Medicare and Medicaid

views updated May 23 2018

Medicare and Medicaid

Medicare and Medicaid are health insurance programs sponsored by the federal government that cover medical expenses for elderly, disabled, and low-income Americans. Both programs took effect in 1965 and are administered by the Health Care Finance Administration (HCFA) which is part of the Department of Health and Human Services. The U.S. Government provides health care coverage to a variety of groupsincluding federal employees, military personnel, veterans, and Native Americansbut the Medicare and Medicaid programs account for the largest proportion of the federal government's health care expenditures.

The cost of administering the programs has increased dramatically over the years with the rapid escalation in health care costs. In fact, the portion of overall federal government spending that was spent to support Medicare and Medicaid increased from 5 percent in 1970 to 20 percent in 2005 and is expected to continue to rise, exceeding 25 percent by 2010. When the estimated costs of a new Medicare prescription drug program that will become effective in 2006 are added to this total, the already high price tag rises even more sharply. As a result, many experts predict that Americans will not be able to depend upon these programs for their long-term health care needs in the future. For self-employed persons and small business owners, who are less likely to be covered by an employer's health insurance program, these statistics highlight the need to plan on obtaining private health insurance coverage to supplement Medicare.


Medicare is the nation's largest health insurance program, providing coverage in 2003 for 41 million Americans who were at least age 65 or who had a disability. Medicare coverage consists of four parts, labeled Parts AD.

Part A of Medicare is financed largely through Social Security taxes. It provides for the following services:

  • Inpatient hospital services up to 90 days per "spell of illness"
  • Skilled nursing facility services for up to 100 days per "spell of illness" following a 3+ day hospital stay
  • Home health care up to 100 visits per "spell of illness" following a 3+ day hospital stay
  • Hospice care
  • Inpatient psychiatric care, for up to 190 days during a beneficiary's lifetime
  • Blood (after the beneficiary pays for the first 3 pints per year)

Part B is financed through premiums paid by those who choose to enroll in the program and pay an extra fee for its services, and provides:

  • Physicians' services, including office visits and a onetime physical examination for new beneficiaries
  • Durable medical equipment (e.g., wheelchairs, oxygen) and supplies
  • Outpatient hospital services
  • Outpatient mental health services
  • Clinical laboratory (e.g., blood tests, some screening tests, etc.) and diagnostic tests
  • Outpatient occupational, physical, and speech therapy
  • Home health care not preceded by a hospital stay and visits over the 100-day Part A limit
  • Some preventive services (e.g., mammograms, diabetes screening)
  • Blood (after the beneficiary pays for the first 3 pints per year)

Part C refers to the Medicare Advantage program (formerly known as Medicare+Choice), under which private plans provide Medicare benefits to enrollees.

Part D is a new prescription drug program available as of January 2006 to everyone eligible for Medicare regardless of income and resources, health status, or current prescription drug expenses. There are two ways to get Medicare prescription drug coverage. One is to join a Medicare prescription drug plan, the other is to join a Medicare Advantage Plan or other Medicare Health Plans that offer drug coverage. Whichever is chosen, the plan is designed to help participants cover the cost of both brand-name and generic drugs.

Participants in the new program are required to pay a monthly premium, an annual deductible, and a percentage of the cost of the drugs they acquire (a copayment). The program does offer some assistance for participants who can prove that they have limited incomes. The program is a complicated patchwork of private and competing insurance company policies, each with a list of covered medications and each with a different premium structure. Critics of the plan focus on these complications in addition to its overall high cost as well as the fact that it does nothing to negotiate on the part of all participants for lower prices with pharmaceutical companies. Once the program has been operating for a period of time, assessments of its efficacy will likely be made and amendments to the program may be anticipated.

Qualified people can enroll in the Medicare program by completing an application at their local Social Security Administration office. It is important to note that, once an employee becomes eligible for Medicare, a small business owner is no longer required to offer him or her health insurance continuation coverage under the provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA). Since Medicare does not cover all of an elderly or disabled person's health care costs, many insurance companies offer Medicare Supplemental Insurance (also known as Medigap coverage) to fill in the gaps. Medigap policies commonly take care of co-payments and over-limit expenses, for example, in exchange for a small premium. Due to past problems with disreputable Medigap providers, experts recommend that individuals shop carefully for this type of coverage.


