Government Intervention & The Birth of Medicare

Arend Pryor

Jan 3, 20228 min read

Updated: Jan 17, 2022

Author: Arend Pryor | Created: 06/12/2021

Details: Sharing content created as part of pursuing my MBA degree

Assignment Details: Analyze the following government intervention area and one of its programs:

Social insurance programs: (Choose 1):
- Old Age, Survivors, and Disability Insurance (OASDI)
- Medicare
- Unemployment insurance

Write an analysis in which you address the following:

Analyze the arguments for government intervention versus those for market-based solutions. Hint: See the information about market failures.
Examine who has been helped and who has been hurt by the selected government intervention.
Examine externalities and unintended consequences of the intervention.
Explain whether the cost of the intervention you selected, as a share of GDP or the number of participants, is increasing, decreasing, or varying with the state of the economy. Your analysis should be based on the cost trend (or number of participants) since 2000 or since its inception if after 2000.
Analyze credible economists’ opinions on the success or failure of the intervention in achieving its objectives.
Recommend whether the program should be continued as is, discontinued, or modified based on your conclusions. Defend your recommendation.

The idea of providing healthcare coverage for all qualifying Americans, is one that dates back more than 100 years. President Teddy Roosevelt included it as part of his presidential campaign when he ran for office in 1912, however, his plans never came to fruition. Efforts to try and implement such a system continued with President Truman and then again with John F. Kennedy, however, both were unsuccessful despite studies they conducted showing that 56 percent of U.S. Citizens over the age of 65 had no form of health insurance. After more than 50 years and several proposals, Medicare became available for those over the age of 65 following legislation signed by President Lyndon B. Johnson. Ironically, the first two recipients of Medicare were Harry Truman and his wife Bess in recognition of their previous efforts (Behring, 2021). As of 1972, President Nixon signed legislation for the first ever changes to the Medicare program making it available to people under the age of 65 who were identified as having long-term disabilities. Additional changes followed in the years to come with the most recent being emergency alterations made in light of the COVID pandemic. As of 2021, more than 63 million people have become beneficiaries of the program (Anderson, 2021).

Now, there are those who argue in favor of government intervention when it comes to existing healthcare programs such as Medicare, and those who would rather see a market-based system implemented along with its potential benefits. For instance, the idea of Medicare for All, which would most certainly require government intervention as proposed by Senator Bernie Sanders, would include benefits such as no out-of-pocket costs, the ability to choose your doctor and/or hospital, and drastic reductions in health care spending. Many feel this would also bring about the use of a consistent set of rules leading to less confusion and decreases in administrative costs (Archer, 2019). Areas seen as problematic with Medicare.

Additional arguments in favor of a market-based system point to company cultures that would encourage continuous improvements to productivity as a result of competition. A trait not seen in most government intervention programs. The level of innovation seen in market-driven programs has also shown to be higher, not just in terms of medical advances, but also with regard to approaches that lead to lower costs for plan members (Capretta, 2018). Consumers of a market-based program would also have the ability to compare pricing when deciding where to obtain a particular service, such as an MRI, giving them more control.

In terms of those who are hurt by this governmental program, this surprisingly includes Medicare recipients who are hit financially with the cost of things Medicare does not cover. When you take into account the vast population of Medicare beneficiaries, this financial impact can have a very wide reach. Not only does this include older adults, but also those under the age of 65 with disabilities or special needs, including adults, teens, and young children (Scott, 2019).

Examples of costs not covered by Medicare are those incurred as a result of long-term care, dental coverage, and the cost of hearing aids, all of which would be out of pocket expenses (Lankford, 2018). High costs also impact those over the age of 85, who on average require up to three times more care than Medicare beneficiaries between the ages of 65 and 74 (Scott, 2019). The expensive cost of Medicare also hits taxpayers, who in 2018, contributed payroll taxes, which accounted for 36 percent of the funds used by the Medicare program (Scott, 2019).

The healthcare industry offers several examples of positive externalities that impact patients and by-standers without they themselves having to directly contribute. The research, manufacturing and administration of vaccines for instance can offer positive benefits to Medicare recipients in the form of lower costs when governments step in and mandate the use of a vaccine. By-standers will also obtain positive externalities from those who are vaccinated by way of lower transmission rates from those who are vaccinated. Advances made in the healthcare industry via medical research would also present themselves as positive externalities in the form of new medications, improved treatment options, or more efficient processes, all of which would benefit Medicare beneficiaries (Mankiw, 2017).

