Chapter One
Medicare and Medicaid
As early as 1949, President Truman introduced legislation to create a universal healthcare program under a national health insurance board within the Federal Security Agency to be funded by a mandatory 1.5% payroll deduction from employees and a matching contribution from employers.1 While introduced annually to Congress throughout his second term in office, legislation enacting universal healthcare as a publicly funded benefit was never passed. Then, as now, it was viewed as a path to socialism and incompatible with the philosophical underpinnings of a nation dedicated to the principles of capitalism. There was also, at the time, little impetus for change.
Employer-based healthcare in 1949 was still relatively new and served the needs of the majority of our population satisfactorily. It could never, however, meet the needs of our entire population and, over time, the clamor for programs to do so grew louder. Three broad groups, in particular, pointed to the inadequacy of employer-based healthcare as the solitary model for healthcare in the United States. Those three groups are the unemployed or marginally employed existing at or below the poverty line, the disabled, and the retired population.
The first two of these three were the easiest to address. The turmoil of the 1960s led to the end of overt racial discrimination and an expansion of our collective social conscience. It was increasingly accepted that American society needed to atone for its previously repressive behavior, behavior which had held the African-American population in the bonds of slavery and then, upon freeing them, denied them an equal right to succeed as Americans. Catharsis required that we, as a society, facilitate advancement of minorities beyond the bonds of poverty. Affirmative action programs were enacted to accomplish this and it was only a natural extension of these policies to enact legislation that would assure the poor access to appropriate medical care. The addition of Title XIX to the Social Security Act in 1965 served that purpose by establishing Medicaid. The addition of the second group, the disabled who were poor through no fault of their own and for whom society had a moral obligation to provide care, was never in question.
Medicaid was established as a program jointly funded by the federal government and the states, with state participation on a voluntary basis. Funding at the federal level was initially derived from the social security taxes collected and generally matched the funding provided at the state level. Because of the voluntary nature of state participation, the eligibility requirements and the services provided under Medicaid varied from state to state.
The third group, the retired population, was now easier to address. The increasingly pervasive opinion that a society has an obligation to provide all the needs of all its members made inevitable the decision to cover medical costs for the elderly following the decision to cover medical costs for the poor and disabled.
With a few exceptions, employer-based healthcare ceased when employment ceased. When few people lived into retirement, this was not a problem. However, the intensity and quality of healthcare services that followed the inception of employer-based healthcare led to longer life spans and served to underscore the inadequacy of employer-based healthcare as a solitary approach to meeting the healthcare needs of the nation. In 1900 the average lifespan was 47 years2. By 1965, the average lifespan was 70 years2. At the time of this writing the average lifespan is 79 years3.
At the same time, the earnings of the average individual post-retirement are far lower than during their employed years while the need for healthcare and the cost of healthcare are at their greatest. Enactment of a publicly funded program similar to Social Security to provide for the medical needs of the elderly was, consequently, viewed as necessary by 1965 and led President Johnson to introduce and help pass legislation establishing Medicare as the healthcare program for the retired and disabled population.
The initial requirements for Medicare eligibility were set by age and disability. Then, as now, eligibility for Medicare began at age 65 for non-disabled adults. Disabled individuals were eligible for Medicare if entitled to Social Security disability benefits for the preceding 24 months. Permanent kidney failure also served as eligibility for Medicare after 1972.
In establishing the operational framework for Medicare, the federal government essentially borrowed the existing framework from the private insurers. Thus, payment for inpatient hospital care was separated from payment for out-patient services. Medicare Part A (also referred to as hospital insurance or HI) was established as mandatory coverage after age 65 and provides a 90 day benefit period for inpatient hospital care. Coverage includes a semi-private hospital room, operating room expenses, anesthesia, imaging studies, diagnostic labs, drugs administered while in the hospital, and blood transfusions with a 3 pint deductible. Those insured by Medicare are responsible for an initial deductible after which Medicare then pays 100% of the charges for the first 60 days of hospitalization. From days 61-90, those insured by Medicare are responsible for daily co pays. If the hospital stay exceeds 90 days there is a lifetime 60 day reserve to extend the benefit period.
Medicare Part A also provides limited payment for stay in a skilled nursing facility. To qualify, those insured by Medicare must first have spent at least 3 days in a hospital prior to transfer to a nursing home and admission to the nursing home must be for the same reason as admission to the hospital. If these conditions are met, Medicare then pays 100% for 20 days. From days 21-100, those insured by Medicare are responsible for a daily co-payment. Medicare pays no benefits beyond 100 days.
Medicare Part B (also known as supplemental medical insurance or SMI) is the framework for payment of out-patient services. This is optional for the Medicare insured and covers a wide range of services provided for illnesses that do not require hospitalization. These include doctor visits, physical therapy, x-rays and lab tests performed in the United States. Medicare Part B does not pay for prescription medication, dental care, podiatry, routine physicals, private nursing care, custodial care of any sort, and care received outside the United States.
Funding for Medicare Part A is provided by a 1.45% tax on employee wages with a matching employer contribution. Funding for Medicare Part B is from premiums charged by the federal government to those insured by Medicare.
The tax on employee wages was initially established as part of the nation’s social security tax. Unlike Medicaid, however, all funding for Medicare was provided at the federal level. Consequently, the total Medicare tax paid was limited by the income limit for payment of the social security tax. With the passage of time, this funding mechanism proved problematic. Increases in expenditures related to increasing lifespan, medical inflation and increased utilization led to larger and larger portions of the funds earmarked for social security being used for Medicaid and Medicare expenses.
Largely to address this problem, Congress in 1977 created The Healthcare Financing Administration (HCFA) within the Health and Welfare Administration to administer both Medicare and Medicaid. With the creation of HCFA, funding of Medicare and Medicaid was separated from funding of Social Security. The creation of the Centers for Medicare and Medicaid Services (CMS) further separated the administration of Medicare and Medicaid from the administration of Social Security. The income limits applied to the collection of Social Security taxes were therefore no longer imposed on the collection of Medicare and Medicaid taxes.
To illustrate, the social security tax is limited to 6.2% of the first $110,100 of earned income in 2012 with a matching contribution from the employer. Thus the maximum social security tax that could be collected per employee is $13,652.40 (12.4% of $110,100). The Medicare tax rate for 2012 is 1.45% of income with a matching contribution from the employer. If the same income limits applied to the Medicare tax as apply to the Social Security tax, the maximum Medicare tax that could be collected per employee would be 2.9% of $110,100 or $3,192.90. The total maximum combined Social Security and Medicare tax that could be collected on behalf of any employee regardless of income would be $16,845.30.
By separating the Medicare tax from the Social Security tax, the federal government was able to eliminate the taxable wage base limitation for the Medicare tax. Thus, an executive earning $1,000,000 would still pay $6,826.2 in Social Security tax but would now pay $14,500 in Medicare tax. His employer would match the $6,826.2 and $14,500 on behalf of this employee for a combined payment of $13,652.4 for Social Security and $29,000 for Medicare on behalf of this employee in 2012. The Social Security and Medicare taxes now collected on behalf of this employee total $42,652.40 rather than the $16,845.30 payable before the taxes were separated.
This separation of the Medicare tax from the Social Security tax has served to substantially increase the revenues paid into Medicare and Medicaid from payroll taxes while simultaneously increasing the proportionate share of Medicare and Medicaid taxes paid by employees with higher earnings and their employers who match those tax payments. This shift in funding created a subtle but powerful, and increasingly pervasive, shift in attitudes in America. With the passage of three decades...
