Medicare: We Were Warned – Econlib

A considerable portion of hospital care was delivered by nonprofit institutions tied to religious organizations, which often made it their mission to serve the needy. While exact figures on charitable care were hard to come by, it was well known that many hospitals had wards for charity cases, and physicians frequently offered their services pro bono. By the early 1900s, the American Medical Association (AMA) had grown substantially, working diligently to elevate medical education and licensing standards.

Our family was covered by Blue Cross/Blue Shield, a product of the American Hospital Association’s efforts to unify hospital insurance plans that began in 1937. Physicians later established Blue Shield to prevent Blue Cross from encroaching on primary care. Both were nonprofit entities that paved the way for a burgeoning commercial insurance market. As noted in the AMA Journal of Ethics, the demand for all types of commercial health insurance skyrocketed during the 1940s, ballooning from 20.7 million enrollees in 1940 to 142.3 million by 1950, during which federal policies allowed employers to provide tax-exempt healthcare benefits.

Key federal initiatives, aside from the Veterans Administration, which began its journey in 1930, included the Hill-Burton Act of 1946 and the Kerr-Mills program. Hill-Burton was instrumental in funding hospital construction across the nation, ensuring even rural areas had access to modern healthcare facilities. I worked with the New York City Commonwealth Fund, which pioneered community-matching grants for hospital construction before the Hill-Burton Act took the reins. From 1947 to 1971, over $3.7 billion was allocated to build more than 9,000 medical facilities nationwide—a groundbreaking initial effort to enhance the healthcare system without overt government control. The Federal Employees Health Benefit Plan launched in 1960, providing health insurance for federal employees, and the Kerr-Mills Act facilitated federal funds supporting state programs catering to the poor and elderly, laying the groundwork for Medicaid.

Doctors treated those unable to pay not out of sheer benevolence, but because it was an intrinsic expectation of their profession. The necessity was evident, and charitable care was the norm until the 1960s.

Fast forward to 1965, when President Lyndon B. Johnson enacted Medicare and Medicaid, reshaping the American healthcare landscape. Today, these programs are so ingrained in our national consciousness that envisioning a world without them seems almost impossible. Yet, just seventy years ago, the U.S. had a healthcare system that functioned adequately for most Americans largely without government intervention. Was it flawless? Certainly not. But we should be questioning whether the seismic shift brought about by Medicare and Medicaid has proved beneficial or sustainable in the long run.

In today’s climate, even the mere suggestion of reverting to a private medical and hospital care system elicits visceral reactions. The idea that healthcare not only existed but flourished prior to Medicare and Medicaid is often labeled as irrelevant, anachronistic, or even cruel. Certainly, those who have contributed to Medicare are entitled to their benefits, having spent a lifetime contributing without making alternative retirement plans. It’s understandable why one might argue against dismantling Medicare: “Are you out of your mind?” However, what if the inception of Medicare marked the beginning of the slow disintegration of what was once hailed as the best healthcare system globally?

Before the legislation was passed, a chorus of dissent voiced apprehensions:

• • Once care became “free” at the point of service, demand would spiral out of control.
• • The government would inevitably resort to rationing care to manage escalating costs.
• • The system would spiral into financial chaos.
• • Physicians would face reduced reimbursements, prompting many to exit the system.

These predictions were astutely anticipated. The premise of government-subsidized healthcare ran counter to fundamental American political and economic principles. It was a significant step toward socialized medicine that hinted at bureaucratic oversight of a profession that relies on informed decision-making and evidence-based practices. Ultimately, this positioned the government as the new arbiter of healthcare funding, dictating who gets paid, how much, and for what services.

In 1961, a then-private citizen Ronald Reagan cautioned that Medicare would usher in an era of heightened government control over healthcare, ultimately constraining patient autonomy:

• “One of the traditional methods of imposing statism or socialism on a population has been through medicine… If Medicare is not stopped, one day we will regale our children and grandchildren with tales of what life was like in America when we were free.”

Dr. Edward Annis, then-president of the AMA, voiced his concerns in a 1965 congressional speech:

• “This program will not be voluntary. Doctors will be dictated to regarding what they can and cannot do. The government will set fees and dictate services provided. This is the first step toward the socialization of American medicine.”

During the Medicare legislation debates, the government forecasted that by 1990, the program would cost $12 billion annually. The actual expenditure turned out to be a staggering $110 billion—nearly ten times higher than projected. Today, combined spending on Medicare and Medicaid exceeds $1.5 trillion annually, swallowing over 25% of the federal budget. These programs are principal contributors to the national debt, yet politicians are paralyzed by fear of the political backlash that could ensue from touching this “third rail” of politics.

Initially, when Medicare was introduced, physicians were assured of straightforward reimbursement for their services, akin to the cost-plus model of Blue Cross/Blue Shield, without government interference. Many doctors and hospitals welcomed Medicare and Medicaid, believing they would be compensated for patient bills without bureaucratic intrusion. This assurance was short-lived. Just seven years later, in 1972, the government established Professional Standards Review Organizations (PSROs), tasked with determining what treatments were deemed “necessary” and “appropriate.” This sparked discontent among physicians, many of whom had initially supported Medicare in good faith.

