The Evolution of Medicare and Medicaid Services

Steven J. Lonchyna


I.      The Rise of Health Insurance Coverage

Prior to 1930, all individuals seeking assistance from medical providers, namely physicians, had to do so at their own expense.  These individuals were left to pay for their medical treatments and consultations by means that were agreed upon between the physician and the individual patient.  It was not uncommon for physicians to receive what today some would be considered absurd forms of payment, including, the trading goods, self-payment, or payment by charitable organizations.  This was highly accepted as physicians viewed themselves as care providers to the community, and the healthcare system was highly paternalistic, in other words, “doctor knows best.”  In 1930, United States healthcare took a dramatic change as the first third-party payer.  Third-party payers can fall into two different sectors, private and public.  Blue Cross & Blue Shield, the first private insurance company, was initiated in 1930 at the Baylor University Medical Center.  At Baylor, the hospital began selling hospital insurance to the community, 21 days for $6.  Blue Cross & Blue Shield soon began to spread throughout the nation, and started pertaining to more than just Baylor University Hospital.  This history of private insurances, their evolution, and their impact on American healthcare will be discussed at greater length in the following chapter. 

II.      Public Health Insurance Coverage: Medicare[i],[ii]

Public Health Insurance followed private health insurance when President Johnson signed the Medicare bill into law on July 30, 1965.[iii] Medicare is a federal insurance program, overseen by the Centers for Medicare and Medicaid Services (CMS) formerly known as the Health Care Financing Administration (HCFA), which provides medical coverage to a selected group of individuals within the American community.  These individuals include all people age 65 and older, disabled workers, and certain individuals with End-Stage Renal Disease (ESRD).  There are currently three different parts to Medicare Coverage, some of which are optional.  These three parts are called Part A, Part B, and Part C (Medicare + Choice) respectively. 

Medicare Part A, commonly referred to as “hospital insurance” is mandatory and automatic once people reach the age of 65 and they or their spouses have paid Social Security taxes for approximately 10 years through employment.  There is no premium that needs to be paid for Part A coverage, but one must meet the annual $792 deductible before Medicare will begin to cover services.  A deductible being met refers to those monies that must be paid out of pocket by the beneficiary.  Part A does not cover all aspects of healthcare for those persons who qualify.  According to the Public Policy Institue Data Digest published by AARP[iv], Medicare Part A coverage includes:

·        Inpatient hospital care up to 90 days per spell of illness[v] and 60 additional days per lifetime

·        Skilled nursing facility care for 100 days per spell of illness following at least a 3-day hospital stay

·        Intermittent home health care up to 100 visits per spell of illness following at least a 3-day hospital stay

·        Hospice care

·        Inpatient psychiatric care, for up to 190 days during a beneficiary’s lifetime


Medicare Part A is primarily financed through what is known as the Medicare Part A Trust Fund, in which the monies come from payroll taxes where employees and employers both pay 1.45% of the wage, unless self-employed, where one pays 2.9% (adding 1.45% for both employee and employer).  Interest made from this trust fund also contributes to the income of the fund, to be used by the beneficiaries.  AARP suggests that in the year 2000, four workers contributing to the fund covered each Medicare beneficiary.   

Realizing that Part A had some flaws, and could prove to become very expensive for those patients who were chronically ill and might not be able to afford treatment within the given coverage guidelines of Medicare Part A, CMS devised an optional Medicare Part B program, commonly referred to as “physician services”.  Medicare Part B not only adds additional insurance, but also covers other health care needs, particularly those not covered by Part A.  This Supplemental Medical Insurance (SMI) does not cover the services 100%, but rather 80%, where the beneficiary would only be responsible for the remaining 20%, also known as a coinsurance. The AARP guidelines of Medicare Part B coverage are as follows:

·        Physician services (including office visits)

·        Medical Equipment

·        Lab and diagnostic services

·        Outpatient hospital services

·        Physical, occupational, and speech therapy

·        Outpatient mental health services

·        Home health care not preceded by a hospital stay and any visits over the 100-day Part A limit

·        Blood for transfusions (after 3 pints per year)

·        Some preventative services, such as mammograms, diabetes screening, pap smears, colorectal cancer screening, prostate cancer screening, and vaccinations


Medicare Part B does not have a trust fund and income as does Part A.  Rather Part B is funded from beneficiary premiums (differ from year to year) (25%), and federal general revenues (75%).  Medicare Part B also has a $100 annual deductible, which must also be met before Medicare will cover Part B services, similar to Part A. 


