Securing Medicare's Fiscal Integrity and Reducing the Threat of Privatization

  • Date: Nov 06 2007
  • Policy Number: 200716

Key Words: Medicare

Medicare, since its creation in 1965, has been a keystone of the nation’s public medical care structure. It has been the nation’s salient example of social insurance1 in medical care—an eminently successful example. Most of its architects regarded it as a potential basis for universal health care.

Medicare’s enduring popularity is attributable largely to its universality, its administrative efficiency, the broad choice of caregivers it has afforded, and a measure of fairness in its financing. These attributes have, in fact, led many to advocate it as an ideal prototype for universal health care, although physicians have criticized it in recent years as reimbursing them inadequately for their services and important gaps in services covered have only recently begun to be addressed. The fairness and efficiency of Medicare rest in good part on the breadth of the risk pool it has attained by virtue of the extent to which the eligible population has enrolled in it. The American Public Health Association (APHA) policy has consistently supported a strong, effective Medicare program.3–7 However, Medicare has been so badly undermined by legislation enacted in 2003 that its survival as an effective program is at great risk unless Congress takes bold action to undo the damage.

Problem Background

From the beginning of the Medicare program in 1966, there were arrangements for coverage of beneficiaries through prepaid health care organizations. However, until passage of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), organizations that provided managed care to Medicare beneficiaries were few and far between. TEFRA simplified the contracting requirements and was the first successful assault on the near-universality of the traditional Medicare program.8 By 1997, the popular backlash against managed care had badly eroded the private share of the Medicare market. Congress responded by further amending the Medicare law to enable creation of private fee-for-service optional plans—“Medicare+Choice” or Medicare Part C.9 However, despite financing that was biased in the private sector’s favor, insurance companies found the program insufficiently profitable and soon abandoned it.10 An obliging federal administration and Congress responded by enacting the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA).11

Amid wide popular demand for a Medicare prescription drug benefit and under the influence of massive industry lobbying,12 legislation emerged with multiple provisions that were calculated to undermine Medicare’s social insurance character. Only 1 of the MMA’s 12 titles is concerned with the drug benefit. The majority of the others serve to promote private alternatives to traditional Medicare while shrinking the public program’s access to resources. Concern with such developments is consistent with APHA’s historic recognition of the profit motive’s damaging impact on health care access and quality.13–15

MMA’s Damaging Provisions

  1. The rising cost of the Medicare program reflects general health care cost trends and growth of the beneficiary population due to aging. The 2007 report of the Medicare Trustees forecast depletion of the Part A (hospital insurance) trust fund by 2019.16 A strategy for addressing this issue responsibly requires controlling underlying cost drivers and optimizing the allocation of available resources. However, in the guise of a Medicare cost control measure, the MMA attacked the revenue underpinning of social insurance: it framed the issue of cost containment in Medicare mainly as a matter of limiting Medicare’s access to the income tax revenues it has depended on since Medicare Part B (medical insurance) was created.17 It set an alarm, an alarm to pressure Congress to cap that revenue stream arbitrarily18 at 45% of the Medicare program’s total cost. This alarm, as it happened, went off in the spring of 2007. The alarm was based on cost projections by the Medicare trustees, projections looking 7 years ahead. In his FY 2008 budget, the president has indicated that in response to the alarm, he will be proposing a programmed series of annual reimbursement cuts to providers.19 The MMA requires Congress to consider the president’s recommendation and to consider it under highly restrictive “fast track” rules that limit amendment and debate. Although the MMA does not require US Congress to act on the recommendation, observers believe the US Congress will feel considerable pressure to do so.20,21 Such a series of cuts would likely drive more and more physicians away from Medicare.
  2. To induce private medical care insurers to participate in Medicare, the MMA overpays them. Notwithstanding the fact that the private plans’ enrollees are healthier than the average Medicare beneficiary, Medicare pays these “Medicare Advantage” plans an average of 12% more than it pays under Medicare’s traditional (indemnity) coverage option. The Congressional Budget Office estimates that this overpayment will cost Medicare $160 billion over a decade.22 
  3. Under Title VIII, Subtitle B, the MMA introduced means testing of premiums for Medicare Part B. With premium differentials now being phased in, premiums by 2009 for beneficiaries with the highest incomes are slated to be more than triple the regular premiums.23 But higher income beneficiaries were already paying more before the MMA—in payroll tax contributions and income taxes. Means-tested premiums are an incentive for higher income eligible beneficiaries to avoid enrolling in Medicare. Thus, means testing undermines the universality of the Medicare program and erodes its popular base of political support.
  4. Under the rubric “comparative cost adjustment demonstration project,” the MMA provides for an experiment with a defined contribution plan, often dubbed “premium support.” Under this provision, effective in 2010, all Medicare beneficiaries in at least 6 metropolitan areas are to start getting vouchers.24 A “defined contribution” voucher, to help buy unreliable private insurance in an uncertain market, would replace what, since Medicare’s beginning, has always been an entitlement to care—a “defined benefit.” Beneficiaries will choose between the traditional plan and 2 or more private plans. But continued enrollment in the traditional plan will no longer ensure one that the full Part A premium is covered, so beneficiaries, increasingly, could find themselves squeezed for additional cash to buy their accustomed level of coverage. This kind of “choice” may force them to decide between their spouse’s medical treatment and paying the rent. Traditional Medicare already affords the choice beneficiaries really want—choice of health care providers without fear of financial risk.
  5. As judged by prices paid by other federal programs, the prescription drug option created by the MMA as Part D of Medicare results in great overpayments to the pharmaceutical industry, overpayments that are helping drive Medicare’s general revenue cost rapidly to the 45% ceiling established by the very same legislation.25 This is mainly because the MMA bars the government’s using its purchasing power to negotiate drug prices on behalf of Medicare. A contributing cost factor is the involvement of private insurers to administer Part D. It has been estimated that these factors in combination will impose on Medicare excess costs totaling more than $600 billion over the period 2006 to 2013. Were such a saving realized, there would be no need for the infamous “doughnut hole” coverage gap in Part D.26–28 Of the government’s total cost for Part D, one fourth is derived from premiums, the rest is from general federal revenues. Consequently, the program’s needlessly high prices are unduly burdensome both to beneficiaries and to taxpayers at large.


