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Debunking Medicare Myths: How a New Prescription Drug Program Could Affect American Taxpayers and Seniors

December 8, 2000


In deciding whether to adopt a new Medicare prescription drug program, Americans should consider carefully how it would affect them in the long run, both as taxpayers and seniors. If history is any indication, the program would most likely end up costing much more than politicians claim.

That, in turn, could lead to rationing--a system whereby politicians and government officials determine which drugs are covered under Medicare and which are not. Even if a senior's doctor thinks a particular drug is the best, the federal government--not the senior--would decide if his or her health care program (Medicare) will pay for it.

At a time when Americans are demanding more choice in health care, a new government program for prescription drugs could have many unintended consequences that would actually reduce choice.

An examination of Medicare's 35-year-old track record for financing and administering medical care will help guide taxpayers, seniors, and policymakers to make informed decisions regarding Medicare reform.

How Has Medicare Affected Taxpayers?

When Medicare was debated in 1965 (the year it was signed into law), taxpayer groups were concerned that program expenditures might grow out of control. They argued that taxpayers shouldn't have to foot the bill for wealthy seniors who could afford to pay for their own health insurance. However, politicians assured taxpayers that all seniors could easily be covered under Medicare with only a small increase in workers' payroll taxes.

Government officials also made unsound assurances. In fact, the federal government's lead actuary in 1965 projected that the hospital program (Medicare Part A) would grow to only $9 billion by 1990. The program ended up costing more than $66 billion that year. Even after adjusting for inflation and other factors, the cost of Medicare Part A (in constant dollars) was 165 percent higher than the official government estimate, according to the actuary who produced them.1 (In unadjusted dollars actual costs were 639 percent above estimates.)

Just three years after Medicare was passed, a 1968 Tax Foundation study found that public spending on medical care had nearly doubled in the first few years of Medicare. The report concluded, "To date, the major demonstrable effect of the 1965 federal legislation creating Medicare and Medicaid has been a shift in financing medical care from the private to the public sector."2

Consequently, Medicare payroll taxes and general taxes have been raised over the years to pay for skyrocketing health care costs. Without an outpatient prescription drug benefit, Medicare now represents 12 percent of federal spending, and it is the largest payer of health care in the world, spending $212 billion in 1999.

How Has Medicare Affected Seniors?

Without proper knowledge of how Medicare has affected seniors' out-of-pocket costs over the years, many seniors might support a new prescription drug benefit believing it would actually reduce their overall costs. However, history provides some strong indications that the opposite is likely to occur. Before opting for a new drug program, the elderly in particular would benefit from investigating several important myths and facts regarding Medicare.

Medicare Myths & Facts

Myth #1: Medicare has reduced seniors' out-of-pocket costs.

Fact: In 1965, the Medicare program was sold to the American people as the best way to help reduce seniors' out-of-pocket health care costs. Yet after it was created, costs skyrocketed and by 1985, Rep. Claude Pepper (Dem.-FL) reported that Medicare beneficiaries were paying 20 percent of their income for health care, the same as in 1964--the year before Medicare was passed.3 Seniors end up paying more for health care when costs skyrocket under a government-financed monopoly for medical care. All told, seniors' out-of-pocket health care costs have gown from $4.5 billion in 1977 to over $26 billion today.

Myth #2: Seniors' life expectancy has increased because of Medicare.

Fact: Supporters of Medicare often overlook the very important fact that average life expectancy had been increasing in the United States long before Medicare and Medicaid were enacted in 1965. In fact, average life expectancy in the United States increased from 47.3 years to 69.7 years between 1900 and 1960.4 It is important to note that life expectancy was low in the early 1900s primarily because of high infant mortality rates, making the overall life expectancy rate appear low. However, in the early 1900s, those who reached age 60 typically lived another ten years or more. The bottom line is that life expectancy for seniors had been increasing nearly every decade for 65 years (1900 to 1965) prior to the enactment of Medicare. Thus, we can't attribute the increases in seniors' life expectancy to Medicare.

Myth #3: Medicare was the main factor in reducing poverty among seniors.

Fact: Considering that Congress gave no Social Security cost-of-living increases to seniors between 1959 and 1965, it is no wonder seniors' income fell below the national average prior to Medicare's passage. After Medicare was passed, median total incomes of the elderly grew about 50 percent between 1969 and 1983. However, most of the income gains were due to increases in Social Security benefits, according to the National Academy of Social Insurance.

It is also worth noting that in 1965, Congress tied a seven-percent Social Security increase to the proposed Medicare bill. Thus, seniors couldn't oppose the proposed Medicare program unless they also opposed a Social Security increase.

If Congress had not withheld a Social Security increase for seniors between 1959 and 1965, the senior poverty statistics would show a very different picture, possibly one that reveals a large number of seniors were lifted out of poverty before Medicare was enacted.

Myth #4: Many seniors did not have access to health care before Medicare was enacted.

Fact: This is probably the biggest myth surrounding Medicare. Prior to the enactment of Medicare, there was already a government program to cover low- income seniors.5 Nearly five years before Medicare was created, on September 13, 1960, President Eisenhower signed into law the "Medical Assistance for the Aged" program, commonly known as the Kerr-Mills law.6 The program extended coverage to 70 percent of the approximately 17 million American seniors,7 even though 54 percent already had health insurance coverage.


What can we learn from Medicare's history?

The most important lesson is that actual Medicare costs will most likely exceed projected costs. There is no reason to believe that prescription drug costs would not escalate as other health care costs have over the past 35 years. Thus, Americans would be wise to consider already existing state-run programs, such as Medicaid, to help poor seniors pay for prescription drugs, rather than creating a federal one-size-fits-all program.

In the end, the current Medicare prescription drug debate comes down to one simple question: Do Americans want to create a safety net for the poor, or a federal program that rations prescription drugs for all American seniors?


1 Robert J. Myers, "How Bad Were the Original Actuarial Estimates for Medicare's Hospital Insurance Program?" The Actuary, February 1994.

2 Tax Foundation study cited in "Medical Care Cost Doubles in 3 Years," New York Times, September 9, 1968, p. 47.

3 Barbara Dreyfuss, "Twenty Years Later: Key Players Reminisce," The Internist, March 1985, p. 11.

4 U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1970, Bicentennial Edition, Part 1 (Washington: Government Printing Office, 1975), p. 55.

5 U.S. House of Representatives (1965) Comm. on Ways and Means, Summary of Major Provisions of the Medical Assistance for the Aged Program (Kerr-Mills Law): Public Law 86-778, 89-1, pp. 1-4.

6 U.S. Code Congressional and Administrative News, [1960] 86-1, p. 1299.

7 U.S. Code Congressional and Administrative News, [1960] 86-2, p. 3609.

Copyright 2000. Institute for Health Freedom. A version of this article by Sue A. Blevins was previously published by the Pacific Research Institute for Public Policy, Action Alert No. 59, October 2, 2000.