Coalition or Collision? Medicare and Health Reform

There is a remarkable consensus that the American

medical care system needs a major overhaul. The critical unanimity on this

point bridges almost all the usual gaps-- between old and young, Democrats and

Republicans, management and labor, the well paid and the low paid. We spend

more and feel worse than our economic competitors, with nine out of ten

Americans telling pollsters health care requires substantial change. This is

the good news for medical reformers in the Clinton administration and the


The bad news is that, for a variety of ideological, economic, and

institutional reasons, our politics have frustratingly failed to coalesce around

a solution that satisfies the reasonable conditions for a medical care system

worthy of a civilized society. We have no assurance that the rare agreement on

the nation's medical ills will generate the legislative support required for a

substantively adequate, workable program of reform.

What President Clinton will propose cannot possibly be specified in detail from

his campaign. As a campaigner, he understandably avoided concentrating on the

details of health policy or its implementation. As president, however, he has

different opportunities and risks. In health, he must specify workable means to

his reform aims that can command a majority in the Congress.

That task is one of the most difficult a presidential reformer faces. Reformers

in the Progressive era and the New Deal, under President Truman, and during the

early 1970s thought universal health insurance was imminent and were bitterly

disappointed. Now, as then, entrenched interests try to block change by

skillfully manipulating our deepest fears and beliefs to maintain their

privileges. In 1993, to be sure, those interests seem to be on the defensive;

the time for reform does appear to have arrived. But before the new

administration and the Congress can resolve the challenges of reform, they will

have to resolve some nasty and hardly trivial budget problems stemming from

Medicare and other current federal health programs. And that sets the stage for

what could become a nightmare of conflicting agendas.

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We had a premonition of conflicts to come last July, when Budget Director

Richard Darman predicted that Medicare outlays would have to be drastically

reduced to cut the budget deficit. Hence Darman proposed a "cap" on

Medicare and Medicaid to reduce federal health spending between 1993 and 1997 by

some $260 billion. In response, Clinton charged such a policy would eviscerate

federal health programs. Kenneth E. Thorpe, an economist advising the Clinton

campaign, warned that enforcing such caps without more far-reaching medical care

reforms would destroy Medicaid, increase cost-shifting from Medicare to

employment-based insurance, and thus lead to the loss of millions of jobs. The

Bush campaign claimed this was nothing but the familiar scare tactics of

Democrats. Nonetheless, Bush tried to distance himself from the flareup by

calling Darman's proposal merely one "option."

As president, Clinton cannot easily escape the problem that Darman identified.

It will be no easy matter for his new administration to deal with Medicare and

its constituencies while taking steps toward universal health insurance and a

transformation of how we pay for and deliver medical care. If the Clinton plan

doesn't incorporate the elderly, and quickly, Medicare is at political and

fiscal risk in the interim. The danger here is a potentially serious clash

between the constituencies of Medicare and of universal health insurance and the

reawakening of the ugly generational politics that marked the debacle over

Medicare catastrophic coverage--the program that Congress enacted in 1988 only

to repeal the following year after an eruption of discontent from the affluent


Were it possible to enact universal health insurance immediately and to fold

Medicare into such a program, a generational conflict would not necessarily

arise. But universal health insurance simply may not proceed that fast. Clinton

himself has signaled as much. His aim is to reach universal coverage by several

transitional steps, meanwhile setting in place the elements of overall cost

control. He has proposed requiring employers to pay for health insurance, with

public financing for the unemployed, and suggested folding Medicaid

beneficiaries as well as some of the employed into health insurance purchasing

groups. President Clinton's hope, quite clearly, is to produce by the end of his

first term a coherent amalgam of the fragmented arrangements we euphemistically

call the American health care system. But what about Medicare in the here and


Although Medicare's costs are not growing as rapidly as those of private

insurance, they pose big budgetary problems. Compared with other federal

programs, Medicare's 30 percent growth in cost over the past four years makes it

one of the most rapidly expanding items in the budget. That's why Budget

Director Darman spoke of "capping" Medicare's expenditure increases.

But any attempt to do so, without controls on the rest of the health economy,

would exacerbate one of the worst trends in health finance during the 1980s: the

shifting of Medicare expenses from public accounts to private insurance and

patient bills.

If Clinton intends to make good on his promise to cut half the budget deficit

by 1996, he will have to show how Medicare outlays will be constrained. After

all, the economic plan he released during the campaign presumed "savings"

of scores of billions of Medicare outlays over the Bush administration's fearful

forecasts that uncapped Medicare expenditures would grow at 15.8 percent

annually. Those savings must come from either reductions in what Medicare pays

or increased Medicare taxes, or both.

