PERSPECTIVE ON MEDICARE : Don’t Erase 30 Years of Progress : We can’t afford to gut a program that has given the elderly longer and healthier lives, especially as their numbers grow.

Sen. Bob Dole told the American Conservative Union on Oct. 26 that he was one of 12 House members who voted against Medicare in 1965 “because we knew it wouldn’t work.”

But Medicare has worked and worked well for 30 years. It needs some changes, which should not be surprising after all this time. But let’s look at what Medicare has accomplished.

By spreading the cost of medical care for the elderly among all working families, Medicare has made that cost bearable. It has saved millions of families from having to face, one-by-one, the huge cost of hospital care for their elderly relatives. And Medicare has meant longer life for the elderly. Although U.S. longevity statistics overall are nothing to brag about, we rank first (along with Japan) in longevity after age 65.

Perhaps even more important, Medicare makes living longer worthwhile. Procedures that many of the elderly could not possibly afford on their own--joint replacements, cataract removal, and cardiac bypass operations, to name a few--have become broadly available.

It is true that Medicare costs more today than was anticipated in 1965. But that’s true of all health insurance. Increasing knowledge of diseases and their causes and technological advances have transformed the care that all insurers are paying for. Health care today is much more effective, and much more expensive.

Medicare costs over the long run have not increased as much as costs in the private sector. But Medicare’s costs are more visible because Medicare, alone among insurers, tries to predict costs far into the future. Private insurers and self-insuring employers usually estimate costs for only a year or two at a time. When they miss the mark--as they often do--it doesn’t look nearly as big as a cumulative error in, say, a 25-year estimate.

Medicare, until recently, was doing better than private plans at holding down costs and led the field in developing cost-saving approaches that have since been widely adopted in the private sector. From the beginning, Medicare required hospitals to improve their record-keeping and insurers with whom it contracted to improve their claims processing. And today, private insurers are learning from Medicare’s electronic claims processing.

Medicare was also able to move away from relying on retrospective cost reimbursement (the Blue Cross model) by inventing a practical way to pay hospitals prospectively according to diagnosis, paying the same per case regardless of how much the hospital spends. This shifted the incentive from running up costs to controlling them. Now that Medicare’s diagnosis-related-groups system has been widely adopted by other insurers, U.S. hospital stays are the shortest in the world.

In reimbursement of doctors, too, Medicare innovation has been adopted by other insurers. Medicare pays doctors according to the cost of performing a given procedure rather than solely by what the market will bear.

Medicare works, but it can work better. Over the last two years or so, private plans appear to have been containing costs more effectively, in large part because major employers have been pressuring insurers and health plans, winning discounts and cutting down on unnecessary care.

Medicare needs to change. Beneficiaries with higher incomes should be contributing more to keep the program solvent, just as higher earners pay more income tax, and co-payments may be in order in additional areas such as home health care.

With a tuck here and a loosening of seams there and possibly some additional financing, over the next 15 years the program can be made to fit what we are willing to spend. But after 2010, quite a different approach will be required. The real Medicare problem will be the huge increase in the Medicare-eligible population as the baby boom generation retires--going from about 37 million people to 70 million in 2030.

Ironically, all of the changes being promoted in Congress are focused on balancing the budget in the next seven years rather than on addressing the long-range problem of meeting the needs of a population that nearly doubles in just 35 years. Measures designed to meet the two goals are not necessarily compatible. For the short run, the Republican preoccupation is radical cutting--so large as to weaken the program. But a strong national Medicare plan will be a godsend to policy-makers as 2010 approaches. It could be the basis from which real solutions can evolve.

Medicare does work and with sensible and gradual changes can be part of a solution for all ages that addresses both the explosion in the elderly population and the continuing costly advances in medical practices. On the other hand, a $270-billion seven-year slash of the kind being contemplated could lead to changes so abrupt and far-reaching that the progress of the last three decades could be all but erased in the next. Alas, that might make Bob Dole’s claim seem prophetic, but it still wouldn’t be right. Medicare does work and can be made to work even better.