Looking at the Medicare program and the topic of unintended consequences, the issue of fraud, waste and abuse within the healthcare industry comes to mind. Despite numerous regulations and requirements implemented for doctors, patients and hospitals, these issues cost the federal government as well as taxpayers billions of dollars each year. This comes in the form falsifying records, kickbacks from referrals, and billing for services which have not been rendered.

Healthcare costs have historically been high and these costs have continually increased on an annual basis. Not surprisingly, experts have estimated that the cost of Medicare, as a percentage of Gross Domestic Product (GDP), will rise from 3 percent annually as of 2019 to an estimated 6.1 percent in 2049 as shown in figure 1 below. This is the second largest government program in the federal budget and as of 2019 it required spending $644 billion annually, making up 14% of total federal spending. This is due largely in part to the retirement of baby boomers, increases in life expectancies, and of course rising healthcare expenses (Budget Basics: Medicare, 2021).

Figure 1: Medicare Spending – Actual vs Projected (Budget Basics: Medicare, 2021)

Looking at the chart in figure 2 below, we can also see that aside from a brief period between 2001 and 2004, annual enrollment in Medicare has continued to increase annually and is projected to continue to do so in the foreseeable future (Total Medicare Private Health Plan Enrollment, Current and Projected, 2016).

Figure 2: Medicare Enrollment – 1992 - 2026 (Total Medicare Private Health Plan Enrollment, Current and Projected, 2016)

Based on research into how economists’ feel about the successes and failures of the current Medicare system in achieving its objectives, the majority feel there are room for improvements. This seems to be based on a comparison of the current system with the Medicare for All (M4A) program being proposed by the likes of Senator Bernie Sanders. Overall, economists such as Jeffrey Sachs, Robert Reich and Alison Galvani feel there are significant opportunities to cut costs in multiple areas within the current system. For example, cases can be made that administration, waste, and profiteering are several areas where problems and process inefficiencies exist. Economists’ think that implementing a program such as M4A would result in cost savings of hundreds of billions of dollars annually from improvements in these areas (The Hopbrook Institute, 2020). Based on this feedback, my thoughts are that economists feel that the largest issues with Medicare have to do with the fraud, waste and abuse, which are somewhat common in the healthcare industry, but areas where education and intervention is needed to bring down expenses.

To continue the discussion above regarding the adoption of the Medicare for All program, many economists feel that moving to this model would be beneficial for its potential beneficiaries and even more so due to the annual cost savings when compared to Medicare. However, this would largely depend on decisions regarding the structure of the M4A program. As we have seen, the current program helps millions of Americans to get the coverage they need, however, the annual costs are growing at a concerning rate and enrollment is projected to grow from 17.6 million as of 2016 to 30 million by 2026 (reference figure 2 above), resulting in continued increases in annual costs (Total Medicare Private Health Plan Enrollment, Current and Projected, 2016). Based on the information covered in this report, my thoughts are that the current Medicare program should be modified significantly to address its current issues, however, I would lean more towards discontinuing the program and working on the specifics of the Medicare for All program. The largest issues with the current plan seem to be centered on excess annual costs, which most feel is due to healthcare corporations and drug companies that are not being constrained from charging excess amounts. As previously mentioned, the issues of waste, fraud and abuse also continue to plague the industry and are in need to policing (Arno & Caper, 2020). While moving to a new plan would have its challenges, Americans could get the care they need without the price tags they increasingly cannot afford. Something taxpayers would most certainly benefit from as well.

In some respects, the U.S. Government can seem like a superior that micromanages your projects, or a parent that steps in and intervenes on your behalf when mistakes are made in order to prevent further failures. With regard to government intervention such as Medicare, we saw the process taken by several presidents to implement a healthcare program aimed at providing Americans with the healthcare solution that was surely needed in our economy and how this intervention came about. We reviewed arguments for government intervention programs such as Medicare and compared this with the advantages of a market based system. With so many older adults in need of healthcare coverage in the U.S., we saw how Medicare has benefitted this population and talked about those hurt by its use. Following this, we looked at vaccinations and medical advances as externalities in the healthcare industry and the issues of fraud, waste and abuse as unintended consequences in the process. On the data side of the house, we looked at the cost of Medicare as a percentage of GDP as well as historical enrollment data along with projections for the future. Finally, some of the feedback provided by top economists was shared on the subject of the current issues with Medicare, which then led into the recommendation of making modifications to the current system or moving to the proposed M4A program in an attempt to curb issues with skyrocketing annual costs. While government action is not always welcomed, it typically comes when voices are not being heard and help is needed to get things back on track and on the way to growth and prosperity.