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.
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
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.
WHAT COULD A RESPONSIBLE ADMINISTRATION DO?
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)
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
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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