A federal social insurance program under the Department of Health and Human Services (HHS), Medicare was established in 1965 to provide healthcare coverage for people over 65. The program was expanded in 1972 to include people under 65 with permanent disabilities. Most Americans are entitled to basic coverage under Medicare if they or their spouse have contributed payroll taxes for more than 10 years. Along with Medicaid, Medicare is administered by the Centers for Medicare & Medicaid Services (CMS), an HHS division, and is financed by payroll taxes, FICA and the Self-Employment Contributions Act of 1954. Medicare currently covers more than 40 million people, but with significant coverage gaps—in vision, dental and long-term care. Accounting for a current 14% of the federal budget, Medicare is a highly debated system that draws bipartisan criticism. The gradual privatization of the system - including recently reformed prescription drug coverage - is also highly contested among advocates, lawmakers and lobbyists.

In 1945, President Henry Truman asked Congress for legislation to establish a national health insurance plan. Two decades of intense debate followed, in which opponents fought against the perceived threat of “subsidized medicine.” But by the early 1950s, it became clear that older Americans were facing a health care crisis, and the Social Security system enacted to protect them was failing to target the main issue weighing upon the elderly - the high costs of medical care. These conditions were exacerbated by the rapid growth of the aged population in the mid-century (The 1950 census showed that it had grown to 12 million from 3 million in 1900, doubling from 4 to 8 percent of the population). Two-thirds of the elderly population had annual incomes under $1,000 - and only 1 in 8 had health insurance, as the group was generally considered high-risk and excluded from private insurance networks.

Amid rising healthcare and hospital costs and a growing aged population that couldn’t afford climbing healthcare premiums, the debate intensified around 1960, becoming a prominent Congressional issue. A 1964 Senate study estimated that only half of the policies administered to retirees provided comprehensive coverage - meaning only a quarter of older Americans had adequate hospital insurance.

 

After two decades of debate, Medicare and its companion, Medicaid, were signed into law as part of President Lyndon Johnson’s Great Society plan. In 1972, several changes were implemented, including the extension of services to disabled individuals under the age of 65 and to those with end-stage renal disease. Coverage was also expanded to include chiropractic, speech and physical therapy. HMO payments were also authorized, and in 1982, hospice benefits were added on a part-time basis. During the 1980s, services were extended to federal employees and hospice benefits became permanent.

 

In 1988 the system underwent a major overhaul aimed at providing coverage for “catastrophic illness” and prescription drugs - which was repealed the following year. Under the Balanced Budget Act of 1997, Medicare + Choice (now called “Medicare Advantage”) was established, giving beneficiaries the option of enrolling in a variety of private plans, including HMOs, PPOs and others.

 

The most basic coverage under Medicare, Part A, is hospital insurance. If recipients (or their spouses) have paid Medicare taxes during their working career, they typically won’t be billed for Part A, which covers hospital services such as rooms, meals, nurse service, hospice and home health care.

 

This is a supplemental option, providing for healthcare not covered under Part A, including doctor office (non-hospital) visits and “medically necessary” services and supplies covered by Medicare. Most recipients pay a premium. Applicants can avoid higher premiums by applying for Part B when they are first eligible.

Also referred to as Medicare Advantage Plans (HMOs and PPOs and others), Part C programs combine Parts A & B, but are operated by private institutions. Provider institutions are approved by Medicare, and include all Parts A and B coverage and services, and some may include Part D as well. Recipients of Part C programs are required to operate within the network of services—meaning using certain doctors and certain hospitals approved by the network.

 

Most people have to pay a premium for this separate prescription drug coverage insurance. Part D is provided by Medicare-approved private companies and covers all “medically necessary” drugs.

 

See “Debate” Section for more information on Part D.

 

 

 

The Office of the Medicare Ombudsman acts as an intermediary with regard to the interests of beneficiaries. The OMO receives complaints, grievances, and requests for information from Medicare recipients, and provides help in regard to the same. The Office also submits an annual report to Congress and the HHS Secretary, with reform recommendations

In recent years, Medicare costs have accounted for around 14% of the entire federal budget, and are expected to rise to $553 billion in 2013 (16% of the federal budget). Costs are also estimated to increase from 2.7 percent (2005) of GDP to about 4.7 percent by 2020. Trust fund reserves for the most basic coverage are expected to run out by 2018, posing a problem of sustainability for lawmakers.

