up until that point, about one-quarter of Medicare beneficiaries had no drug coverage, said Guterman.

Under Part D, beneficiaries could join a Prescription Drug Plan for drug coverage only, or they could join a Medicare Advantage plan, which covers both medical services and prescription drugs. So most Medicare patients had to enroll in at least two different plans — one for medical care, and one for drug coverage.

This put pressure on physicians to coordinate care for the patient, and to make sure that drugs they prescribed were actually covered by the patient’s drug plan, which has proved difficult, said Guterman.

“This is a complicated program,” Guterman said. “Physicians provide care, but they are not always in the best position to provide consultation on what drugs are covered.”

But overall, adding the drug benefit to Medicare has been a success, said Wilensky.

“It’s worked far better than people would guess,” she said. “Seniors for the most part have gotten drug coverage, and it’s come in at lower spending than the Congressional Budget Office and the Office of Managment and Budget had predicted.”

The main problem with the drug benefit is a major gap in coverage called the “doughnut hole.” Patients enrolled in Part D currently pay the first $295 of their of their drug costs. Medicare then covers 75% of the remaining costs until the total reaches $2,700. At that point, patients must foot 100% of their costs until total out-of-pocket spending reaches $4,350. This void in coverage is called the “doughnut hole.”

Senate Majority Leader Harry Reid (D-Nev.) has promised that the healthcare reform bill will eliminate the doughnut hole.

The economists all agreed that Medicare is a successful program, but that it needs efficiency improvements in order to be sustainable for future generations.

The Medicare fund that pays hospitals for treating Medicare patients will run dry in 2017, according to a recent report from the Obama administration.

But such reports have predicted dire consequences before — for Medicare and for Social Security, and Congress has come up with solutions, not always popular ones at the time, to forestall the predictions. Each fix has tweaked the systems to one degree or another.

So is it likely to be with whatever healthcare reform passes Congress this year.

Visit for more Medicare news.