when will medicare go bankrupt

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					CP, January 19th, 2004
Transcribed by: Elizabeth Oelsner (eco7)

Health Care Systems

Two issues will be described in this lecture:
  1. The evolution of the healthcare system in the US
  2. Strategies for dealing with the uninsured, including the current administration’s

There are 6 major points regarding these issues:
   1. The US health insurance system is a relatively recent phenomenon.
           a. The healthcare “wild west”: from the 18th C until the early 20th C, there
              was no health insurance in the US. It was a low-cost, non-prestigious, fee-
              for-service system.
                   i. Unlicensed doctors, herbalists, and medicine men all called
                       themselves healers. With almost zero regulation by the states or
                       federal government, it was a “buyer beware” system.
                  ii. Costs were relatively low, therefore patients would pay out of
                 iii. There were very few hospitals, and they were perceived as a last
   2. There was a fundamental change to the US healthcare system in the early 20th
       Century, for two reasons:
           a. First, the rise of the medical profession. New technologies emerged
              allowing the doctors to differentiate themselves. Doctors convinced the
              state regulators to put the other “healers” (medicine men, etc) out of
           b. Second, and perhaps more importantly for this discussion, the rise of the
              hospital as a high-quality, high-cost method for healthcare delivery.
                   i. The number of hospitals – and, consequently, the cost of healthcare
                       – exploded from 1900 through 1930.
                           1. In 1873, there were less than 200 hospitals. These hospitals
                               were considered dangerous, and only for the destitute. In
                               1900, there were 4,000, with 35,000 beds. In 1930, there
                               were 7,000, with over 900,000 beds. This number is
                               enormous – in 1998, US hospitals had only 843,000 beds.
                           2. This rise was due to a number of factors:
                                   a. New technologies (x-rays, antibiotics), such that the
                                       hospital became a convenient, efficient facility for
                                       high-tech care
                                   b. Rise of nursing, which increased hospital safety
                                   c. Rise of teaching hospitals
                                   d. Urbanization and industrialization
                           3. As a result of these factors, the hospital became a place
                               where middle and upper class individuals would go for
                               care, and healthcare became expensive.
              ii. Unfortunately, in the 1930s, the trend towards more expensive
                  healthcare coincided with the trend towards economic depression,
                  and patients couldn’t pay their bills. Health insurance –
                  specifically, Blue Cross Blue Shield – emerged out of this crisis.
                      1. Hospitals banded together to form insurance companies
                          they called Blue Cross. They asked individuals and
                          companies to pay a certain fixed, annual fee in return for
                          guaranteed hospital care.
                      2. Doctors followed suit with Blue Shield.
                      3. Thus, BCBS comprised the first major health insurance
                          companies in the US, created by the doctors and hospitals
                          at a time of fiscal crisis, enabling people to pay the high
                          cost of healthcare.
             iii. In the 1940s, the federal government encouraged a private,
                  employer-sponsored health insurance system. Commercial
                  insurance companies started to enter the health insurance market.
                      1. In this period, BCBS was small, but well-established.
                      2. Federal government rejected the European health insurance
                          model, national healthcare, and promoted a private,
                          employer-sponsored model (e.g., by making employee
                          health insurance tax-deductible for companies).
                      3. This model became dominant in the US by the late 1940s.
                      4. Commercial insurance companies (offering life insurance,
                          etc) expanded into health insurance.
                      5. The cost of healthcare continued to increase, and the ability
                          for patients to pay out of pocket diminished further.
3. There were many Americans who were excluded from this evolving system (e.g.,
   the unemployed, the disabled, those whose employers would not pay for their
   insurance or who could not afford the copay). Various strategies for addressing
   the problem of the uninsured were debated from 1940 to 1965. In 1965,
   government passed Medicare and Medicaid.
       a. 1940 – 1964: the debate between social health insurance and a means-
          tested system.
               i. FDR wanted to propose national health insurance, but was advised
                  against this, so that he could gain acceptance for other programs.
              ii. Truman proposed national health insurance, but was defeated. He
                  retreated and pursued an incremental program: hospital insurance
                  for the elderly. This became the democratic platform for healthcare
                  for the next 20 years (through President Johnson). Hospital
                  insurance for the elderly was always defeated in congress, since
                  conservatives/republicans argued that the wealthy elderly should
                  not be subsidized.
             iii. The central question became: should we have a social health
                  insurance policy, like social security (democrats), or a means-
                  tested program, in which only the needy would be subsidized
       b. 1964 – 1965: LBJ, Wilbur Mills, and the advent of Medicare and
                i. LBJ was elected by a landslide, and came to term in 1964 with
                    enormous political capital, which he used to pursue the democratic