 

In 2006 and 2007 Medicare Trustees projected that general revenues will account for more than 45% of total Medicare spending by 2013, and issued a “Medicare funding warning.” The President has responded to the warning by proposing cost-saving legislation to Congress—including the introduction of an income-related premium for Part D, and malpractice liability reform.

 

The Administration’s FY 2009 budget proposal includes measures to reduce net spending by $178 billion over the next five years, by more than $556 billion over a ten-year period, and to reduce the annual growth rate.

 

See Debate and Reform sections for more information surrounding Medicare Trust and funding.

Some reports estimate Medicare and Medicaid fraud costs the system more than $30 billion each year. Seemingly small rip-offs in “durable medical equipment” (canes, walkers, electric beds, etc.) add up to billions of dollars in theft. The phenomenon is particularly acute in parts of California, Texas and especially South Florida. A 2007 NPR report (below) outlines how many former drug dealers have “shifted” to Medicare fraud - seeking bigger profits and softer punishment.

 

In response to escalating fraud levels in recent years, the government began to crack down on fraud in the early 1990s, and law enforcement agencies have reported billions of dollars in annual program savings since. The crack down has elicited a backlash from providers, who target the government’s main tool for combating fraud and abuse, the False Claims Act, for reform.

 

Originating during the Civil War, the False Claims Act allows private citizens to sue on behalf of the government (in “qui tam” actions) and to retain a share of the recovery. Congress amended the Act in1986, making it easier for private parties to sue, and affirming its application to Medicare cases. Private whistleblowers are the main source of False Claims cases, and penalties can be massive.

 

A 2000 Supreme Court Decision enhanced fraud enforcement powers by concluding that providers that participate in Medicare can be prosecuted under the bribery statute - which mandates a fine and/or imprisonment for up to 10 years.

The Bribery Statute: A New Weapon Against Medicare Fraud - Fischer V. United States case (by Larry A. Cozort, Healthcare Financial Management)

 Fraud-and-Abuse Enforcement in Medicare: Finding Middle Ground (by Thomas H. Stanton, Health Affairs)

Strike Force Targets Medicare Fraud By Los Angeles Area Health Care Companies: Initial Weeks of Phase Two Operations Leads to Indictment of 11Defendants in Nine Cases (Department of Justice)

Meet Medicare Fraud's Whistleblower: Hospitals Across The Nation Are Sending Medicare Fraudulent Charges (CBS News)

FBI, IRS launch Medicare fraud investigations: Former clinic doctor says unnecessary biopsies were done (by Paul Harasim and Steve Tetreault, Las Vegas Review Journal)

Firm Charged With Medicare Fraud (by Catherine Larkin and Aliza Marcus, Bloomberg News)

Medicare Fraud Flourishes in Sunshine State (by Jacob Goldstein, Wall Street Journal)

Blatant Medicare fraud costs taxpayers billions: Officials say outrageous fraud schemes are ‘off the charts’ (by Marc Potter, NBC News)

Medicare Fraud Acute in South Florida (by Greg Allen, NPR News)

MEDICAID FRAUD AND ABUSE: CMS’s Commitment to Helping States Safeguard Program Dollars Is Limited (GAO Report) (PDF)

Tenet accused of $1 billion Medicare fraud (by Julie Appleby, USA Today)

Medicare Fraud and Abuse: DOJ Has Made Progress in Implementing False Claims Act Guidance (GAO Report)

Fraud in Medicare (National Center for Policy Analysis)

 

Medicare provides substantial subsidization for low-income beneficiaries, but an estimated one in five who are eligible for this assistance don’t receive it, and there are many more who need help, but don’t qualify for it because their resources are just above the allowed limit. Eligibility is based on income and resources, and according to the Social Security Administration (SSA), 57% of low-income subsidy applicants who are rejected would qualify if the criteria were based on income alone.

Medicare: Low Income Assistance Under the Medicare Drug Benefit (Kaiser Family Foundation) (PDF)

 

This controversial Act was assailed by criticism from both sides, with Medicare opponents decrying the “huge costs” and advocates calling it a move to privatize the system, forcing recipients into HMOs and other private insurance programs. Medicare advocacy group Medicare Rights Center (CRC) likened the law’s passage as the “beginning of a battle over the soul of the Medicare program.”

