Medicare: Complex but Essential, a Mirror for Reform?

As Congress stands poised to make the most sweeping change to the U.S. healthcare system since the creation of Medicare, a look back at the incremental growth in that program may serve as a harbinger for the progress of healthcare reform.

The program -- which provides insurance for some 43 million elderly and disabled people -- is considered both a huge success that has markedly improved the health of the nation's elderly and an unbelievably complex, unsustainable program that accounts for an ever-increasing portion of the federal budget.

"It's a bizarre program that is absolutely essential to American healthcare," said Theodore Marmor, a professor of public policy at Yale, and author of the book The Politics of Medicare.

Feelings about Medicare vary from interest group to interest group.

Most patients who are enrolled in Medicare like the program. "It's been very successful in getting seniors access to care that they hadn't had before the program," explained Gail Wilensky, an economist at the Galen Institute and administrator of the Health Care Financing Administration in the early '90s.

Before Medicare was created in 1965, only about 55% of seniors had health insurance, said Stuart Guterman, an economist at the Commonwealth Fund.

Physicians, however, have had a love/hate relationship with the program. The onus has fallen on them to attempt to keep medical costs down, and yearly over at least the last decade they've had to fight proposed draconian cuts in reimbursement. But for some physicians, Medicare has proven to be their most reliable payer.

Republicans worked hard to stop the program from becoming law in the 1960s, and still use Medicare as an example to illustrate how Congress can legislate the country into an unsustainable fiscal path. But, at the same time, they decry proposed cuts to the privately-run Medicare Advantage plans in the healthcare reform bill.

Democrats generally consider Medicare one of the most successful social programs in history, and even briefly entertained a notion to allow younger people to buy in to the program under this most recent round of healthcare reform discussions.

Big Changes 25 Years Ago

Medicare underwent its first major overhaul when "diagnosis related groups" -- DRGs -- entered the medical lexicon in 1983. By 1984 hospital payments were determined prospectively on the basis of a patient's diagnosis rather than on daily charges.

DRGs were developed at Yale by economists as a way to do quality comparison by creating codes to cover different hospital procedures. DRGs were an economic theory -- a way of comparing hospitals and the services they provided -- but were not intended to be translated into a major form of financing, Marmor said.

But Medicare officials hoped to cut program costs, creating a new payment system that would encourage hospitals not overutilize medical resources. Instead of paying for each medical service and what it costs the hospital, Medicare began paying for what it deemed the "average" cost to treat a patient with a particular diagnosis.

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