Medicare: We Were Warned

A significant fraction of hospital care was by nonprofit institutions affiliated with religious denominations. These hospitals often had an explicit mission to serve the indigent. While precise statistics on the volume of charitable care are scarce, it is well-documented that many hospitals maintained charity wards, and physicians frequently offered pro bono services to those in need.​ By 1910, the American Medical Association (AMA) already was large and began to improve medical education and licensure standards of physicians.

My family had Blue Cross/Blue Shield. The American Hospital Association (which had taken on accreditation of hospitals) started Blue Cross in 1937 to unite the country’s networks of hospital insurance plans; physicians then started Blue Shield to prevent Blue Cross from entering the primary care field. Both were nonprofit. In a sense, they led the commercial insurance companies that soon flocked into the field. In the AMA Journal of Ethics, George Moseley writes that “… the market for [commercial] health insurance of all kinds increased dramatically during the 1940s, from a total enrollment of 20.7 million in 1940 to 142.3 million [out a total U.S. population of 151 million] in 1950.” During World War II, federal legislation cleared the way for employers to offer healthcare benefits—and employees to receive it—tax exempt.

The chief federal initiatives apart from the Veterans Administration, started in 1930, were the Hill-Burton Act of 1946 and the Kerr-Mills program. Hill-Burton funded hospital construction across the country, ensuring especially that rural areas had access to modern facilities. I worked at the New York City Commonwealth Fund, which pioneered the concept of community-matching grants for hospital construction—until the federal government took over the idea with Hill-Burton. Between 1947 and 1971, more than $3.7 billion was allocated for building more than 9,000 medical facilities across the country. This was a first, early initiative of government to improve the system while soft-pedaling government control over medical decisions. In 1960, the Federal Employees Health Benefit Plan was begun to provide health insurance to federal workers. The Kerr-Mills Act was passed, which used federal funds to support state programs providing medical care to the poor and elderly (a precursor to Medicaid).

Doctors treated the indigent for free or a reduced fee not because they were more charitable than today, but because of the fundamental pledge of their profession, because the need was there, and because until the 1960s charitable care was expected.

In 1965, President Lyndon B. Johnson signed Medicare and Medicaid into law, transforming American healthcare. Today, those programs have become so much part of our national consciousness that imagining a world without them borders on the unthinkable. And yet, just seven decades ago, the United States had a medical and hospital care system that functioned well for most Americans largely without government. Was it a perfect system? No. But the question we should be asking is if the radical transformation that came with Medicare and Medicaid was ever an improvement or sustainable economically or systemically.​

Today, any suggestion of return to a private medical and hospital care system is met with outright horror. The idea that healthcare existed—and functioned—before Medicare and Medicaid is treated as irrelevant, paleo conservative, and callous. Of course, those who paid into Medicare deserve, need, and are owed their benefits. If you are forced all your working life to contribute to Medicare, you make no other provisions for retirement and older age and can be relied upon to cry, “It is impossible to end Medicare! Are you crazy?” No argument there. But what if Medicare’s introduction was the moment that the best medical care system in the world began its slow but accelerating unraveling?

Before the enactment of the legislation, vocal opposition was widespread and arguments powerful:

• • Once care became “free” at the “point of service,” demand would be unlimited.
• • The government would react by rationing care to control soaring costs.
• • The system would become financially unsustainable.
• • Doctors would be forced to accept lower reimbursements, and many would leave the system.

It was all foreseen. The premises of government subsidized healthcare defied American political and economic principles. It was a first step toward socialized medicine and portended bureaucratic control of a science-based profession that daily made highly informed judgments that called for a balancing of evidence. Above all, the logic of he-who-pays-is-responsible for deciding who gets paid, for what, and how much. Now, the responsible party would be government.

In 1961, then-private citizen Ronald Reagan warned that Medicare would lead to increasing government control over healthcare, ultimately limiting patient freedom:

• One of the traditional methods of imposing statism or socialism on a people has been by way of medicine…. If you don’t stop Medicare, one of these days you and I are going to spend our sunset years telling our children and our children’s children what it was like in America when men were free.2

Dr. Edward Annis, then-president of the AMA, argued in a speech before Congress in 1965:

• This program will not be voluntary. Your doctor will be told what he can do and how he can do it. The government will set the fees, and in return, they will determine the services provided. This is the first step toward the socialization of American medicine.3

When Congress was debating Medicare legislation, the government estimated that by 1990 the program would cost $12 billion annually. The actual cost was $110 billion—nearly ten times the projection. Today, combined Medicare and Medicaid spending exceeds $1.5 trillion per year, accounting for more than 25% of the federal budget. These programs are among the primary drivers of the national debt, yet politicians, fearing this “third rail” of politics, refuse to touch them, fearing voter backlash. ​

When Medicare was enacted, physicians were assured that they would simply be reimbursed for services (cost-plus like Blue Cross/Blue Shield), with no interference. Many doctors and hospitals initially welcomed Medicare and Medicaid because they promised to pay patient bills without interference. That promise was short-lived. Seven years later, in 1972, the government established Professional Standards Review Organizations (PSROs), tasking them with determining which medical treatments were “necessary” and “appropriate.” It angered physicians, many of whom had backed Medicare in good faith.