The American Public Health Association calls on Congress— 

1. To initiate a congressional study of Medicare’s long-term financing, examining overall health system cost factors and ways to control cost growth, with a view toward ensuring Medicare’s fiscal integrity while continuing to ensure beneficiaries’ access to appropriate health care and their freedom from health care–related financial stress.
2. To create a prescription drug benefit that is entirely within the traditional Medicare program and for which the Medicare program is able to negotiate drug acquisition prices. 
3. To eliminate large Medicare related subsidies to private insurance companies, such as the overpayments to private “Medicare Advantage” plans, and pay them at the same rates as traditional Medicare.
4. To reject the president’s proposed measures that would implement a 45% cap on the general revenue component of Medicare funding.
5. To repeal the arbitrary statutory cap on the general revenue component of Medicare funding.
6. To eliminate means testing in relation to Medicare Part B premiums.
7. To repeal the comparative cost adjustment demonstration project.
8. To develop and disseminate a detailed review of the impact of health promotion, disease prevention, and early intervention services on the demand for and aggregate cost of Medicare-funded health care services.


  1. National Academy of Social Insurance. What is Social Insurance? Available at: www.nasi.org/publications3901/publications.htm. Accessed December 11, 2007.
  2. Ball RM. What Medicare’s architects had in mind. Health Aff. 1995:14(4):62–72. 
  3. American Public Health Association Policy Statement 88-01. Mandatory Medicare assignment. Washington, DC: American Public Health Association; 1988. Available at: www.apha.org/advocacy/policy/policysearch/default.htm?id=1163. Accessed December 11, 2007.
  4. 1998. Available at: www.apha.org/advocacy/policy/policysearch/default.htm?id=155. Accessed December 11, 2007.
  5. American Public Health Association Policy Statement 99-06. Protecting Medicare beneficiaries. Washington, DC: American Public Health Association; 1999. Available at: www.apha.org/advocacy/policy/policysearch/default.htm?id=177. Accessed December 11, 2007.
  6. American Public Health Association Policy Statement 99-34(PP). Protecting and strengthening Medicare: financing and prescription drug issues. Washington, DC: American Public Health Association; 1999. Available at: www.apha.org/advocacy/policy/policysearch/default.htm?id=205. Accessed December 11, 2007.
  7. American Public Health Association Policy Statement 2001-8. Establishment of a Medicare prescription drug benefit. Washington, DC: American Public Health Association; 2001. Available at: www.apha.org/advocacy/policy/policysearch/default.htm?id=247. Accessed December 11, 2007.
  8. Moore JD. Medicare Managed Care: Current Requirements and Practices to Ensure Accountability. Available at: http://books.nap.edu/openbook.php?record_id=5299&page=326. Accessed June 18, 2007.
  9. Oberlander J. The Political Life of Medicare. Chicago: University of Chicago Press; 2003: 177ff.
  10. Moon M. Medicare+Choice: an Evaluation of the Program. Testimony Before the House Committee on Commerce, Subcommittee on Health and Environment. Washington, DC: Urban Institute. August 4, 1999. Available at: www.urban.org/url.cfm?ID=900257&renderforprint=1. Accessed June 18, 2007.
  11. Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Public Law 108-173. Accessed June 18, 2007 at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_cong_public_laws&docid=f:publ173.108.pdf.