As the nation's second-largest health insurance program, Medicaid provided medical assistance to 52 million low-income Americans in 2004. It was established through Title XIX of the Social Security Act of 1965 to pay the health care costs for members of society who otherwise could not afford treatment. The program is jointly funded by the federal government and the state governments, but is administered separately by each state within broad federal guidelines. Medicaid recipients include adults, children, and families, as well as elderly, blind, and disabled persons, who have low or no income and receive other forms of public assistance. Medicaid also covers the "medically needy," or those whose incomes are significantly reduced by large medical expenses.

Medicaid covers the full cost of a wide range of medical services, including inpatient and outpatient hospital care, doctor visits, lab tests, X-rays, nursing home and home health care, family planning services, and preventative medicine. A large proportion of the Medicaid population is elderly or disabled, and thus also qualifies for Medicare. In these cases, Medicaid usually pays for Medicare premiums, deductibles, and co-payments, in addition to some non-covered services.


Although many Americans plan to rely on Medicare to meet their health insurance needs later in life, the program as it stood in 2000 actually covered only half of an average elderly person's medical costs, according to the American Association of Retired Persons (AARP). Medicare does not provide funds for dental, vision, or hearing care, for example, and 97 percent of the time it does not cover nursing home care. And the program faces significant challenges in the coming years as the baby-boom generation reaches retirement age.

The United State's Congressional Budget Office (CBO) projects that the Medicare program will run a $5.8 trillion cumulative deficit during the period 20032026 when the transfers that the trust fund receives from the general fund are excluded. This means that the revenues coming into the system will be far short of the funds the system will need to pay out. The CBO summarizes the situation this way in its report The Impact of Social Security and Medicare on the Federal Budget. "The looming fiscal strains are not a temporary phenomenon caused by the retirement of post-World War II baby boomers over the next few decades. They reflect a growing imbalance driven by currently prescribed entitlements as well as long-lasting and powerful demographic trends that could have major unfavorable consequences for the economy. Enacting changes to the Social Security and Medicare programs sooner is better than enacting them later because future beneficiaries would have longer to prepare, because the revisions could be less drastic, and because the changes could enhance economic growth."

The question is not whether or not changes will be made but when will they be made and how will they effect future retirees. All Americans need to include some form of contingency planning for post retirement health care coverage as a part of their retirement planning. And the same advice that the CBO offers our legislature in terms of the benefits of taking action early applies to individuals. The sooner one takes action to plan for the future, the longer one will have to prepare and the less dramatic the process may be.


Caplan, Craig. "What Share of Beneficiaries' Total Health Care Costs Does Medicare Pay?" American Association of Retired Persons (AARP). Available from September 2002.

Connolly, Ceci. "OMB Says Medicare Drug Law Could Cost Still More." Washington Post. 19 September 2004.

"Medicare Requires Serious Help." Business Insurance. 11 September 2000.

Shapiro, Joseph P. "Medicare's Drug Woes." U.S. News & World Report. 21 February 2000.

"Trend: U.S. health spending projections for 20042014." Medical Benefits. 30 March 2005.

U.S. Congressional Budget Office. "The Impact of Social Security and Medicare on the Federal Budget." Available from 14 November 2002.

U.S. Government Printing Office. "Budget of the United States Government." Available from Retrieved on 18 April 2006.

U.S. Social Security Administration. "Status of the Social Security and Medicare Programs." Available from 23 March 2005.

Wolosky, Howard W. "The Growing Medical Care Component of Retirement Planning: Planners must deal with rapidly rising costs, a confusing Medicare prescription drug program, and a decrease in employer-paid benefits." The Practical Accountant. March 2006.

