In the 50 years since they were signed into law by President Lyndon Johnson, Medicare and Medicaid have grown into health insurance behemoths, covering one-third of all Americans and accounting for $4 of every $10 spent on healthcare here. Widely supported by beneficiaries, the programs have been dramatically successful on many fronts: Medicare has extended health insurance to nearly all the elderly, and Medicaid provides vital prenatal and maternity care for almost half of U.S. births. Both programs have helped narrow the healthcare gap between rich and poor, and between whites and minorities. But the programs' size is also their biggest challenge.
Medicare and Medicaid were designed to plug gaping holes in health coverage for retirees and impoverished families back in the days when insurance was provided almost exclusively by employers. To finance Medicare, workers and employers paid payroll taxes into a fund for hospital coverage (Medicare Part A), and retirees paid income-based premiums if they wanted coverage for doctors' visits (Part B). The cost of insuring poor families through Medicaid was split between the federal government and states that chose to participate — which every state did.
The programs are as large as they are today because they were expanded over the years to cover more people. Congress extended Medicare to the permanently disabled (who make up about a sixth of the enrollees) and people of all ages with advanced kidney disease, while also adding coverage for prescription drugs (Part D), with most of the cost falling on taxpayers. Medicaid, meanwhile, was extended to children from families with somewhat higher incomes and, in the 2010 Affordable Care Act, to childless adults and families earning up to 138% of the federal poverty level. State Medicaid programs also started picking up the tab for low-income retirees' Medicare Part B coverage.
Although most of the beneficiaries of Medicare and Medicaid have been people of modest means, both programs deliver broad public benefits. The dollars flowing to doctors and hospitals help keep care available for all Americans, while also financing improvements in treatments and medical technology. There's also a clear benefit to public health in providing a third of the population access to care that might otherwise be unaffordable. Finally, bringing more people under the insurance umbrella helps the effort to deliver more preventive care, manage the treatment of chronic disease and address problems before they become acute.
On the other hand, these programs are staggeringly expensive — together, they cost more than $1 trillion annually — and they're expected to gobble up a growing percentage of federal and state budgets in the future. Those pressures have led House Republicans to propose transforming Medicare into a subsidy for private insurance, with a cap on the program's growth, while giving states Medicaid block grants that would not keep pace with inflation. Those changes wouldn't address the forces driving up the programs' costs, however; they would simply shift costs off federal taxpayers and onto states and beneficiaries. Unless those forces were addressed, Medicaid would become increasingly difficult for states to maintain and Medicare harder for seniors to afford.
The right approach is to address the roots of the growing costs, but it's also a significantly harder course. A major factor is how many people the programs reach. The retirement of the baby boom generation is causing Medicare enrollment to increase by more than a third over the coming decade, even as the number of retirees with health benefits from a former employer drops. What's more, retirees are living longer. The number of people reaching their 90s is projected to quadruple by 2050. Medicaid costs, meanwhile, would shrink if more Americans were able to climb out of poverty and into higher-paying jobs. But two-thirds of Medicaid's costs stem from elderly or disabled Americans who can't work.
Another problem is the incentives built into the healthcare system that promote excessive spending. Here is where policymakers have been making some progress.
For much of its history, the healthcare industry has paid doctors, hospitals and other providers based on the amount and intensity of the care they provided. That "fee for service" system is inherently biased against providers with patients who recover quickly and stay healthy. Through the ACA and other laws, Congress has increased the pressure on doctors and hospitals to abandon fee-for-service approaches to Medicare and Medicaid, although it's not yet clear what the right replacement might be. Private insurers and large self-insured employers have also been pushing for systems that encourage wellness and prevention to lower costs over the long run.
Those efforts appear to be paying off. The growth in Medicare and Medicaid's cost per enrollee has slowed since the ACA became law. Analysts give some credit to the cuts the law made in payments to providers and its efforts to change incentives, but they also say providers are paying more attention to the value of each procedure they perform or drug they prescribe.
Yet there is so much more to be done to make healthcare spending more efficient and better oriented toward preserving health instead of treating ailments. This includes encouraging more use of "advance directives" to stop providers from giving unwanted care, reducing obesity, shifting more tasks to nurses and physicians' assistants, and making better use of the data being generated by electronic health records. There's also the challenge posed by pricey new specialty drugs, which pit medical innovation against affordability.
Because they account for so much of the annual spending on healthcare, Medicare and Medicaid can lead the efforts to promote more efficient care. Lawmakers should look at the programs as the means to solve larger spending problems in the healthcare system as a whole, rather than simply trying to cut the federal taxpayers' bill.