  12. Public Citizen Congress Watch. The Medicare drug war. Washington, DC: Public Citizen. 2004. Available at: www.citizen.org/documents/Medicare_Drug_War%20_Report_2004.pdf. Accessed December 21, 2007.
  13. American Public Health Association Policy Statement 75-03. Effects of profit motives in health care institutions. Washington, DC: American Public Health Association; 1975. Available at: www.apha.org/advocacy/policy/policysearch/default.htm?id=781. Accessed December 11, 2007.
  14. American Public Health Association Policy Statement 97-02. Protecting health care accessibility and quality in a profit-oriented marketplace. Washington, DC: American Public Health Association; 1997. Available at: www.apha.org/advocacy/policy/policysearch/default.htm?id=136. Accessed December 11, 2007.
  15. Available at: www.apha.org/advocacy/policy/policysearch/default.htm?id=150. Accessed December 11, 2007.
  16. Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. 2007 Annual Report. Washington, DC: Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds; April 23, 2007. Available at: www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2007.pdf. Accessed June 18, 2007.
  17. Reference 11, Title VIII, Subtitle A—Cost Containment. 
  18. Greenstein R, Kogan R, Park E, Horney J. Trustees’ Report Focuses Attention on
  19. Misguided Medicare “45-Percent Trigger.” Washington, DC: Center on Budget and Policy Priorities; 2006. Available at: www.cbpp.org/4-28-06health.htm. Accessed June 18, 2007.
  20. US Department of Health and Human Services. FY 2008 budget in brief. p. 58. Available at: www.hhs.gov/budget/08budget/2008BudgetInBrief.pdf. Accessed June 18, 2007.
  21. Moon M. The Policy Implications of Medicare’s New Measure of Financial Health. Kaiser Family Foundation Policy Brief. October 2005. Available at: www.kff.org/medicare/upload/7414.pdf. Accessed December 21, 2007.
  22. Alliance for Health Reform and the Robert Wood Johnson Foundation. Health Legislation 2007–2008: What’s possible? December 13, 2006. Available at: www.kaisernetwork.org/health_cast/uploaded_files/121306_alliance_legislation_transcript.pdf. Accessed June 18, 2007.
  23. Orszag P. The Medicare Advantage Program: Trends and Options. CBO Testimony Before the Subcommittee on Health, Committee on Ways and Means, US House of Representatives. March 21, 2007. 
  24. Pauly MV. Means-testing in Medicare. Health Aff [Web exclusive]. December 8, 2004. Available at: http://content.healthaffairs.org/cgi/content/full/hlthaff.w4.546/DC1. Accessed June 18, 2007.
  25. Reference 11, Title II, Subtitle E—Comparative Cost Adjustment (CCA) Program. Families USA. No Bargain: Medicare Drug Plans Deliver High Prices. Washington, DC: Families USA; 2007. Available at: www.familiesusa.org/assets/pdfs/no-bargain-medicare-drug.pdf. Accessed June 17, 2007.
  26. Congressional Budget Office. A detailed description of CBO’s cost estimate for the Medicare prescription drug benefit. July 2004. Available at: www.cbo.gov/ftpdoc.cfm?index=5668&type=0&sequence=0. Accessed June 18, 2007.
  27. Baker D. The Savings From an Efficient Medicare Drug Plan. Washington, DC: Center for Economic and Policy Research; 2006. Available at: www.cepr.net/documents/efficient_medicare_2006_01.pdf. Accessed June 17, 2007.
  28. Baker D. The Excess Cost of the Medicare Drug Benefit. Washington, DC: Institute for America’s Future and Center for Economic and Policy Research; 2006. Available at: www.ourfuture.org/docUploads/Excess%20Cost%20-%20Med%20Drug%20Benefit.pdf. Accessed June 17, 2007.

Back to Top