                    health insurance platform (hospital insurance for the elderly).
               ii. Two other proposals circulated during LBJ’s term: the republican
                    platform (means-tested health insurance), and physician insurance
                    for the elderly (a response to the increasing glut of hospitals).
              iii. Wilbur Mills “ran congress” in the 1950s and 1960s. He was a
                    Southern Democrat who wanted to become president. His hopes
                    were smashed when he was found in flagrante with a certain
                    “Fanny Fox” at the tidal basin, however chances looked good until
                    then. Mills ran the Ways and Means committee for the House of
                    Representatives, and wanted to use healthcare as his platform for
                    the presidency. As a result, he passed all three proposals:
                        1. Hospital insurance for the elderly  Medicare A
                        2. Physician insurance for the elderly  Medicare B
                        3. Means-tested health insurance program for the poor 
4. Medicaid, a means-tested (or “welfare-based”) system, is now the largest health
   insurance group in the US. It is a state-based program, and in every state, it is
   facing a cost crisis.
       a. Medicaid covers over 50 million Americans, and it costs over $300 billion
           per year.
       b. It is a state-based program. It is not mandatory, but as of 1982 (AZ), all
           states offer Medicaid.
       c. There is extraordinary variation between states. States have full discretion
           over program details, and thus no two states have the same eligibility,
           benefits, and reimbursement plans.
       d. Despite state-to-state variation, every state is facing a cost crisis.
                i. The federal government supports 50-80% of state Medicaid costs,
                    based on need (e.g., Mississippi is ~80% subsidized, New York is
                    ~50% subsidized).
               ii. State budgets are shrinking, and every state is trying to control
                    Medicaid costs. Strategies include:
                        1. Eligibility restrictions. Problems with this strategy include:
                            the increased burden on hospitals, which are not
                            reimbursed for treating uninsured patients; states receive
                            less money from the federal government if they cover
                            fewer residents; cutting eligibility for children has major
                            political ramifications. Most eligibility cuts have been for
                            adults, and via the “back door” (e.g., by imposing more
                        2. Premium assistance programs. In such programs, Medicaid
                            will pay premiums for private insurance.
                        3. Provider reimbursement cuts.
                        4. Benefit cuts. For instance, many states have cut mental
                            health coverage. However, such “non-essential” services
                            usually represent a small portion of total costs, so cutting
                            them is not a full solution.
                        5. Drug cost cuts. States are trying to increase use of generics,
                        6. Managed care. This is very unpopular.
               iii. The bottom line is that it is hard to cut Medicaid costs because
                    Medicaid has become the health insurance safety net for so many –
                    not just the very poor.
5. Medicare provides health insurance to over 41 million elderly (over 65 years) and
   disabled Americans. The probability of a “Medicare crisis” continues to be a
   subject of concern and debate.
       a. The two components (A, B) are financed differently
                 i. Part A, hospital care: financed by a “trust fund” collected from
                    young workers (2.9% of income).
                ii. Part B, physician care: financed by elderly, whose premium pays
                    for 25% of costs while the government pays 75% from general
       b. Many argue that part A will go bankrupt.
                 i. Medicare A accumulated a large reserve, 1965-94.
                ii. In 1994, Medicare A spent more than it took in, leading to talk of a
                    Medicare crisis. Thus, the 1996 presidential campaign was booked
                    as a referendum on Medicare.
               iii. In 1998-1999, Medicare collected a surplus that is currently over
                    $200 million. The question is now, how do we spend this surplus?
                    In 2003, the Medicare package was extended somewhat to
                    prescription drugs.
               iv. Actuaries maintain that there will be a Medicare crisis in the
                    future, due to long-term demographic changes.
6. The problem of the uninsured is dire. There are four basic strategies for reducing
   the number of uninsured Americans, however their effectiveness has yet to be
       a. There are currently over 45 million uninsured Americans, and that number
           is rising. Over 75-80 million Americans lack insurance in a given year.
       b. The employer-sponsored health insurance system is at risk. Employers are
           charging employees more for health insurance, and providing less
       c. The uninsured have delayed care, and depend on ER’s. Thus, their care is
           more expensive. Hospitals are at risk for their costs, and are attempting to
           shift these costs to private insurance companies by raising rates for all
           procedures. In turn, insurance companies are raising costs, discouraging
           employers from buying insurance, and contributing to the vicious cycle.
       d. There are four basic strategies for reducing the number of uninsured:
        i. Increased outreach and education. There are millions of people
           who are eligible for public programs, but still do not have
       ii. Expanded eligibility for public insurance.
      iii. More affordable private health insurance, by means of tax credits,
           health savings accounts, purchasing pools, and premium
      iv. More subsidization for the medical safety net, via increased
           funding to hospitals, etc.
e. The Bush administration favors market-driven approaches (iii), and these
   cost the government the least. Kerry’s plan would have reduced the
   number of uninsured by 15 million, however at a huge cost.

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