 

Adding to the firestorm was a report by Public Citizen (based on analysis of federal lobbying disclosure records) that uncovered massive special interest lobbying for pharmaceutical and managed care industries, including a combined expenditure of $141 million dollars and 952 individual lobbyists in 2003 - or nearly 10 lobbyists for each U.S. Senator. Nearly half of these hires “had ‘revolving door’ connections to Congress, the White House or the executive branch.”

 

The centerpiece of the 2003 legislation was a voluntary entitlement program for prescription drugs under “Program D,” funded by tax breaks and subsidies. The overhaul provided for issuance of discount prescription drug cards in 2004, preventative benefits in 2005, and implementation of the prescription drug plan in 2006.

 

The bill also forbade the federal government from negotiating with manufacturers over drug prices for beneficiaries. (In 2007, a newly Democratic-led House passed legislation requiring HHS to negotiate drug prices: The Medicare Prescription Drug Price Negotiation Act of 2007).

 

A month after the bill was signed, the ten-year cost estimate rose to $534 billion—more than $100 billion more than the figure presented to lawmakers by the Bush administration during deliberations. The lower figure helped garner unlikely support from Republicans who had promised to vote against the bill if costs were over $400 billion. A Salon.com article reported that the Administration had intentionally withheld the higher estimate—and that an official threatened to fire Medicare Chief Actuary Richard Foster if he revealed the real figure. By early 2005 the budget had risen to a 10-year estimate of $ 1.2 trillion.

Medicare Advocates argue the drug system, available exclusively through private providers, is confusing and expensive.

The Best Medicine: A Drug Coverage Option Under Original Medicare (Medicare Rights Center) (PDF)

Lies, bribes and hidden costs: Bush's Medicare quagmire - and the striking parallels to Iraq (by Eric Boehlert, Salon)

Drug Industry and HMOs Deployed an Army of Nearly 1,000 Lobbyists to Push Medicare Bill, Report Finds: Study Shows Special Interests Spent $141 Million in 2003, Hired 431 Lobbyists With “Revolving Door” Connections to Congress and the White House (Public Citizen)

Mysterious Fax Adds to Intrigue Over the Medicare Bill's Cost (by Sheryl Gay Stolberg and Robert Pear, New York Times)

The Politics of Medicare (Susan Dentzer, PBS)

Report on Medicare Legislation Raises Concern on Costs (by Reed Abelson, New York Times)

Why we pay so much for drugs (by Donald L. Bartlett and James B. Steele, CNN)

Passage of the Medicare Modernization Act Represents Victory for Proponents of Market-Driven Reforms of Medicare (Medicare Rights Center)

House votes for negotiation on Medicare drug prices (By Larry Wheeler, USA Today)

Medicare Drug Benefit May Cost $1.2 Trillion: Estimate Dwarfs Bush's Original Price Tag (by Ceci Connolly and Mike Allen, Washington Post)

CBO vs. The Bush Administration on Medicare - A Difference of Opinion, Not a ‘Raised’ Estimate (by Jeff Lemieux, Centrists)

Time to Rethink the Disastrous Medicare Legislation (by Stuart M. Butler and Robert E. Moffit, Heritage Foundation)

 

Controversy Develops Over Medicare’s Pay-for-Performance to Hospitals: CMS says improvement ‘substantial,’ study call it ‘modest’ (Senior Journal)

 

A $400 billion annual price tag makes Medicare an attractive prey for reformist fiscal Republicans. The program has been successful in providing coverage for uninsured elderly for more than 40 years but many argue that the program’s financing system is not sustainable. Perhaps more accurately, the “sustainability” issue - though a potentially viable concern - has been used liberally as a propaganda tool to scare people into thinking that the system is bankrupt.

 

Medicare payroll taxes and premiums cover 57% of current benefits, with the remainder financed from general revenues. At this rate, argue opponents, and given the rising costs of health care (and the demographic change that will occur as Baby Boomers start to retire), general revenues will pay for an estimated 62 % of Medicare by 2030. Furthermore, argue Conservative reformists, increased privatization will increase competition among providers, and thereby drive prices down.

 

However, it is accepted knowledge in the industry that long-range forecasts are not viable in the unpredictable health care field. And as usual, counter Medicare advocates, it is society’s most disadvantaged that will be hardest hit by privatization.