PSROs were eventually replaced in 1982 by Peer Review Organizations (PROs), later rebranded as Quality Improvement Organizations (QIOs). Despite the new name downplaying the notion of oversight in medical practice, the core function remained the same: government-mandated oversight of medical decisions aimed at controlling costs. This marked an unprecedented level of bureaucratic intrusion into U.S. medical practice. Gradually, rationing became commonplace. With government reimbursement rates set far below those of private insurance, the inevitable consequence ensued: physicians began to abandon Medicare patients. A 2023 survey by the Medicare Payment Advisory Commission (MedPAC) revealed that 34% of primary care doctors and 28% of specialists are now refusing new Medicare patients due to inadequate reimbursement rates.

The AMA reports that since 2001, Medicare payments to physicians have increased by only 9% while the operational costs of running a medical practice have surged by 47%. In comparison, hospital reimbursements have escalated by 60% during the same timeframe. Many top-tier doctors in major urban centers have stopped accepting Medicare altogether. One Manhattan doctor bluntly stated, “Medicare doesn’t even cover my overhead.” The AMA warns that, “Without reform, fewer and fewer doctors will be willing to see Medicare patients, leading to significant access issues for seniors.”

Defenders of Medicare often assert that the government hasn’t taken control of healthcare; it merely finances it. This is an opportune moment to engage in a rarely undertaken discussion of fundamental principles. In our pragmatically driven political climate, insisting on principled consistency might be dismissed as “extremism.” However, it’s crucial to recognize that we should only fear consistency when our principles are flawed—such as the idea of altruistic self-sacrifice as a moral absolute. While Medicare hasn’t nationalized healthcare in the traditional sense of public ownership, it has subjected the industry to fundamental government control through price regulations, extensive oversight, and rationing.

This runs counter to the dynamics of a free market. In a true market, employees aim to maximize a company’s value and profit while maintaining a degree of autonomy to make decisions, innovate, and experiment. Conversely, government bureaucrats operate under strict legal frameworks and regulations. Fields where bureaucratic systems thrive include the military, law enforcement, and the judiciary, where adherence to orders and established procedures is paramount. It should come as no surprise that when the government controls pricing, it inevitably controls supply. This is a matter of principle.

Medicare cannot simply be “fixed.” The government cannot sustainably finance unlimited healthcare while simultaneously controlling costs. The aging American population only accelerates this reality. We face a scenario where physicians are leaving the system due to inadequate compensation, services are rationed by bureaucratic measures, and the national debt has reached levels most citizens find unfathomable. Even now, defenders of Medicare acknowledge that the system is unsustainable, yet the AMA proposes only minor adjustments. It’s time to recognize that the system itself is the root issue.

Before 1965, we had a healthcare system that functioned effectively and was on an upward trajectory of improvement. Alternative methods existed to enhance access for the poor and elderly without surrendering control to the government. Critics of Medicare were not heartless; they understood the trade-offs and advocated for gradual solutions, such as expanded charitable funding for hospitals and private insurance options for the elderly. Medicare and Medicaid ostensibly eliminated the need for charitable care. However, as government funding took precedence, the philanthropic contributions of Americans to healthcare became secondary. Now, with reimbursement rates cut, hospitals are once again pleading for assistance.

In 2023, total U.S. charitable contributions reached approximately $557 billion, with $374 billion from individuals, $76 billion from foundations, $43 billion in bequests, and $21 billion from corporations. However, as governments have taken on responsibilities in areas like healthcare, these funds have been diverted toward less pressing causes, including the arts, social and political movements, foreign aid, environmental initiatives, and a quarter allocated to religious endeavors. The financial resources are available to assist those in need of charitable healthcare support.

We must commence fundamental reform now. Achieving it while honoring current Medicare commitments and potentially enhancing interim funding to uphold the system’s promises will take decades, though improvements could manifest much sooner. The key lies in maintaining services for those currently enrolled in Medicare, refunding contributions to those not yet in the system (perhaps directing these refunds to the private insurance plan of their choosing), and ceasing contributions from new entrants into the workforce.

The challenge with the refund proposition, however, is that the funds no longer exist. Every dollar has been allocated to current Medicare expenditures. Medicare is not a healthcare insurance scheme; it operates as a welfare program sustained by a misleading tax. This tax burdens our children and grandchildren, who are compelled to support current recipients, all while relying on future generations to shoulder the same responsibilities. With a shrinking base of contributors and an expanding recipient pool, compounded by politicians’ reluctance to raise necessary taxes, we are left with a national debt of $36.6 trillion—a figure that feels insurmountable. It will never be fully repaid; instead, it will be eroded through inflation.

While I doubt that the kind of reform I advocate will be enacted before an inevitable collapse occurs, one must wonder how many lives will be lost in the interim. Will we even remember that America thrived for over two centuries with a private healthcare system? That, once upon a time, doctors and patients shared the freedom to navigate their own healthcare paths?