Okay, so this multi-billion-dollar enterprise is on the
verge of going belly-up. Despite recent assurances from the
executives in charge that its assets exceeded its liabilities--indeed,
the debate has been about what to do with the surplus in the
coming years--it now comes out that these rosy scenarios were
based on faulty projections and fraudulent accounting. In
fact, it comes to light that the enterprise has had a long
history of manufacturing budget numbers and purposefully misleading
the public. But through political manipulation and careful
marketing, it headed off criticism and corrective action until
its status as a house of cards was too obvious to obscure.
This financial miscreant is the Medicare program, founded
in 1965. And as described in a new book by Sue Blevins, [founder
and president] of the Institute for Health Freedom, Medicare
got its start with generous use of hype and fraud, and never
got out of the prevarication habit.
Early Attempts to Socialize U.S. Health
Serious leftists had sought a government-run health care
system in the United States since the turn of the century,
taking their lead from Bismarck's Germany and the other nascent
welfare states of Europe. Early attempts, just after the first
and second world wars, were rebuffed by Congress and the public
as contrary to American principles of freedom and self-reliance.
So in the 1950s, the activists changed their strategy, dumping
honest socialism for dishonest incrementalism. While in other
countries, the welfare state had gotten its start in the class
warfare of employer vs. worker, America had resisted such
simplistic divisions. So big-government advocates decided
to start with beneficiary populations more likely to attract
public sympathy: the elderly and disabled.
The first fruits of the new political strategy came in 1957
Incremental Strategy and Kerr-Mills Bill
In the first case, Congress and President Eisenhower added
disability benefits to the Social Security system. In 1960,
the same alliance created Medical Assistance, also known as
the Kerr-Mills program, to provide basic health care services
to the elderly poor using a joint federal-state model that
later became the Medicaid program. In both cases, advocates
skillfully built political constituencies made up of families
with elderly or disabled dependents, state governments struggling
with revenue shortfalls, and organized medicine--the various,
powerful state associations of doctors and hospitals--to overcome
opposition from congressmen espousing traditional concerns
for the size of government and cost to taxpayers.
Still, the political movement for national health care wasn't
satisfied with Kerr-Mills. As a means-tested program, it would
never grow to encompass the entire population and would likely
remain relatively limited in scope and expense. Moreover,
it gave far too much power to state governments, which political
liberals tended to distrust.
So, despite passage of the [Kerr-Mills] program in 1960,
advocates immediately set to work on a more ambitious goal,
seizing on an alternative proposed during the 1960 debate
over Kerr-Mills by Sen. John F. Kennedy of Massachusetts,
who later in the year would narrowly defeat Richard Nixon
to become president.
His [Kennedy's] bill, to create national and mandatory health
insurance for all seniors, paid for by payroll taxes, was
renamed the King-Anderson bill after its two main sponsors.
Unlike Kerr-Mills, it was strenuously opposed by organized
medicine and other groups fearful that a federal monopoly
would result in federal regulation of virtually all aspects
of health care (a fear that ultimately proved to be solidly
rooted in reality).
Congressional Republicans offered an alternative plan, "Bettercare,"
that used general federal revenues to subsidize a voluntary
insurance plan for which seniors would pay monthly premiums.
Meanwhile, doctors and hospitals decided to offer a counterplan
of their own, dubbed "Eldercare," that would expand the Kerr-Mills
program and retain a state-run design. It would also employ
the services of the Blue Cross and Blue Shield associations,
run respectively by the nation's hospitals and physicians,
in order to keep commercial insurers at bay.
Blue Cross and Blue Shield Plans Seize
Control over Most Medicare Administration
Organized medicine had already used government power, in
the form of tax exclusions and regulatory exemptions, to keep
the dreaded private insurers from playing a large role in
health care, since the latter tended to pay claims in cash
directly to patients, giving them power as consumers to shop
around for better rates and service. The Blues paid providers
instead of patients, thus keeping those pesky market forces
from reducing hospital and physician incomes. Ultimately,
Eldercare turned into Medicaid, and the Blues did in fact
seize control over most Medicare administration.
This period, the legislative run-up to the pivotal 1965
creation of Medicare, is the subject of Blevins' most telling
revelations. She provides persuasive evidence, for example,
that the administrators of Kerr-Mills in the Kennedy and Johnson
administrations sabotaged the implementation of Medical Assistance
in many states. Being [strong advocates] of Medicare, they
didn't want to see an effective alternative program set up
in the states to care for the elderly poor, whom they needed
as poster children for Medicare. Furthermore, after the Kennedy
assassination, Medicare advocates apparently saw their chance
for legislative victory and sought to manufacture bogus projections
of how many seniors lacked access to health care and how much
the new program would cost.
Misleading the Public with Enron-Like Accounting?
In 1965, actuaries in the Department of Health, Education,
and Welfare projected that the hospitalization part of Medicare
would cost $9 billion by 1990. The program actually cost $66
billion in 1990. Meanwhile, Medicare Part B, which basically
adopted the Bettercare concept advanced by Republicans to
subsidize doctor visits, was itself the subject of faulty
predictions. The original design called for only 50 percent
subsidy by federal taxpayers. But by 1990 the subsidy was
75 percent of cost, tens of billions of dollars higher than
the ratio originally anticipated would have yielded.
Were these revenue numbers, which make Enron's bad accounting
look comparatively accurate, the result of simple error? Alas,
it doesn't look like it. Blevins points to the prescient warnings
of Dr. Barkev Sanders, a renowned statistician who had done
health and welfare cost estimates for 35 years for the Social
Security Administration, the U.S. Public Health Service, and
other agencies. During the 1960s, he warned his colleagues
and the nation that "the Social Security Administration has
been concealing the truth by means of its actuarial estimates"
in selling national health insurance. In 1962 he sent the
Social Security Administration a 33-page memo detailing numerous
problems with its Medicare cost estimates, such as failing
to adjust for increasing hospitalization and faulty numbers
on eligibility. Seeing no effort to correct the "errors,"
Sanders told a business magazine in 1964 that "if a sound,
realistic health program cannot be accepted by the public
on its merits, it should not be imposed on them by the government."
Blevins further points out that Sanders was not a conservative
opponent of Medicare but was actually an advocate, albeit
an honest one.
The fuzzy math and misrepresentation continues. Because
Medicare Part B does not earmark payroll taxes for a trust
fund to pay providers, unlike Part A, its financial problems
have traditionally not been factored into computations about
the Medicare "surplus." That has allowed the federal government
to shift services from A to B, as the Clinton administration
did in the case of home health care, in order to mask the
size of Medicare's unfunded liability. In its 2001 budget
plan, the Bush administration came clean, noting that projected
revenues from payroll taxes and the current share of other
federal taxes devoted to Medicare would fall short of projected
expenditures through 2011 by a cumulative $645 billion. In
other words, there is no Medicare surplus--despite attempts
by Democrats to blame Bush for using "it" to fund his tax
Blevins adequately discusses market-friendly reforms of
Medicare, such as giving younger workers the ability to opt
out of the program in favor of personal savings accounts or
private insurance. I wish she had worked in a discussion of
Medicaid reform, which might have prompted her to consider
merging the programs and transferring their administration
to the states. Nevertheless, Medicare's
Midlife Crisis is an excellent, concise, and readable
treatment of how shameless politicians, left-wing federal
bureaucrats, and brazen special interest groups tricked the
American public into becoming "investors" in their giant,
and unsustainable, pyramid scheme. Somehow, I doubt the Senate
will be holding any hearings on this scandal.
John Hood is president of the John Locke Foundation in
and publisher of Carolina Journal.