To get savings amounting to $145 billion over this period, the Bush

Administration proposed what amounts to Draconian burdens on our elderly, our

hospitals, and some of our physicians. A quick review makes plain why Darman's

proposed cap excited such outrage last summer. To save nearly $64 billion in

Medicare's physician insurance program, Bush proposed increases in the premiums

and cost-sharing for which the elderly are responsible. Such changes, the

Congressional Budget Office estimated, would, along with increased payments for

supplementary private policies, raise the elderly's spending on medical care

from 7 percent of their incomes to nearly 12 percent by 1997. Other proposed

spending cuts in physician coverage ($14 billion over five years) presumed

reductions in payments to doctors.

Other savings, estimated at $68.8 billion, would come from Medicare's hospital

program. Today, Medicare pays something like 90 percent of reported hospital

costs. Bush proposed to pay hospitals about 72 percent of their costs by 1992.

On the basis of past experience, hospitals would expect to shift much of those

reductions to other payers. Thus, spending cuts in Medicare alone would likely

mean higher medical bills for the elderly (cost-shifting backwards), increased

burdens on employers (cost-shifting sideways), and decreased revenues or higher

fees for physicians (cost-shifting forward). Such a policy would enrage those

groups and complicate enormously any other more fundamental reform of the way

American medical care is organized and financed.

The short-run problem facing Clinton is obvious. Medicare appears a voracious

consumer of public dollars. On its present course, an unreformed Medicare seems

certain to defeat hopes for deficit reduction. How can the Clinton

administration get Medicare's outlays under control without the full fright (and

fight) sketched above?

At its inception in 1966, Medicare was seen as a way

to bring the elderly into the mainstream of American medicine. Its hospital

coverage and medical insurance mirrored the dominant forms of Blue Cross-Blue

Shield and commercial health insurance in the postwar period. For nearly fifteen

years, the program's costs grew rapidly, rising from 9.2 percent of national

health expenditures in 1967 to 16.7 percent in 1984. During this period, the

program paid hospitals "reasonable costs" and physicians "reasonable

and customary fees." But the unreasonable result was that Medicare helped

to promote seemingly uncontrollable health care inflation.

Since the mid-1980s, however, the Medicare program has had far less rapid

growth than medical care generally. Few people are aware of it, but the facts

are undeniable: the rate of increase in Medicare outlays fell sharply from an

average of 16 percent between 1980 and 1985 to an average of 9 percent between

1986 and 1990. The increase in outlays for 1991 was only 6.3 percent.

As Marilyn Moon, a health care analyst at the Urban Institute, shows in a

forthcoming book, Medicare controlled its costs more tightly than did private

health insurers during this same period. So, despite the fiscal strain of the

recent recession and the undeniable cost-shifting that Medicare has prompted,

its health budget pressures are less than those facing American businesses and

workers. The fearsome picture of Medicare's future stems from the rapid

inflation officially projected for the rest of the 1990s. For example, the

Congressional Budget Office estimates that Medicare outlays will increase at

approximately 11 percent every year from 1993 through 1997.


The Bush administration's answer to rising Medicare costs was to cut Medicare

benefits and reimbursement rates and to increase costs to the elderly. The

alternative is to restructure Medicare, and American health care more generally,

to put both on a more affordable trajectory. But the hardest questions remain:

Which strategy of reform to choose and what steps are required for


One strategy would be to reform Medicare as a first step in the process of

making the transition to national cost controls and universal coverage. That

presumes Medicare expenditures simply cannot be permitted to grow at rates of 11

to 15 percent per year. So, by Medicare reform, I mean two things. The first is

to restrict Medicare's budget growth to a rate comparable to general inflation,

not twice that; the second is to embrace a program of long-term care and

catastrophic coverage to relieve the elderly's legitimate anxieties.

Restraining the rate of Medicare's current budget growth would head off some of

the direct conflict among Medicare and universal health insurance constituents

provided that cost controls were imposed throughout the medical economy and

precluded another orgy of cost-shifting. The generality of the cost

controls--not whether national expenditure limits are enforced through price and

volume controls or produced through managed competition--is the crucial element

in this approach.

But such reforms require incorporating Medicare's constituencies into the

demand for overall cost control. It is here that the clash of generational

politics is most dangerous. To avoid that means a serious commitment to

relieving the continuing health worries of the elderly.