                              Hillstrom, Northern Lights

                                updated by Magee, ECDI

Medicare and Medicaid

views updated Jun 08 2018


MEDICARE AND MEDICAID. In most industrialized countries virtually everyone receives government-ally insured health care. The uniquely expensive U.S. medical system, however, consigns most citizens to private health insurance or to none at all. Medicare (federal government health insurance covering the costs of private medical care for seniors and, after 1972, the long-term disabled) and Medicaid (means-tested coverage for the medical expenses of the poor, jointly paid for by federal and state governments) stand as notable exceptions, accounting for one of every three dollars spent on health care in the 1990s.

Since the 1910s major government reform of the U.S. health care system has often seemed just around the corner. Despite overwhelming public support, it has usually foundered on pressures from the medical establishment; claims that these programs were socialist vehicles that would confer undeserved benefits on many who could be perfectly well served by hospital charity wards, private health insurance, and the private market; and predictions of burdensome, unsustainable expense along with an impersonal bureaucracy that would undermine family responsibility and the sacred doctor-patient relationship. President Franklin D. Roosevelt thus omitted health insurance from his social security proposals in the 1930s. President Harry S. Truman's proposed National Health Act in 1945 for compulsory medical expense insurance succumbed to conservative partisanship and an attack from the arch enemy of government health care activism, the American Medical Association (AMA), the medical profession's well-funded organizational center.

With the vast expansion of private health insurance, particularly union-negotiated medical plans, in the 1940s, government plans seemed doomed, but in the 1950s key officials in the Social Security Administration, a group commonly at the core of U.S. welfare state expansion, shifted strategy. To make government health insurance more politically marketable, they proposed that it be confined to seniors and tied to the hugely popular old age insurance social security program. After all, older Americans, who had to stretch far smaller than average incomes to cover far greater than average medical needs, could scarcely be cast as unworthy welfare cheats. The private health care market for the elderly had clearly fallen short; almost half of them in 1965 possessed no health insurance at all.

By the late 1950s government health insurance for seniors was backed by organized labor and many Democrats, including the candidate and future president John F. Kennedy, who recognized Medicare as a popular mobilizing campaign issue. Kennedy never was able to push the program through either house of Congress, and even the clear commitment and legendary legislative skills of his successor Lyndon B. Johnson at first could only secure Senate passage. In 1965, however, Kennedy's martyred legacy plus a strong economy and the overwhelming Democratic congressional majority elected on the coattails of Johnson's 1964 landslide combined to pass by partisan votes the Social Security Amendments of 1965, which established both Medicaid and Medicare as part of Johnson's triumphant Great Society. To honor former president Truman, Johnson signed the bill at the Truman Library in Independence, Missouri, on 30 July 1965.


Medicaid's enactment proved less of a legislative struggle than Medicare's. Medical interests saw some virtue in the government picking up the tab for hospital or doctor bills of "charity cases, " and confining government-funded health care to the poor was a common fallback position for opponents of more wide-ranging plans. As early as 1950, states had been allowed to make payments under federally subsidized welfare programs directly to hospitals, nursing homes, and doctors. An amendment to the Social Security Act in 1960 (the Kerr-Mills program) beefed up these so-called "vendor payments" for the elderly poor while adding coverage of the "medically indigent" elderly, whose health care expenses would otherwise leave them impoverished. In 1965 a new medical assistance program, administered by states but with federal matching grants funding 50 to 83 percent of expenditures, extended this coverage of medical costs from the elderly poor to low-income people of all ages.

This Medicaid program had a marked impact. By 2001 it paid for a third of all births and almost two-thirds of all nursing home patients, and it covered one-fifth of American children. It allowed the poor to receive much more care from doctors and hospitals (now desegregated, thanks in part to the financial leverage provided by Medicare and Medicaid) than previously, because the poor had often postponed treatment until they required emergency-room care. While two-thirds of its recipients by the 1990s were children and nonelderly low-income women, Medicaid served as a safety net for the American medical system, assisting in coverage ranging from the elderly poor's Medicare premiums and copayments to prescription drugs to long-term institutional services for the developmentally disabled and AIDS patients. It carried the stigma, however, of welfare, and wide disparities among state programs assured that many who needed medical treatment would receive inadequate coverage or none at all.