 

According to Medicare advocacy group Medicare Rights Center (MRC), the roots of the current drive to overhaul Medicare lie in the Heritage Foundation’s three-year, $30 million media campaign, launched to impose a Federal Employees Health Benefits Program (FEHBP)-style reform. In such a plan, the government would give insurance or managed care companies a set amount of money to provide benefits, thereby reducing government payments - which would be borne increasingly by Medicare recipients, who would absorb rising costs over time. MRC argues that this model is “counter to the principle of collective-risk sharing that the Medicare program is built on. If too many people choose a private Medicare option that provides fewer benefits at less cost, only the sickest and hardest to insure would remain in Medicare's risk pool, which could eventually make original Medicare unaffordable.”

 

According to Heritage documents, in their 1995 propaganda campaign, the Foundation set out to: “Convince Americans that Medicare provides inferior medicine and poor financial security; Convince Americans that Medicare cannot be sustained for long; Focus on "health care security"; Attract provider constituencies to support reform; and Build bipartisan support first, then reinforce it with a commission.”

 

Conservative reformists scored a major victory with the passage of the 1997 Balanced Budget Act, which increased the presence of private providers in the Medicare system.

 

Recent recommendations from the Heritage Foundation for reforming Medicare financing under current structure:

“[T]ighten up the existing system of Medicare price controls on doctors, hospitals, and other medical providers; add a new system of price controls to prescription drugs under the guise of ‘negotiation’; impose new standards or requirements on doctors, hospitals, or other medical providers as a condition of reimbursement (e.g., ‘pay for performance’ schemes); revise payment formulas to exclude payment for the delivery of care under new or unapproved circumstances; slow or restrict access to new medical technologies or medical procedures; or reduce payments to private health plans serving Medicare enrollees, which are routinely described as ‘overpayments’ (compared to traditional Medicare's supposedly ‘right" administrative payment).”

Make Medicare Budget Options Compatible with Comprehensive Reform (by Robert E. Moffit, Heritage Foundation)

The Heritage Foundation Media Campaign (Medicare Rights Center)

Medicare’s Much-Too-Hard Sell (New York Times)

UnitedHealth lobbied on Medicare reform (Associated Press)

AARP Wants Medicare Reform to Include 'Parity’ (by Monisha Bansal, CNS News)

Informed Choice: The Case for Standardizing and Simplifying Medicare Private Health Plans, (PDF)

Medicare Private Health Plans vs. Medicare Savings Programs: Which Is the Better Way to Help People with Low Incomes Afford Health Care? (PDF)

Too Good to Be True: The Fine Print in Medicare Private Health Plan Benefits (PDF)

Medicare: A National Treasure for Forty Years (PDF)

 

The Policy Almanac page on Medicare has many links to articles, reports and other information on both sides of the debate.

Advocates of Medicare argue that the increasing privatization of the system hurts consumers/recipients. Critics of privatization argue that taxpayers would save billions of dollars (according to Medicare Rights Center (MRC), $65 billion over the next five years) if private Medicare plans, or “Medicare Advantage Plans” were paid the same amount per participant as in traditional, government-administered plans. (According to the Kaiser Foundation, the average Medicare payment to Medicare Advantage plans for Part A and B services is 111% of the cost of similar benefits in the traditional fee-for-service plan). Critics also blame rampant consumer and marketing fraud on the plush market enjoyed by private providers.

 

Critics would also like to see Medicare cover mental health services at a level equal to that of all other outpatient services (80% as opposed to the current 50% of mental health outpatient care covered by Medicare). See MRC’s Mental Health Parity for Medicare.

 

Medicare advocates also claim recent reforms that created the (privatized) prescription drug plan (Part D) have pandered to large companies while making coverage more costly and confusing for consumers.

The Privatization of Medicare (National Committee to Preserve Social Security and Medicare)

Health Savings Accounts: A Bad Idea Whose Time Has Come? (by Leif Wellington Haas, Mother Jones)

North America: The Medicare fraud and the decay of American democracy (by David Walsh, World Socialist Website)

The Best Medicine: A Drug Coverage Option Under Original Medicare (Medicare Rights Center) (PDF)

 

Medicare Fraud: Reforming our way to bankruptcy (by Jacob Sullum, Reason Online)

The Medicare Debate: Politics, Process, and Proposals for Reform (by Dan Miller, Grace-Marie Arnett, John C. Liu and Phillip N. Truluck, Heritage Foundation)

 

Bush Proposes Medicare Cuts in Latest Budget (by Julie Rovner, NPR)

Doctors Press Senate to Undo Medicare Cuts (by Robert Pear, New York Times)