To reformMedicare as part of the transition to national cost controls and

universal coverage offers a difficult politics. We need to acknowledge honestly

the elderly's fears of economic insecurity from the costs of catastrophic

illness and long-term care. To address those problems requires adding to

Medicare by the end of 1996 a social insurance program covering long-term care

and catastrophic medical expenses. This, of course, raises the risk of the

legislative disaster acted out over Medicare catastrophic coverage in 1987-89.

On the other hand, the linking of increased benefits to earmarked social

insurance taxes has considerably more popular support than the oft-cited

American aversion to taxes would suggest. A 1988 survey reported that 63 percent

of Americans favor increasing access to medical care rather than lowering the

nation's health spending.

The long-term care and catastrophic proposals raise, however, somewhat

different issues. Long-term care is not an ordinary medical matter and there are

legitimate disputes over whether it should be part of health insurance at all.

What is not in dispute is that Americans fear impoverishment from frailty in old

age and the dread of Alzheimer's disease has universalized this anxiety. No

system of private insurance--without cross-subsidization and extensive

regulation--can spread the financial risks of long-term frailty widely enough to

be affordable to those with modest incomes. Social insurance, with small

payments spread out over a lifetime of work, is precisely the risk-spreading

device called for in such circumstances. As with catastrophic protection against

the costs of acute care, the burden of financing should be distributed over both

time and income classes. An increase in Medicare taxes so justified would be far

more compelling than non-earmarked tax increases, the polls (and common sense)

tell us.

The political disaster that resulted when catastrophic insurance was repealed

because the elderly resented paying for it entirely themselves was not the

result of taking on the wrong problem. Rather, an analysis reveals calculated

misinformation, poor legislative design of an otherwise sound program's

financing, and ill-managed politics. The "rationale behind the ill-fated

Medicare catastrophic coverage legislation was compelling and remains compelling

in the aftermath of its repeal," Edward Lawlor of the University of Chicago

has rightly argued.

The disaster was largely the result of departing from social insurance

principles of finance, concentrating tax increases solely on the current

elderly, and failing to explain why that choice made sense, particularly to the

more comfortable elderly with their own supplementary policies. The experience

offers a lesson for reform. Both for catastrophic protection against the costs

of acute illness and for the social and economic problems of long-term care,

social insurance financing makes most sense. Administering either will be

difficult, and the political fears each will excite are considerable. But there

is reward here as well as risk.

The reward would be a dampening of the fears of elderly constituents and their

pressure groups about their interests being sacrificed in budget deficit

struggles and the transition to universal health insurance. However, meeting

these concerns of the elderly also may re-ignite the political hostility toward

the elderly evident in the battle over Medicare catastrophic. Two decades of

fiscal strain have worsened intergenerational strains in American public life.

Because our welfare state has concentrated on programs for the elderly--as with

social security pensions and Medicare--welfare state critics have seized on the

image of "greedy geezers" as the explanation for our woes. The

scapegoating, led by the Americans for Generational Equity and supported by Wall

Street gurus like Peter Peterson, is an unanticipated consequence of how we have

structured our public household. Canada, for instance, has a nearly identical

proportion of elderly citizens and similar rates of medical care use by its

elderly; it has also experienced comparable economic strain during the 1970s and

1980s. But its universal medical program addresses the sick, not the elderly,

and so Canada has nothing comparable to our handwringing about the "graying

of the federal budget."

The implication is that we should address the real problems facing the elderly

while taking deliberate steps to incorporate their health insurance into a

wider, less age-graded system. Convincing the Congress that this is both

possible and desirable will not be easy. Many will remember the catastrophic

episode bitterly, buttressed by the image of Congressman Rostenkowski being

hounded on a Chicago street by what amounted to a mob of older Americans. A

presidential commitment to addressing Medicare reform while moving toward

universal health insurance would help enormously. Making sure that the controls

on cost bring genuine savings, not cost shifting from Medicare, is crucial. The

task of designing that transition is an unheralded but central element in the

new administration's agenda.

Such reform, of course, is easier to propose than to produce. Could we reform

Medicare as suggested above and simultaneously place a budget limit on overall

health expenditures? Could we at the same time add a program for pregnant women

and children, thus addressing one of our most pressing needs in access? And

could we also address the concerns about financial disaster for the uninsured

and underinsured by a temporary program of refundable tax credits for medical

expenses beyond, for example, 15 percent of annual income? No one would want

such a program permanently, but as a stopgap isn't it administratively workable

and relatively free of bureaucratic complexity?

