What is Medicare? How did it start? What makes it so great?

Every US citizen gets Medicare when they turn 65 or qualify through disability status. Today, there are over 45mm people on the program. That’s roughly the same number of people who are uninsured, and about a fourth of the number who get health insurance through the commercial market (ie. their employer, spouse, or parents). The Medicare program itself is divided into 4 parts called Part A (hospital insurance), Part B (physician insurance), Part C (Medicare Advantage or private Medicare), and Part D (prescription drug insurance). Traditional Medicare includes Parts A and B. A senior can choose Medicare Advantage (Part C), which replaces traditional Medicare coverage. Medicare Advantage can also be known as privatized Medicare or as Obama called it in his speech to Congress the “Medicare voucher program.” Seniors can opt into Part D at any time but pay a penalty for opting in later than 65. Confused yet? We’ve barely scratched the surface.

Traditional Medicare is a fee-for-service insurance program or an indemnity program. This means a patient can go to any willing provider in America to get their healthcare. What that effectively means is that they can go to any hospital and almost any physician to get treatment. This is vastly different from what we may be used to in the commercial market, which is dominated by network products. We are familiar with the concepts of in-network and out-of-network (and if you’re not, you’ll figure it out when you start working) and the cost savings associated with going in-network.

So how did Medicare get started, why do some Congressmen believe Medicare or a program like it is the answer to all our problems, and what are its flaws?

In the 1960s, Lyndon B. Johnson overcame a lot of political hurdles to cover the nation’s sickest and most vulnerable population, the elderly. This was an admirable goal, and the debate over whether or not to have this program was remarkably similar to the one we have today. Think about it – huge public plan, criticized that it was going to be a Trojan Horse to government take over, promises by supporters that it could support itself through premiums and modest taxes. That didn’t exactly work to plan.

It is believed by some Congressmen that Medicare is an efficient, popular program that should be expanded to the entire population – boom all problems solved. In fact, Pete Stark of California introduces a “Medicare for all” bill to every new Congress or in other words every 2 years. So, why do people like Pete Stark think of it as efficient? Well the argument is that 1) the administrative costs of Medicare are much lower than a private health insurer and 2) there is no need for profits. To put this into perspective, let’s look into where an average healthcare dollar goes for a for-profit insurance company in the Medicare Advantage space. Roughly 85% of each $1 is spent on medical costs. 10% is spent on administrative costs, and 5% is kept in the form of profits. These numbers vary company to company and product to product, so to be fair in the commercial market these numbers would look closer to high 70s medical costs, mid double digits administrative costs, and high single digit pretax profit margins. The not-for-profits may have something like mid-high 80s medical costs, low-mid double digit administrative costs, and less than 2% profit margins (yes they make something, but they give it back later). To keep the comparison equivalent, we’ll stick to the senior population. So what’s the thought process for efficiency? Eliminate the 15% spent on administrative costs and profits and replace it with the 2-3% of administrative costs borne by the government. The problem…the other 85%!

Next Post: Why is Medicare bankrupting us? Why are the costs out of control?