Aisha Gillan

Forney Fleming
HMGT 4301.001
An In-depth Analysis of Medicare
Medicare began in 1965 through a social security amendment, and was Title XVIII of the
Social Security Act. It grew out of a few actions that expanded care for the elderly, gave grants to
provide health care for the low-income elderly, and allowed cost sharing between the elderly and
the government. (Shi Ch 3)
Title XVIII of the Social Security Act specified that there was to be no class distinction
when determining the basis of eligibility, and that there was to be a national standard for benefits
and eligibility. (Shi Ch 3) There are three classes of people that qualify for coverage under
Medicare as stated by Title 18. These classes include people that are aged 65 or older, younger
people with specified disabilities, and those with end-stage renal disease.
This act also breaks down Medicare into four components. Part A includes benefits such
as 90 days of inpatient hospital care per period, psychiatric hospital services for a total of 190
days during their lifetime, post-hospital extended care for up to 100 days, home health services
and hospice care. (Compilation 1812) If a beneficiary or the spouse of a beneficiary has worked
and earned at least 40 credits, then they do not have to pay a premium. If they have not, they can
still pay into the program by way of premiums. Part B covers various outpatient services. Part C
is known as the Medicare+Choice program. It is voluntary and doesnt add any specific benefits,
but does include managed care as well as services such as chemotherapy, renal dialysis services,

skilled nursing care, and anything else that the Secretary determines appropriate. (Compilation
1852) Part D is also voluntary, and serves to reduce premiums on prescription drugs.
Medicare is financed through two government trust funds: the Hospital Insurance Trust
Fund and the Supplementary Medical Insurance Trust Fund. The Hospital Insurance Trust fund
gets its money from the mandatory payroll taxes paid by employees, employers, and those that
are self-employed. It is also funded in part by income taxes paid on social security benefits,
interest earned on the trust fund investments, and premiums from those that are not on a
premium-free plan. The Hospital Insurance Trust fund finances Medicare Part A (inpatient care,
hospice care, etc.) as well as the administrative side of Medicare (the costs of paying benefits,
collecting taxes, and combating fraud.) The Supplementary Medical Insurance Trust Fund has its
funds authorized by Congress, and receives its money from those paying premiums into Part B
and Part D of Medicare. It also gets some of its revenue from interest earned on the trust fund
investment. The SMI trust fund pays for Part B, Part D, and the administrative side of Medicare.
(How Is Medicare Funded?) Both the HI and SMI Trust Funds incurred deficits in 2012. (Shi
Ch 6)
Medicare has become more and more difficult to finance as the years the go by. In its first
year of existence, the program cost the Unites States government $11 billion. Fifteen years later,
it had grown to $84 billion and fifteen years after that it had shot up to more than $216 billion. In
2012, the cost almost doubled again to a whopping $397 billion. (Cost 83) It is estimated that
this cost will continue to balloon to more than 6% of the nations GDP, which is almost twice as
much as Medicaid, Obamacare, and State Childrens Health Insurance take up combined. The HI
Trust Fund is set to go bankrupt in 2026 at the current rate of influx into the fund. Reform in the
current governmental system seems difficult, because it doesnt seem to handle these sorts of

duties well and is plagued by ineffectiveness, inefficiency, and resistance to simple,

commonsensical reforms. (Cost 84)
These problems with Medicare stem from many sources. The first is the rising cost of
delivering health care. The reasons for cost escalation in the health sector begin with moral
hazard and an overutilization of inpatient care. With access to health care comes a desire to use,
and often abuse the health care system for problems that have cheaper alternative solutions, such
as outpatient care. Cost inflation also comes from a large boom in technology and specialization.
Patients tend to have a desire to want the newest, most high-tech form of care, often confusing
new with better. These new technologies are very expensive in order to cover the research
and development costs that went into them.
More issues contributing to the rising costs of Medicare delivery include the tendency of
patients to bypass their primary care providers and go straight to specialists. This is also very
costly, because specialists demand higher payment for their services. (Shi Ch 12) There is also a
misplaced emphasis on disease treatment instead of health promotion and disease prevention. If
disease prevention became a primary concern of the health care system, it would allow for less
spending on treatment of illnesses. Fear of malpractice suits lead to doctors performing
unnecessary medical tests and treatments for their own self-protection. Finally, much inefficiency
in the administrative side of Medicare financing, delivery, and payment contributes to the
escalating costs of the program.
Another source of Medicares woes comes from a large and fast growth of the elderly
population. Medicare was created at a time when people did not live long past 65, and the system
only had to support them for a few years after retirement. However, advances in technology are
allowing the old to get older and therefore utilize Medicare for longer than the government

