Report — From the November 2016 issue

“Don’t Touch My Medicare!”

Is the beloved program on its last legs?

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When Lyndon Johnson signed Medicare into law fifty-one years ago, on July 30, 1965, he made a number of ambitious promises:

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. . . . 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.

Medicare, the president told the crowd at the Harry S. Truman Library in Independence, Missouri, was another important part of the social-insurance structure designed by Franklin Roosevelt thirty years earlier—a structure, FDR said at the time, that was “by no means complete.”

HA047__03HJ0-1After LBJ ended his remarks, New York Times Washington correspondent Max Frankel approached him. “My mother thanks you,” Frankel said. “No,” the president replied. “It’s you who should be thanking me.” Johnson intended for Medicare, crafted according to the same principles as Social Security, to be a safety net not only for Frankel’s mother but also for all Americans into the future. The idea, then as now, was to provide health insurance to millions of older, sicker people at a cost more reasonable than what the private market could or would provide.

For the time being, the basics of the program Lyndon Johnson called for are still in place. Everyone who pays into the system during their working years—contributing 1.45 percent of each paycheck, which is then matched by their employer—earns the right to common benefits at age sixty-five. Those contributions cover a substantial amount of hospital care, home care, and skilled nursing care. There is a deductible required for hospital care, which is adjusted for inflation each year, as well as coinsurance, the patient’s share of the cost.1 This section of the program is labeled Part A.

1 The deductible for 2016 is $1,288 per benefit period; coinsurance is $322 per day for hospital stays lasting from sixty-one to ninety days.

Under a separate plan, called Part B, beneficiaries are covered for medical and surgical fees incurred in or out of the hospital, lab tests, medical equipment, and outpatient care. Part B does in fact require additional contributions from patients, who pay a monthly premium that is adjusted annually. The government, through general tax revenues, funds the rest.2

2 This year, most people pay $121.80 for their Part B premium, as well as 20 percent coinsurance and a separate deductible—currently $166—for all Part B services.

A key fact: Medicare was never meant to cover all of a beneficiary’s medical expenses. To fill this gap in coverage, a separate industry sprang up to sell supplemental insurance, known as Medigap policies. Standardized by the government in 1991, these policies are now purchased by millions of seniors, and many companies offer similar supplemental coverage to former employees.

Soon after it was signed into law, Medicare gained favor with the general public. “Polls repeatedly show that Medicare is one of the most popular domestic programs,” says Robert Blendon, the director of the Harvard Opinion Research Program. “It’s seen as highly important to people’s lives.”

Medicare’s popularity, however, comes with almost no understanding of what the program is and how it works. “I don’t want government-run health care,” a woman wrote to President Obama in 2009. “I don’t want socialized medicine. And don’t touch my Medicare!” That confusion has made it hard to defend Medicare against Washington’s slash-and-burn campaigns aimed at killing the country’s social programs. Under discussion now in the halls of Congress and in the opinion columns of the news media is a plan to transform Medicare into a more privatized system. Not only would this break apart the social compact and render Johnson’s promises a distant memory—it would also pass more of the program’s expenses on to the elderly and disabled.

Johnson’s social compact, however, began to erode as far back as the 1970s, when oil shocks, a stagnant economy, and inflation came to dominate the national agenda. The liberals’ goal of rounding out LBJ’s vision by expanding Medicare to all Americans disappeared. Meanwhile, the cost of health care itself began to skyrocket. Between 1970 and 1985, the cost of such care as a percentage of GDP rose by nearly fifty percent. Expensive new technology such as imaging machines and lithotripters to pulverize kidney stones flooded the market. Hospitals and physicians rushed to buy these new machines, and then used them freely to cover the cost of their investments, driving up prices even faster. And all along, Medicare kept paying the bills.

This gave an opening to Medicare’s enemies. “If you couldn’t attack the program directly, you attacked it as unaffordable and uncontrollable,” says Yale professor emeritus Theodore Marmor, whose 1970 book The Politics of Medicare describes the contentious politics and compromises that led to the creation of the program.

By the 1990s those attacks were being taken seriously in Washington, and policy discourse around Medicare was soon reframed. Now the virtues of the marketplace—competition, individual choice—were touted over the virtues of social insurance, especially as a means to contain costs. Soon it was clear that Medicare was no longer untouchable. In 1995, John Kasich, then chairman of the House Budget Committee and now governor of Ohio, proposed slicing $270 billion from Medicare’s budget to pay for a $90 billion increase in defense spending. It was part of a “bold plan,” Kasich announced, to “downsize government.”