These are questions, not firm answers. But with budget limits, improved access

in stages, and time to augment America's supply of capitated health care

systems, these are worth raising while admitting uncertainty about their

feasibility. Most important, such transitions attend to political fissures that

exist quite beyond the traditional opposition to the combination of universal

health insurance and cost controls among private insurers and their allies.

This approach to incremental reform brings enormous risks of misinformation.

None of the elderly constituencies will be fooled by vague promises of attending

to Medicare after introducing a new program for those under sixty-five built on

principles different from Medicare's. So, it is worth sketching out an

alternative scenario.

The most appealing, yet difficult, approach would be to introduce

simultaneously a national budget for medical care and an insurance program for

all those under sixty-five. As Clinton has suggested, a national health care

commission would set a budget limit for expenditures, allocate subnational

limits to the states, and hold Medicare to a specified share of that budget.

There are daunting tasks of implementation here, but the general idea would be

to incorporate Medicare budget constraints into an overall cap on health

expenditures and to fold Medicare into the decentralized administration of cost

control planned for the nation as a whole.

If the Congress enacted universal coverage by aggregating separate programs for

the employed, the unemployed, veterans, the poor, and Medicare, the result would

be administratively complex. "Play-or-pay" plans would require not

only budget limits, but state rate setting to control the pressures on

expenditures. Evidence from the 1970s and 1980s, developed by Thorpe, shows that

states which implemented rate-setting had rates of medical inflation comparable

to Canada. But such programs would have to cover all health insurance plans

within a state, and Medicare would have to be incorporated in such efforts. The

appeal to the elderly constituencies would arise from the benefit additions

suggested above, with the funds drawn from earmarked Medicare taxes spread over

the entire working population and increased Medicare premiums. Were the Congress

to mandate universal coverage for those under sixty-five on terms commonly

described as "managed competition," other options for Medicare remain.

One approach, as Paul Starr has suggested in his recent book, The Logic of

Health-Care Reform, would be to offer the new program as an option to people

over sixty-five. This could be made attractive to many now in Medicare with the

inclusion of catastrophic coverage, and the new program might very well become

mandatory for new cohorts reaching age sixty-five. On that model, Medicare

itself would fade away over time.

In each of these options, the central political feature is that Medicare

beneficiaries are promised improvements in their circumstances as part of a

broader health care reform. Under some, the program continues but is subject to

administrative cost controls on the entire medical care industry. Many analysts

doubt whether such administered prices can work well in an industry as complex

and changing as medical care. But we have ample experience from Canada and

Australia that countervailing public power can restrain medical inflation more

readily than our current system. Whether the prospects of price and volume

controls are better than the promise of managed competition is a question no one

can answer with confidence. Nearly two decades of managed care programs should

leave no one smug about those prospects. Managed competition has never been

tried comprehensively and, necessarily, cannot be said to have been proven in

practice. But, whether through monopsony bargaining over budgets, rates, and

allocations or through a decentralized system of health maintenance

organizations, the double task for health care reform is to dampen medical

inflation while widening access. I am suggesting that options exist to do so

without re-enacting the generational warfare that marked the ill-fated

catastrophic reforms of the late 1980s.

One such option, seemingly the most straightforward, would subsume medical care

for the elderly under the new universal plan; Medicare as a separate program

would cease to exist. This option, however, has three necessary preconditions.

First, the basic benefits of the universal program would have to be at least as

comprehensive as Medicare's current physician and hospital coverage; second, its

administration would have to be simpler and more responsive; and third, the new

universal plan would have to be implemented speedily enough so that Medicare

would not continue to bleed red ink during a long interim.

There are valuable lessons we can draw from the frustrations of the past two

decades. One is that the opportunities for reform are few and precious, not to

be squandered. The excellent but undoable should not be allowed to defeat what

is both good and doable. Another is that piecemeal change, without a clear

timetable, design, and commitment to where one wants to get, is both frustrating

and politically wasteful. There is no easy escape from addressing problems

simultaneously, even if the steps of reform must be sequenced. Cost control

without increased access to health insurance was a disaster in the late 1970s.

Expanding access without reforming the financial structure of American medicine

is no better, as the catastrophic debacle illustrates. But reforming Medicare

while moving toward universal financial coverage and workable restraints on

health expenditures should, in 1993, be within our grasp.

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