Academic journal article Generations

Confronting the Rising Costs of Healthcare in Medicare and Medicaid

Academic journal article Generations

Confronting the Rising Costs of Healthcare in Medicare and Medicaid

Article excerpt

Is spending in these public programs out of control?

It has become trendy to argue that the growth in spending that has occurred in the Medicare and, in particular, Medicaid programs is out of control and needs to be reined in. But these programs should not be viewed as separate from the rest of the healthcare system simply because they are run through the public sector. In fact, the public and private health sectors are integrally related, and change in one area will be felt elsewhere. Moreover, some of the changes necessary to slow the growth of healthcare spending-or at least to ensure that society is investing wisely in these expenses -ought to occur throughout our healthcare system. Ultimately what matters is not the "appropriate" size of healthcare spending in the public sector, but the appropriate level of spending on healthcare for society as a whole.

In practice, it is easier to examine Medicare and the issues surrounding that program than Medicaid because of the vast differences across states in die shared state and federal Medicaid program. Thus, much of this article does focus on Medicare, but many of the same issues apply to Medicaid. Where appropriate, some of the particular complications arising from Medicaid will be raised.


The Medicare program has always been closely related to the overall system of insuring care in the United States. In fact, one of the major goals of Medicare was to assure individuals access to mainstream medical care. The rules established to govern Medicare did little to disrupt or change the way healthcare was practiced or financed in the United States. Claims processing was structured to resemble the process found in the private sector and was to be handled by private contractors. Medicare statutes specifically assured free choice of provider and no interference in the routine practice of medicine. Payment rates were also designed to resemble those in the private sector, both in the mechanics and the level of payment.

After a few years, pressures on Medicare to hold the line on the growth in costs led to an effort to restrain price increases and eventually to reform the way in which payments are made. For example, since the reforms, Medicare payments to hospitals are based on paying for specific costs or are made on a per diem basis, rather than paying for the entire hospital stay, as was originally the case. Other insurers have since copied a number of the innovations in payment systems developed by Medicare. Private insurers have also adopted Medicare's decisions about coverage rather than establishing their own decision-making process. Thus, in many ways, Medicare has become a leader in creating norms for the healthcare system rather than merely being a follower.

And, over time, as Medicare increased in size and importance to the healthcare system, a new concern arose-mat those in charge of this public program needed to be aware that changes in Medicare would affect the healthcare system as a whole. The level of payments to providers of care under Medicare, for example, should maintain a reasonable balance with the level of payments from private insurers. In this way, doctors and other healthcare providers would continue to treat both Medicare and privately insured patients. Indeed, the Medicaid program has occasionally been so out of step with privateinsurer payments that access to care became a problem. At these times, Medicaid payments have usually been ratcheted upward to at least guarantee its beneficiaries some access to care. Much of Medicaid's growth is a result of instances in which it has expanded coverageoften to pick up coverage of people priced out of the private sector. A recent study of Medicaid found that payment rates keep the program's spending lower than the private insurance sector (Hadley and Holahan, 2003/2004).


The problems driving Medicare costs upward are not unique to the public sector, but radier are found throughout the nation's healdicare system. …

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