Medicare, by contrast, was a federally administered, contributory, social insurance program, provided to Americans, rich and poor alike, aged sixty-five and over as a right they had purportedly earned through the earmarked social security hospital insurance taxes paid by their employers and themselves over their working lives. The AMA and other Medicare opponents sought to limit the government's role by proposing a last-ditch alternative of government-subsidized voluntary private insurance for needy seniors. This "eldercare" plan, they noted, would cover a wider range of medical services, including doctor bills, than the original Medicare bill. The rural Arkansas Democrat Wilbur Mills, the powerful and previously obstructive chair of the House Ways and Means Committee, cannily adapted this alternative into a new Part B of Medicare. Thus Medicare Part A, financed by payroll taxes on employers and employees, reimbursed recipients for ninety days of hospital care per single "spell of illness" and another hundred days of posthospitalization nursing home care plus additional home nursing visits. Part B, "Supplementary Medical Insurance, " offered Medicare recipients a voluntary government insurance program that combined monthly premiums deducted from social security checks with even more substantial subsidies from federal general-revenue funds to pay for doctor visits, ambulance charges, and certain lab tests (though significantly not out-of-hospital prescription drugs, which eat up a sizable share of the out-of-pocket medical expenses that have long required more than a fifth of the annual incomes of Medicare beneficiaries).

Post-1965 History

Despite or perhaps because of the gap between the perception of Medicare as an earned benefit and the reality that most of this program's costs were financed from current social security taxes and government subsidies rather than from the accumulated lifetime contributions of the elderly themselves, Medicare became popular. But it also proved much more expensive than advocates had anticipated, even though the Social Security Administration's overhead to administer the program was gratifyingly low.

To gain the cooperation of medical interests who had opposed Medicare as intrusive "socialized medicine, " Medicare originally had no cost-control provisions to speak of. Being guaranteed reimbursement of all customary or reasonable fees, hospitals and doctors cashed in, pushing up medical prices far faster than general inflation, and provided medical services, lab tests, and technologies that a more cost-conscious system might have precluded. Medicaid reimbursement rates were less generous, enough so that many doctors refused to participate. Even so, Medicaid expenditures also rocketed, fueled less by sensational cases of provider fraud than by a combination of greater use of medical services and a manyfold increase in the number of recipients (by 2001 it covered 44 million low-income Americans). With exceptions, such as the financial incentive provided for states to move the chronically mentally ill from state-supported mental hospitals to overcrowded but Medicaid-eligible nursing homes, this program growth was a boon for the health of the poor but an increasingly resented bust for state budgets (in 2001 Medicaid was the fastest-growing item in most state budgets, accounting for nearly a fifth of their outlays).

Also facing mounting costs, Medicare kept increasing payroll taxes, deductibles, and copayments; established systems to limit allowable charges by hospitals and doctors; and encouraged enrollment in health maintenance organizations. Medical schools and their teaching hospitals, which had provided most of the free or below-cost charity ward care for the poor, were in turn transformed by these new streams of revenue, shifting faculty time from research and teaching toward now more lucrative clinical practice. As the United States entered the twenty-first century and faced the prospect of a declining ratio of contributing taxpayers to baby boom retirees, Medicare, Medicaid, and medical and pharmaceutical costs in general approached financial crisis, assuring further reform.


Berkowitz, Edward D. America's Welfare State: From Roosevelt to Reagan. Baltimore: Johns Hopkins University Press, 1991.

———. Mr. Social Security: The Life of Wilbur J. Cohen. Lawrence: University Press of Kansas, 1995.

David, Sheri I. With Dignity: The Search for Medicare and Medicaid. Westport, Conn.: Greenwood Press, 1985.

Ludmerer, Kenneth M. Time to Heal: American Medical Education from the Turn of the Century to the Era of Managed Care. New York: Oxford University Press, 1999.

Sundquist, James L. Politics and Policy: The Eisenhower, Kennedy, and Johnson Years. Washington, D.C.: Brookings Institution, 1968.

Zelizer, Julian E. Taxing America: Wilbur D. Mills, Congress, and the State, 1945–1975. New York: Cambridge University Press, 1998.

Mark H.Leff

See alsoSocial Security .

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