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In 1965, President Lyndon Johnson signed the Social Security Amendments Act creating the Medicare program. (From left: Mrs. Johnson, President Johnson, President Harry Truman, Vice-President Hubert Humphrey, Mrs. Truman)


Published 6/1/2011
Manish K. Sethi, MD, William T. Obremskey, MD, MPH; A. Alex Jahangir, MD

A Medicare primer

Where are we? How did we get here? Where are we going?

As America finds itself burdened with $14.3 trillion of national debt, legislators are under increased pressure to find ways to balance the budget. Although cuts have been proposed in various areas, one thing is certain—controlling mounting Medicare costs will be a central flash point in the budget deficit battle.

With the age 65-and-older population expected to double by 2030 to an estimated 72 million, the growth in Medicare will place significant strain on the federal budget. Medicare’s annual costs were approximately 3.6 percent of the gross domestic product in 2010, or nearly a quarter of all healthcare spending. Even more concerning is the fact that funding for Medicare is expected to be exhausted by 2024, according to an annual report from the program’s trustees.

Any legitimate attempt to reduce the debt will involve cuts in entitlement programs such as Medicare, Medicaid, and Social Security. Orthopaedic surgeons—whether in practice or in training—must have an understanding of the evolution of Medicare and its potential impact on their futures. The rapidly increasing pace of change in the Medicare program between 1965 and 2011 may lead to tectonic shifts in policy in the near future.

The creation of Medicare
President Harry Truman first proposed expanding the Social Security system to include health coverage in the 1940s, which Congress repeatedly refused to do. The fear of “socialism” in part prevented the creation of Medicare in the post-World War II era. However, over the following two decades, the issue of health insurance became a hot button political issue.

The plan finally became a reality on July 30, 1965, when President Lyndon Johnson signed the Social Security Act Amendments of 1965 as part of his Great Society program. The law established Medicare and Medicaid, which would eventually deliver health care benefits to millions of elderly and poor Americans.

Evolution of Medicare
The two components of Medicare—Part A and Part B—have been the heart of the program since its creation. Part A is Medicare-provided hospital insurance. Most people do not pay a premium for this coverage. Part A covers inpatient care in hospitals and skilled nursing facilities. Hospice and home health care have also been traditionally covered by Part A.

Part B is basically “medical insurance” to pay for medically necessary services and supplies provided under Medicare. Most people have to pay a premium to receive this coverage. Part B covers outpatient care, doctors’ services, physical or occupational therapists, and additional home health care.

Although there were changes in Medicare between the 1960s and 2000—such as the Social Security Amendment of 1972, which extended Medicare privileges to those younger than the age of 65 with significant illnesses—the entitlement program for the most part remained in its original form. The 2003 passage of the Medicare Prescription Drug Improvement and Modernization Act (MMA 2003) allowed the program to evolve into its current format, with the addition of Medicare Advantage and Medicare Part D.

Medicare Advantage plans are health insurance options that are approved by Medicare, but are run by private companies. As part of the Medicare Program (sometimes called “Part C”), Medicare Advantage plans provide all of a beneficiary’s Part A (hospital) and Part B (medical) coverage and must provide at least the same benefits as the original Medicare program. These plans most frequently take the form of health maintenance organizations (HMOs), preferred provider organizations (PPOs), or private fee-for-service (PFFS) plan types. Initially created under the Balanced Budget Act of 1997 and initially known as “Medicare +Choice,” these plans were created to provide seniors with more choices while simultaneously cutting cost.

Medicare Part D, otherwise known as the Medicare Prescription Drug Act, was also created under MMA 2003 to help cover the costs of prescription drugs for America’s senior citizens. Under Part D, prescription drug coverage is offered only by private companies that contract with Medicare through stand-alone plans (for beneficiaries who have original Medicare) and through HMOs, PPOs, and PFFSs (for beneficiaries who have a Medicare Advantage plan). These companies are in turn reimbursed by the Centers for Medicare & Medicaid Services. Anyone who has original Medicare or Medicare Advantage is eligible to enroll in Part D.

Healthcare reform 2010 and Medicare
Estimates from the Congressional Budget Office based on the healthcare reform legislation passed in 2010 indicate that net reductions in Medicare direct spending will reach close to $400 billion from FY2010 to FY2019. The Obama Administration is seeking to reduce the escalating costs of the entitlement program on multiple fronts including sharply reducing Medicare’s annual payment increases, aggressively reducing costs within the Medicare Advantage program, creating an Independent Payment Advisory Board to make changes in Medicare payment rates, and modifying the high-income threshold adjustment for Part B premiums.

Part of the new legislation also includes the establishment of a national, voluntary pilot program that will bundle payments to hospitals and physicians with the goal of improving patient care and reducing spending. Adjustments in reimbursements to hospitals will also occur with respect to readmissions related to certain potentially preventable conditions.

Medicare and politics
As the 2012 election cycle approaches, the increasing national debt and the debate over Medicare are becoming focal points of political and ideologic disagreement between Republicans and Democrats. Recently, Rep. Paul Ryan (R-Wisc.) released a new vision for Medicare. The “Ryan Plan” would essentially end Medicare as it is currently formulated, dramatically reducing the involvement of the federal government in providing health care to citizens older than age 65. Instead, seniors would receive a fixed payment from the government and would independently obtain health insurance. According to Rep. Ryan, “A Medicare premium-support payment would be paid by Medicare to the plan chosen by beneficiaries, in turn subsidizing its cost.”

The concept is based on the premise that by providing a stipend for health care and asking senior citizens to purchase health insurance in the marketplace, individuals will take more responsibility for healthcare costs and costs will therefore be dramatically reduced. Democrats for the most part want to maintain the program in its current state with the dramatic cost reduction strategies offered by the recently passed healthcare reform act.

Medicare and orthopaedics
The history of Medicare from its creation to the present day shows that the most rapid pace of change has been in the past decade. Since the economic meltdown of 2008 and the explosion of the national debt, the country has seen dramatic cost reduction strategies proposed and an ideologic debate as to whether the program should even exist. Based on the current rate of change in Medicare, one should continue to expect major transitions.

As the “baby-boom” generation approaches retirement, the practicing orthopaedic surgeon will increasingly find that patients are older than age 65 and Medicare is a major source of reimbursement. Orthopaedic surgeons must have an understanding of the entitlement program and its influence on their practices because future policy will certainly shift.

Manish K. Sethi, MD, and A. Alex Jahangir, MD, are codirectors of the Vanderbilt Orthopaedic Institute Center for Health Policy; William T. Obremskey, MD, MPH, is associate professor of Orthopaedic Surgery and Rehabilitation at Vanderbilt University.