A Short History of Medicare

Appendix A:: A Brief History of Medicare

Medicare, along with Medicaid, was signed into law in 1965 as part of the Johnson Administration’s Great Society program. You will also recall that several landmark civil rights laws also came into being in 1965. The laws are actually amendments to the Social Security Act of 1935.

In 1965, Medicare only consisted of Parts A (hospital insurance) and B (medical insurance), which is properly termed Original Medicare. Medicare took this form primarily by following the norms of private health coverage at that time for seniors. Many seniors had “hospital insurance” which was what today we commonly call catastrophic coverage — a plan with a deductible and coinsurance. Most plans did not have any out-of-pocket maximum, which may explain why Original Medicare does not have an OOP max.

In the late ‘50s and early ‘60s, medical care was mostly delivered at a doctor’s office, where patients would pay for care at the time of service. Costs were relatively low. In fact, doctor’s often dispensed prescriptions from their offices. Outpatient care was generally not included in health plans, when people had any coverage at all. Overall health care costs were significantly lower than they are today as a relative measure versus a family’s household income. There were far fewer hospitals and centers of excellence. Knowing this, it should be easy to understand why policymakers designed Original Medicare as they did, into two parts:: A and B.

It took Medicare a few years to get rolling, particularly with the payment system that was in wide use at that time — let’s call it a “fee for service” model based on a percentage of common regional charges.

Medicare was modified in 1973 by allowing folks who had been on either the Social Security or Railroad Benefits fund disability program for 2 years to join Medicare, even if they were not 65. The funding for SSDI is accrued separately under the Medicare system.

In addition, people diagnosed with End Stage Renal Disease (severe kidney disease that requires dialysis) were allowed to join Medicare regardless of their age, and without any waiting period.

It also became possible for people, not otherwise eligible for Medicare, to enroll by paying a premium for Part A, as well as Part B. These amounts can and do change annually.

In 2001, people with ALS (Lou Gehrig’s disease) were allowed to immediately join Medicare.

In 2010, people who contracted asbestosis as the result of their having lived or worked in the vicinity of Libby, Montana were allowed to join Medicare regardless of their age. The vermiculite mined in Libby was heavily contaminated with asbestos, which exposed many residents to lung disease — mesothelioma. The asbestos operations in Libby ceased in 1990, so people from the prior era became immediately eligible.

Medicare Payroll Costs

Medicare first began assessing taxes, through payroll deduction, in 1966. The total Medicare per employee tax, half contributed by the employee and half by the employer, was 0.7% of the gross salary. In 1967 the deduction total increased to 1%; 1968-1972 – 1.2%; in 1973 – 2%; 1794-77 – 1.8%; back to 2% in 1978; 1979-80 – 2.1%; 1981-85 – 2.6%; 1987-present – 2.9%. In 2013 legislation associated with the Affordable Care Act enacted an additional 0.9% tax on higher earners.

Looking at these numbers, it should be obvious that the large jump in payroll tax in 1980-81 indicated that federal policymakers understood the financial hardships ahead for Medicare as the population was moving toward the time when the first of the baby boomers would start to claim Medicare, which began in 2010.

Parts C and D

In the 1970s, Medicare began to experiment with payment programs. During this time, HMOs became a federally permitted delivery system for health care. HMOs are known for using a “capitation” payment system — or remitting a fee to primary care physicians for each enrollee. The primary becomes responsible for the total care of the patient for that fee.

In the early 1980s, TEFRA was passed to, among other things, allow Medicare to use these aggregated payment systems. Also, TEFRA dictated that with employer sponsored programs, those companies with fewer than 20 employees, the Medicare payment system would pay first for those employees on Medicare, and the company’s plan would pay second. Exactly the opposite is true for companies with more than 20 employees — it such cases Medicare pays after the group plan pays.

In the early ‘80s, Medicare Part C was added to allow what is now known as the Centers for Medicare and Medicaid Services (CMS) to use HMO structures to pay providers.

Medicare+Choice came along in 1997. This system permitted CMS to contract with private insurance companies to offer HMO type plans to Medicare recipients. In these plans, the government would pay a capitated rate to the insurance company rather than directly to providers. The insurance companies would use their networks and programs to provide at least the minimum level of care defined under Medicare. In addition, it was the insurance companies that had to negotiate with providers for the fees to be paid, not Medicare.

In 2003, with the Medicare Modernization Act, Medicare Advantage replaced Medicare+Choice, and further allowed a greater range of plan types:: HMOs, of course, along with PPOs, private fee for service plans (PFFS), as well as Medical Savings Account plans. A small number of other alternatives were also permitted. As time has gone on, the majority of Medicare Advantage plans have gravitated into the HMO and PPO models.

The 2003 MMA also created Medicare Part D, for outpatient prescription drug coverage. Original Medicare never included an outpatient prescription drug benefit. A few Medigap plans incorporated a limited Rx benefit, all of which were eliminated under the MMA.

In 1997, with the Omnibus Reconciliation Act, the Medicare payment system was once again modified and saddled with formulaic restrictions that effectively would cut reimbursement amounts to providers under the assumption that new health care delivery methods would cost less and achieve greater efficiencies. (This system was called the SGR = Sustainable Growth Rate.)

This never actually occurred and on 17 separate occasions, Congress had to step in to avoid significant reductions in the amounts Medicare would pay. The situation with regards to primary care reimbursements became particularly acute.

The March 2010 enactment of the Patient Protection and Affordable Care Act, established a new Medicare payment advisory commission. Even though no one has ever been appointed to that committee, CMS has nevertheless acted to enact suggestions from an older committee to cut reimbursement amounts paid by Medicare.

The United State Preventive Care Services Task Force (USPSTF), has also been quite active since about 2007 in reviewing and establishing parameters for preventive care benefits that are most cost effective. Some of what the USPSTF has suggested, in terms of reducing certain examinations due to the lack of cost effectiveness proof, has been adopted by CMS.

In early 2015, Congress passed the Medicare Access and CHiP Reauthorization Act (MACRA). This legislation totally revised the primary care doctor reimbursement system used by Medicare, effectively abolishing the SGR.

MACRA also directed several other Medicare changes, one of which was to mandate the elimination of any supplementary indemnity plan that would eliminate Medicare cost shares to the beneficiary. This will effectively make such coverage like Medigap Plan F extinct, starting in 2020.

The MACRA legislation also modified a system created in 2007 called “means testing.” By any other name this is a progressive tax system that charges Medicare beneficiaries higher premiums based on higher incomes. Currently there are five tiers to this system. MACRA will reduce that to three, and charge higher amounts starting in 2018.

The Bipartisan Budget Act of 2015 also brought to light a problem that Medicare has with Social Security. Medicare is charged with keeping the balance in Part B expenses at about 75% federal funding and 25% beneficiary premium. This means that each year, as the underlying cost of care increases, so must the premium paid by beneficiaries. However, Social Security also contain a provision to “hold harmless” from any Medicare price increase, those already claiming retirement income benefits.

Therefore, in any year in which Social Security determines that it cannot provide a cost-of-living-adjustment, Medicare cannot increase the premiums to be paid by those already claiming Social Security. This means that any mandatory premium increases must be borne by those on Medicare, but:::

  not claiming Social Security benefits;

  those being means tested into higher premium levels;

  those new to Medicare

This event has happened multiple times in the 2000s, such as 2010-2011 and again in 2016. Moreover, this is likely to occur in any low interest rate environment.