Medicare and Medicaid – 50 Years Later – It’s Time for Change

Robert Moffit / Nina Owcharenko Schaefer /

Fifty years ago, on July 30, 1965, President Lyndon B. Johnson signed legislation creating the nation’s two largest federal health entitlements, Medicare and Medicaid.

Medicare was created as a social insurance program for seniors and those with disabilities. It is financed primarily by payroll taxes collected during a recipient’s working life, and secondarily by personal and business income taxes.

Medicaid was designed as a welfare program to provide health care services to vulnerable low-income groups. Medicaid is jointly financed by federal and state governments.

>>> On Thursday, the Heritage Foundation and the American Enterprise Institute are hosting an event with leading experts to reflect on the past 50 years and look ahead to the next. Details here.

Unfortunately, at the age of 50, both Medicare and Medicaid continue to suffer from problems inherent to their structure and organization.

For example, both programs:

Medicare is the largest purchaser of health care in the nation, covering roughly 55 million persons.

The Congressional Budget Office (CBO) estimates Medicare’s total annual cost at $615 billion in 2015, and it is scheduled to exceed $1 trillion by 2023.

In other words, over the next 75 years, American seniors are expecting tens of trillions of dollars of Medicare benefits that are not paid for. Today, working taxpayers, mostly through business and personal income taxes, fund an estimated 86 percent of the program’s annual cost.

For Medicaid, the Centers for Medicaid and Medicare Services (CMS) Office of the Actuary estimates that Medicaid’s total (federal and state combined) spending is expected to reach $529 billion in 2015, with 68.9 million enrollees.

Fifty years later, in its July 22, 2015 memo to Senate Budget Committee staff, Medicare’s Office of the Actuary reports that Medicare’s debt—the program’s long-term unfunded liability—ranges from $27.9 to $36.8 trillion.

Whether it’s the lower or higher debt number, this year’s estimates are worse than last year’s by more than a $1 trillion.

For Medicaid, cost and enrollment are expected to continue to grow, in particular due to the expansion of the program under the Affordable Care Act.

By 2023, total Medicaid spending is projected to climb to $835 billion, and enrollment will near 80 million.

The president’s answer is to cut Medicare payments to medical professionals and institutions.

Under Obamacare, the Medicare Trustees warn, “[b]y 2040, approximately half of hospitals, 70 percent of skilled nursing facilities and 90 percent of home health agencies would have negative total facility margins, ” adding that this creates the “possibility of access and quality of care issues for Medicare beneficiaries.”

For Medicaid, access and quality of care are already a top concern.

A recent CDC study found that only 68.9 percent of physicians would accept new Medicaid patients.

For the next 50 years, Congress could initiate transformative changes through defined contribution (“premium support”) financing in both programs, giving patients direct control over the flow of health care dollars and compelling health plans and providers to compete for patients’ dollars on a level playing field.

Intense competition among health plans and providers would stimulate innovation in benefit design and care delivery, improve patient outcomes and enhance patient satisfaction and save serious money for seniors and taxpayers alike.

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