His boss at the time, House Speaker Newt Gingrich, had his own vision for Medicare. If private alternatives were available, he predicted, people would voluntarily switch. Medicare would “wither on the vine.” Persuaded by Gingrich, along with other Republicans and many Democrats, the government began to make that happen, using a combination of salami tactics and stealth.

The right-wing Heritage Foundation provided the intellectual blueprint. It proposed transforming Medicare into a system like the Federal Employees Health Benefits Program, whose beneficiaries choose coverage from a menu of government-subsidized private plans. The idea quickly gained respectability, with the help of favorable and unquestioning media coverage and an influential paper written in 1995 by Henry Aaron and Robert Reischauer, Democratic economists from the Brookings Institution. They called for a system of “premium support”—a sum of money the government would give beneficiaries to buy their own insurance in the private market. (Some critics called this a voucher system.) If the government sum was too small, beneficiaries would have to pay the difference themselves.

Aaron himself later changed his mind about such arrangements. “What we were defending in the article was a different proposal than the one that has emerged in the last ten years,” he told me. “I came to the conclusion it is not workable now.”

Aaron’s change of heart didn’t stop the march toward privatization, though. The idea of Medicare transforming itself from social insurance into a private, market-based system had caught on. In 1997, Congress continued to push privatization with a new program called Medicare + Choice—a largely managed-care model that beneficiaries could choose as an alternative to traditional Medicare. Crucially, private insurers, not the government, would provide the benefits.

Medicare + Choice proved a costly and fateful step. Insurers soon demanded more money from the government in order to sell private plans, especially in smaller, rural markets where they were reluctant to go. It came down to “how much money on the table was necessary,” says a former high-level Democratic staffer on Capitol Hill, who agreed to talk to me only on the condition of anonymity. “We were bribing them.”

In the end it took billions to get insurers on board, and to keep them there. By 2009, Congress was doling out 12.4 percent more to private insurers than it would have spent to provide the same benefits via traditional Medicare. “For most of the program’s history, Congress has thrown money into the pot to assure a robust expansion of private plans and provide extra benefits for beneficiaries signing up,” says Robert Berenson, an institute fellow at the Urban Institute.

In 2003, as part of the Medicare Modernization Act, Congress authorized private companies to offer yet another type of plan, called Medicare Advantage—which is what Maxine Davis was selling at the East Side Cafe. Because of generous government payments, many MA plans require no premiums (although seniors still must pay their Part B premiums to the government). Often, they will also offer extra benefits that are not part of the standard Medicare benefit package, such as eyeglasses, hearing and dental exams, and gym memberships like the SilverSneakers program Maxine Davis mentioned. Many come with high out-of-pocket maximums (for instance, Empire’s $6,700), after which the insurer will pay 100 percent of the cost of medical care—to in-network providers only.3

3 Overall, MA plans are able to provide traditional Medicare coverage for 6 percent less than the government, but, Berenson points out, the data is misleading because MA plans attract healthier beneficiaries who need less care: “We are trying hard to adjust payments for health status, but so far we haven’t been successful enough to adjust for the favorable selection MA plans enjoy.” Furthermore, he adds, the plans’ ability to manage their costs is helped by government regulation that permits them to pay hospitals the lower Medicare rates, not the 75 percent higher rates carriers pay for their commercially insured patients. 

But Congress was not yet done tilting the scales toward private insurers. In the same law, it introduced the Part D drug benefit. This provision allowed only commercial insurers to offer drug coverage. Both the government and Medigap plans, which had previously offered such coverage, were now forbidden to do so. Even people still covered by traditional Medicare now had to buy separate drug plans from private carriers.

The Medicare Modernization Act poked yet another hole in Lyndon Johnson’s fraying compact. It called for wealthier beneficiaries—people with incomes above $85,000 if single or $170,000 if married—to pay higher premiums for Part B benefits. The provision moved through Congress with “unexpected support from some Democrats,” the New York Times reported. As the law neared final approval, though, the Times noted that AARP, the UAW, and liberal Democrats, including Senator Edward Kennedy, viewed some of its proposals as a “dangerous first step in turning Medicare from a universal social insurance program into a welfare program.”

In a sense, the conservative assault on Medicare is two-pronged. On the one hand, there is a drive to privatize. On the other, critics hope to rebrand Medicare as a variety of welfare. The former Hill staffer says that the Republicans have “been on a very consistent march for decades now. They basically want to get rid of the entitlement and want everything means-tested.” Means-testing—that is, basing eligibility for benefits on whether a person has the means to do without that help—saves billions for the government. But it would also make Medicare into the equivalent of food stamps or Medicaid. And that, of course, is the objective.

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last wrote for Harper’s Magazine on the Affordable Care Act, in the July 2015 issue.

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