PSROs were superseded in 1982 by Peer Review Organizations (PROs), later rebranded as Quality Improvement Organizations (QIOs). As the name increasingly skirted any suggestion of oversight over medical practice, the function remained the same: government-mandated oversight of medical decisions to control costs. This shift represented an unprecedented level of bureaucratic intrusion into U.S. medical practice. Gradually, full-scale rationing was introduced. Government set reimbursement rates far below private insurance payments, leading to the inevitable: doctors abandoning Medicare patients. A 2023 survey by the Medicare Payment Advisory Commission (MedPAC) found that 34% of primary care doctors and 28% of all specialists now refuse new Medicare patients due to low reimbursement rates.4

The AMA reports that since 2001, Medicare payments to doctors have increased just 9%—while the cost of running a medical practice has increased 47%. By comparison, hospital payments have risen 60% in the same period. Many of the best doctors in major cities have stopped accepting Medicare entirely. Doctors I saw for years in Manhattan told me bluntly: “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 severe access issues for seniors.”

Many will spring to the defense of Medicare by claiming the government didn’t take over health care, it just pays for it. Pause here to do what is seldom done today: talk in terms of fundamental principles. In our resolutely pragmatist age of politics (and much else) to insist on consistency of principle is to be accused of “extremism”: “Well, we don’t have to go that far!” In fact, however, we must fear consistency only when we have unworkable principles—for example, altruistic self-sacrifice as a moral absolute. No, Medicare has not nationalized healthcare on the public ownership model of socialism; that is not the American approach to socialism. Yet America has placed the industry under the most fundamental government control: price setting, extensive regulation, and rationing.

That is the opposite of free-market dynamics. In a market, employees share the goal of maximizing a company’s value and profit and have considerable autonomy to make decisions, experiment, innovate. Government bureaucrats must operate within the rule of law and under regulations derived from law. Areas where the bureaucratic approach works are the military, the police, and the courts, where the essence of the job is to follow orders, respect the law, and abide by strictly defined procedures. It should surprise no one that when government controls the price, it controls the supply. It is a matter of principle.

Medicare cannot be “fixed.” Government cannot pay for unlimited care and also control costs. America’s aging population only makes that obvious sooner. We are left with doctors fleeing the system because they are underpaid, services rationed by bureaucratic cost controls, and budget deficits and a national debt almost ungraspable by most Americans. Medicare’s defenders now admit the system is unsustainable—but even the AMA proposes only tweaks. It is time to say that the system itself is the problem.

And yet, before 1965, we had a system that worked and was on a steep upward curve of improvement. There were ways to improve access for poor and/or elderly individuals without handing control of healthcare to the government. Opponents of Medicare weren’t callous; they recognized tradeoffs and advocated incremental solutions, like expanded charitable hospital funding and private insurance pools for the elderly. Medicare and Medicaid supposedly obviated the need for charity. The huge philanthropic giving of Americans to healthcare became ancillary with the advent of government funding—until reimbursements were slashed and hospitals again are crying for help.

In 2023, total U.S. charitable giving reached approximately $557 billion ($374 billion from individuals, $76 billion from foundations, $43 billion in bequests, and $21 billion from corporations). But as governments have assumed responsibility for such major charitable areas as healthcare, these dollars have been redirected to less urgent (and at times rather esoteric) causes in the arts, social and political movements, foreign aid, a welter of environmental causes, and fully one-fourth to religion. The money is there to pay for those who need charitable assistance for healthcare.

We’d best start now on fundamental reform. To achieve it while honoring present commitments under Medicare and even providing better interim funding to keep the promises of the system, will take 50 years—although things will get better much sooner. The key is to maintain all services for the cohort now in Medicare, refund Medicare contributions to those not yet in the system (perhaps directing the refunds to the private insurance plan of their choice), and from those just beginning to work collect no contributions.

The problem with the refund idea, of course, is that the money no longer exists. All of it is spent on current Medicare costs. Medicare is not a healthcare insurance plan; it is a welfare program supported by a deceptive tax. That tax is on our children and grandchildren who pay it to support us and in turn count on their children and grandchildren to pay the tax to support them. Since that base is shrinking, and the recipient cohort is burgeoning, and since politicians will not tax as needed, we have a $36.6 trillion dollar national debt. It will never be paid. It is being and will be inflated away.

I doubt that reform at the level I describe will occur before the inevitable collapse. But how many Americans will pay with their lives before that happens? And by then, will we even remember that America functioned for more than 200 years with private healthcare? That doctors and patients once were free?

Footnotes

[1] George B. Moseley III. “The U.S. Health Care Non-System: 1908-2008.” AMA Journal of Ethics. May 2008.

[2] Ronald Reagan, Radio Address on Socialized Medicine, circa 1961.

[3] Edward Annis and Jane M. Orient, “Medicare and the Destruction of Freedom in Medicine: Recollections of Dr. Edward Annis,” Journal of American Physicians and Surgeons. Winter 2008.

[4] Medicare Payment Policy. Report to Congress.