With both Part A and B present, there are still a number of health care services that remain uncovered by Medicare.  The AARP report states these as the following:

·        Prescription Drugs

·        Long-term care

·        Some preventative care

·        Hearing aids and eyeglasses

·        Dental care

·        Services obtained outside of the U.S.


This list demonstrates the problems that the Medicare system has, as most of these uncovered items could prove to be very expensive, especially when the beneficiary will be also paying the out-of-pocket premiums and deductibles.

As part of the Balanced Budget Act of 1997, Medicare Part C, also known as the Medicare + Choice program allows beneficiaries to select a private health plan provider (e.g. a Health Maintenance Organization or HMO) that contracts with Medicare to provide all of the covered health services.  These private companies are expected to cover all of the services, while only receiving a fixed monthly fee from CMS, regardless of the cost of care that was obtained.

While Parts A, B, and C, still have gaps in Medicare Coverage, the US Congress stepped in and instituted Medigap policies to cover the said gap.  Currently there are Medigap plans A through J with premiums ranging from $75 to upwards of $300 which in some cases may pick up the 20% coinsurance for Part B, the $792 Part A deductible, and may cover 80% in a foreign country.[vi]

In the early 1980’s, following what have come to be known as the Wennberg Variations managed care arose, and had an impact on Medicare payments.  John Wennberg[vii] performed a study in which he observed two similar geographic areas to see differences in healthcare consumption; all other factors were controlled for.  Wennberg noticed differences that could not be explained among these similar areas, and came to the conclusion that physicians were still ordering, but might not be knowledgeable about the treatment’s medical necessity.  He also hypothesized that these differences might possibly be the result of the physician responding to certain other pressures (e.g. money), the more tests completed, the more expensive the visit; and thus managed care came to be. 

The Wennberg Variations had a tremendous impact on Medicare payments.  Under Medicare Part A came the shifting from fee-for-service payment, payment for services rendered, to a prospective payment system based on a Diagnostic Related Group or DRG, which would hopefully decrease healthcare spending.  DRG’s are only present under Medicare Part A coverage, although many other insurances, private and public, also utilize this system or one similar to set up their payment methods.  Under the DRG system, the hospital receives a fixed amount of money from Medicare per admission, regardless of the length of stay or the cost of the stay.  This amount of money was determined to be the average cost of treatment of someone with the same diagnosis at the time of admission.  The created an incentive to move Medicare patients out as quickly as possible, so it would not end up costing the hospital money to keep that patient in longer than necessary.

Medicare Part B also has a similar system that sets up the amount CMS will pay for its beneficiary’s treatments.  The Resource Based Relative Value Scale (RBRVS)[viii] was set up to pay for physician services in a similar way to that of the DRG.  RBRVS takes into account the time required for treatment, the intensity of treatment, the costs of training, the equipment needed, the malpractice cost, and is adjusted for geographic area and an annual conversion factor. 

III.      Public Health Insurance Coverage: Medicaid[ix]

When Congress passed the Medicare bill in 1965 it also passed an insurance that would cover the low-income aged population, people with disabilities, single parent families with low incomes and no way of attaining employment, low-income meaning close to the poverty line.  Medicaid is partially funded by the federal government, and partially funded by each individual state.  While benefits may vary from state to state, since federal funding is being donated, each state must follow a minimum set of coverage guidelines.  Currently the federal government allows all other Medicaid coverages to be determined by the state. 

When being compared to Medicare, Medicaid is very different in the services that are covered.  Medicaid will cover almost all of the healthcare services that are needed for its qualifying members.  The reasoning behind this is that the people who do qualify are very poor, and do not have extra money to pay out of pocket expenses.  Medicaid will cover prescription drugs whereas Medicare did not, there is a modest co-pay[x] for Medicaid beneficiaries whereas Medicare had high deductibles, and Medicaid will cover nursing home care whereas Medicare did not cover long term.  Based on this information, Medicaid might seem to serve its beneficiaries better than Medicare, however, in today’s society, Medicaid has a tremendous stigma attached to it.  Medicaid reimburses providers very low amounts of money in comparison to the charges of the actual treatment, and for this reason, some physicians choose not to be Medicaid providers (this is also true for Medicare).  With physicians choosing not to participate in these programs, it can be imagined that the best physicians would opt out, leaving the standard or sub-standard physicians to care for these patients, thus possibly resulting in a lower level of care.