originally intended for them to use it. Similarly, an issue that has recently become to manifest is
the rise of the Baby Boomer generation. This generation is the largest so far population wise, and
many of these people are now beginning to reach retirement age. There is now a large population
of people that is living longer and using Medicare for longer, draining the trust funds much faster
than expected.
Lastly, since Medicare is financed by the taxes of the younger, working population, there
needs to be more people putting money into the trust funds than are taking money out of it.
Unfortunately, as stated in the last paragraph, the Baby Boomer generation is very large, and
there are not enough people that are working and paying taxes to support the large volume and
demand for Medicare by the elderly. The elderly use almost three times as much health care as
younger people, and this puts a strain on the younger generations to support the system.
The many problems with Medicare and the rest of the health care sector stem from the
two different opposing sectors that provide health insurance: the government and the private
sector. The root cause of this problem goes all the way back to the days when America was
founded, and the government was purposefully set up in order to have a system of checks and
balances. While this system has worked for the most part within the government, the notion of it
in relation to the health care sector causes unwanted impedance of progress. Since so many
factions have the ability to veto policy changes, the healthcare system favors whatever the status
quo happens to be. (Cost 86) The current social-welfare programs provide some of the groups
that hold the majority with good benefits, and the beneficiaries to these benefits are hesitant to
enact policy changes that may reduce these benefits, even if they are in the best interest of the
public. Medicare itself was poorly designed from the outset, but over the years has gathered a
large and loyal group of followers that are unwilling to change the program and vehemently

oppose reform. (Cost 86) In order to enact any changes in Medicare, no matter how small, the
reformers would have to win over many smaller interest groups and gain the support of the
public at large.
Another mistake occurred with the inception and implementation of Medicare in 1965. At
that point in time, the Congress was the most liberal it had been in a while, and Wilbur Cohen
under President Johnson saw a brief opening to get Medicare passed. Unfortunately, this window
of time was very short, and the bill was drawn up in a haste. Politically this made sense, but
policy wise it didnt allow for the thought and debate necessary to make this an effective
program. (Cost 88) In his book on Medicare reform, Jay Cost describes three fateful choices
that ultimately led to todays problems with Medicare. The first was what was called a three
layer cake approach. The Republicans had suggested their own plan called Bettercare which
had the same benefits as todays Medicare Part A, and the AMA had proposed their own plan
called Eldercare, which sought to subsidize health care for the elderly. The Democrats feared
that these plans would overshadow theirs, so they combined all three plans into a single bill so
that more people would favor it and it would get passed more quickly. As good a political move
as it was, it made the plan way more expensive than it otherwise might have been if they had not
consolidated the plans.
The second fateful choice that was made in order to get Medicare through Congress
quickly was done in order to garner the support of the health care providers. This was done by
giving legislation a weak regulatory structure for governing the providers. The Democrats were
concerned that the program would be boycotted by doctors, hospitals, and nurses so they
attempted to reduce the potential regulation on them. Ultimately, the doctors and hospitals came
to find that Medicare was actually beneficial to them, because it allowed the care providers to

regulate payments. (Cost 89) The third and final choice that they made contributing to the issues
with Medicare was the decision to model Medicare after the Social Security accounting model.
Managing social security is relatively straightforward, but with the dynamic and ever-changing
field that is health care, it is very difficult to estimate how much hospital expenses will be in the
future. With Medicare, everyone who qualified is eligible for the same care regardless of how
much they paid into the fund, which ends up being very costly. While being good politics, all of
these decisions made for bad policy and led to cost overruns, huge inefficiencies, and trust fund
bankruptcy crisis. (Cost 90)
Since its conception in the 1960s, Medicare has become extremely outdated, to the point
that many of its original policy choices no longer make any sense. Its lack of adaptability to the
changing patterns in the Unites States has yielded many consequences. The first is that it allowed
doctor and hospital payments to remain unregulated. This has yielded out-of-control costs that
have yet to be reined in. Originally, the idea to fund the trust funds via payroll taxes made sense,
but as the years have gone by, more and more of American income has been earned through
capital gains, dividends, and interest instead of wages, which limits the money available to the
HI fund. The economic fortunes (Cost 92) of the elderly have also increased since the 1960s,
and the older generations are now far wealthier than the younger generations that are paying into
their health care.
The future of Medicare faces many problems, especially with the HI trust fund set to go
bankrupt by 2026. Many solutions have been proposed, the first being the introduction of a
Medicare that is financed by premiums. Republicans have been attempting to get such a reform
passed for decades, the most recent occasion being when Mitt Romney was running for
president. This plan would save people a lot of money, all while providing the elderly with the

