© 2008 Delmar Cengage Learning.

Chapter 14

Medicare:

The Great Transformation

John Oberlander

© 2008 Delmar Cengage Learning.

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Medicare: Offspring of NHI Failure

• Medicare has its roots in 1910s struggle for national health insurance (NHI)

• After repeated policy failures:– Proponents limited ambitions– Sought to expand coverage to “deserving”

group• The elderly

© 2008 Delmar Cengage Learning.

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Medicare: Offspring of NHI Failure

• Champions of NHI then hoped Medicare would be incrementally expanded to cover all Americans

© 2008 Delmar Cengage Learning.

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Legacies of Founding Compromise

• To achieve passage:– Medicare proponents were forced to

compromise with conservatives on a host of fronts

– These compromises made it nearly impossible to expand Medicare later

© 2008 Delmar Cengage Learning.

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Provider Accommodation Under Medicare• Compromises were also made with medical

providers

• Payments under Medicare were to be determined by hospitals, doctors

• Led to long-term increases in cost of program

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Effects of Accommodation

• “Blank check” to physicians, hospitals led to dramatic increase in cost of program

• Financial “crises” common in first years of program

© 2008 Delmar Cengage Learning.

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Effects of Accommodation

• Pressure to reform:– Led to institution of Diagnostic-Related Groups

(and successors) in 1980s

© 2008 Delmar Cengage Learning.

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Managed Care and Beyond

• Prospective payment systems lowered cost of Medicare program– But providers made up the difference by

shifting higher costs to private customers

• Businesses responded to higher costs by moving into managed care

© 2008 Delmar Cengage Learning.

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Managed Care and Beyond

• Pressure then built with Republican Revolution of 1994-95 for Medicare to post savings– Incorporate principles of managed care

© 2008 Delmar Cengage Learning.

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The Medicare Modernization Act (2003)

• Passed under President Bush– Complicated program represented vast

expansion of Medicare into prescription drugs

• Prominent role retained for private insurers

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The Medicare Modernization Act (2003)

• Savings partly attained through unique “doughnut-hole” structure– In which benefits curtailed for those facing

middling costs

© 2008 Delmar Cengage Learning.

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Chapter 14 Summary• Medicare was the orphan of the national

health insurance debate• Circumstances at enactment have had

profound effects on the way the program has unfolded

• Providers accommodated by program framers, particularly in terms of payment structures, amounts

© 2008 Delmar Cengage Learning.

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Chapter 14 Summary

• Political accommodation led to spiraling costs– Which were then controlled through

prospective payment systems

• Resultant cost shifting led business to move to managed care plans– Which were later introduced within Medicare