One can also qualify for Medicaid, even if they had money prior to their illness.  Due to previous exploitation of this concept, (e.g. give money to family or rearranging money) in order to get the state to pay for Medicaid services, The Health Insurance Portability and Accountability Act (HIPAA)[xi] of 1996 made it a felony to knowingly hide assets in order to qualify for Medicaid if it results in a period of ineligibility.  This was referred to as the “Granny goes to Jail Law” and was later repealed and amended so that it would penalize parties that would aid in the hiding of assets.  Therefore if one was to be wealthy, in order to qualify for Medicaid, he would need to “spend down” his assets to the states standards. 

IV.      The Future of Public Health Insurance

Nobody quite knows what lies ahead in the future of both Medicare and Medicaid.  John Iglehart[xii] proclaims that today, “Medicare beneficiaries who require medical care receive far more from the program than they contributed in payroll taxes…a couple retiring in 1998 with one wage earner who paid average Medicare taxes since 1966, would have contributed $16,790, with interest, not including employer’s equal contribution.  The present value of future Part A benefits for such a couple is estimated at $109,000.”  One reason of great concern and worry about financial solvency is that maturation of the Baby Boomer generation to “retirement age”.  It has been predicted that should these public health insurance programs fail to change with the coming trend, they could lose financial solvency, and the programs (Medicare and Medicaid) could see their endings.  By this measure, it has been proposed that the age to qualify for Medicare benefits be pushed up in the coming years, starting by going up to 67. 

Since its inception, Medicare has had a tremendous number of provisions and amendments to get allow for certain other diseases (as in case of ESRD) to be covered, one in particular is Amyotrophic Lateral Sclerosis (ALS) commonly referred to as Lou Gehrig’s disease.  It would not be a surprise to see an increase in debilitating diseases to be lobbied for to Congress for Medicare coverage.  The issue that Medicare faces in the future is its spending, but with the possible coverage of more diseases and the current lobbying for Medicare to cover prescription drugs, cost control does not seem to be the top priority, but with the healthcare industry also growing with the baby boomers, it is reasonable to expect that Medicare will also continue to grow, despite critics fears of financial insolvency.

Medicaid’s future is in the currently under fire.  Since Medicaid is a state-by-state run system, different states are attempting different measures on how to obtain the best Medicaid system, in the hopes that one day this “perfect” system will be completely federally funded.  The prime example is that of the State of Oregon[xiii].  In short, the Oregon System ranks all of the treatments/diseases that are generally covered by Medicaid services, and then looks at the budget, and draws a line where the money will run out.  Anything above the line will be covered, anything below will not.  The problem here is that one-year you may be covered, and the next year you may not make the cut, then what is to happen?  Critics say that Oregon needs to focus on spending and cost cutting, but nobody knows for sure what the correct solution to this problem is.  Oregon was allowed to perform this program for a probationary period, which is to expire in the next few years.

Medicare and Medicaid attempt to deal with distinct populations of people that should be able to receive adequate healthcare.  Some people cannot afford health insurance and still do not qualify for Medicare or Medicaid.  However, these systems are not in place to help everyone, it is possible that there will be changes in health insurance and health insurance coverage, especially in the disease specific cases that are being lobbied for.  Medicare and Medicaid will/are go through growing pains as the Baby Boomer generation moves towards qualifying age, the obstacle is to stay solvent for the future and maintain the faith of the people.  The rationing of healthcare always seems to pose an ethical dilemma as some may view healthcare as a right.  Currently there is no right to healthcare, but who is to say that this will not change in the future.  Should healthcare become a right, how will we justify giving special coverage to special populations, or will this mean the end of Medicare and Medicaid?


[i] Public Policy Institute, AARP, The Medicare Program, (2001).

[ii]  Center for Medicare and Medicaid Services,

[iii] Corning, Peter. The Evolution of Medicare…from idea to Law,

[iv] AARP,

[v] AARP defines “spell of illness” beginning on the first day a beneficiary receives services from an inpatient hospital.

[vi] Medigap Insurance,

[vii] Wennberg Experiment,

[viii] Resource Based Relative Value Scale (RBRVS),

[ix] Medicaid Law,

[x] Payment out of pocket, used in order to have some control over healthcare consumption

[xi] HIPAA,

[xii] John K. Iglehart, The American Healthcare System: Medicare, 340 New England Journal of Medicine, 327-332(1999).

[xiii] Oregon Medicaid Program,