same benefits as before. However, it would threaten the Democratic partys long term goal of
having the government provide health care for all Americans. Medicare was supposed to be the
first step in this direction, and reforming it, to the liberals, would be a step in the opposite
direction. This huge divide in views on the system between the parties makes Medicare reform
particularly difficult, because no matter what reform occurs, some group of people will be left
worse off, and that faction of people will use its power of Checks and Balances to prevent
reform. (Cost 94)
One other flaw in Medicares original plan was the lack of a global budget. Its original
founders had not put one in for fear of antagonizing the medical community when the bill needed
their support to pass. Without it however, no limit has been placed on how much the government
can pay its beneficiaries, leading to out of control costs. (Cost 92) Now that the plan is
established and in place with the support of the medical community, I believe that putting in a
global budget and sticking to it will help in cutting costs and preventing the HI trust fund from
going bankrupt. It will also keep expenditures in line with inflation and will force the
government to make compromises and the tough decisions necessary in order to keep costs under
the budget. (Marmor)
Another potential solution would be to pay providers less. This would require a lot of
bargaining and compromises with doctors and hospitals, but as such a big program Medicare has
the power necessary to reach a conclusion with them and ultimately lower costs. Since private
medical costs are decreasing, Medicare providers could demand that the public sector follow
suit. They could also compare costs of procedures to those in other countries and make efforts to
match those prices in order to lower the rates of medical tourism. Cutting out the excess and
unnecessary procedures would also aid in lowering costs in the hospital environment. Having

doctors make decisions instead of administrators with a strictly business background would
lower the amount of questionable procedures that are done. (Marmor)
Having middle man intermediaries also contributes to the rising costs of Medicare.
Having the government administer Medicare directly would be cheaper because there would be
no intermediaries like Blue Cross trying to make a profit. (Marmor) On top of having the
government be the sole administrator of health care, they could also start more programs that
would educate the general public about keeping up with their general health and when to use
what resources in order to prevent overutilization of Emergency Room services, etc. Lastly, and
perhaps more obviously, a solution would be to either tax the current working class more in order
to make up for the growing elderly population or expand our workforce by having people move
here from other countries. There has to be some way to balance the amount of money used by the
elderly and the amount of money put into the system, and aside from having those covered by
Medicare use health care services less, the only other way to balance it out would be to add more
people or more money to the other side of the scale.
As a program that was initially started in order to benefit a population whose life
expectancy after retirement was only a few years, Medicare in theory was a very fiscally
beneficial notion. However, in the years since its conception in 1965, advances in the medical
field have allowed the growth of a population that is living long past previous expectations,
effectively draining the money out of the system faster than the work force can add to it. Without
reform, Medicare will effectively lose all of its funding and go bankrupt.

Works Cited
"Compilation Of The Social Security Laws." Act 1812. Social Security Administration,
n.d. Web. 01 Dec. 2014.
"Compilation Of The Social Security Laws." Act 1852. Social Security Administration,
n.d. Web. 01 Dec. 2014.
Cost, Jay. "Madison's Medicare Problem." National Affairs 17.(2013): 83-96. Academic
Search Complete. Web. 30 Nov. 2014.
"How Is Medicare Funded?" How Medicare Is Funded. Centers for Medicare & Medicaid
Services, n.d. Web. 03 Dec. 2014.
Marmor, Ted. "The Medicare Solution." Washington Monthly 27.9 (1995): 33. Academic
Search Complete. Web. 03 Dec. 2014.
"Medicare (Title XVIII of the Social Security Act)." Health Information & the Law.
Robert Wood Johnson Foundation, 21 Aug. 2012. Web. 01 Dec. 2014.
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Shi, Leiyu, and Douglas A. Singh. Ch 6: Health Services Financing. N.p.: Jones &
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Shi, Leiyu, and Douglas A. Singh. Ch 9: Managed Care and Integrated Organizations.
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