Medicare troubled by past concessions

LBJ's deals with doctors and hospitals in 1965 are hurting the program now.
WASHINGTON -- Political deals sometimes come back to haunt you, and that is the case with Medicare.
So says Joseph Califano, who 40 years ago sat at the elbow of one of the great wheelers and dealers in presidential history at the creation of the federal health insurance system that now serves 41 million Americans.
As Medicare prepares for the vast expansion in January of a prescription drug benefit, there are doubts about whether it can stay fiscally solvent without a vast overhaul that could force cutbacks in benefits.
Califano recently talked about the deals President Lyndon Johnson cut four decades ago as he talked Congress into establishing what has become the nation's largest health insurance system.
"I saw LBJ cajole and persuade both Democrats and Republicans in Congress and the special interests like the doctors groups and the hospitals to reach his dream of a new health care system," said Califano.
"There were plenty of compromises along the way," said Califano, then a White House domestic affairs "whiz kid" and now the white-haired president of an anti-drug group at New York's Columbia University.
Some of those compromises are now coming back to haunt Medicare. The deals with hospitals, doctors and Congress -- in addition to subsequent changes in Medicare, population growth and longer life spans -- have put Medicare in jeopardy.
Seven years from now, the Medicare hospital insurance program will start to pay out more than it receives in taxes and premiums. It is expected to run out of money in 15 years. Spending by the fund that pays doctors' bills is rising even faster.
"We need to look at what happened 40 years ago to see where we go from here to preserve our national health program," Califano said. "To lose it would be unthinkable."
Medicare's run-up in spending over the years was predictable, said Michael Cannon, health policy analyst at the Cato Institute, a libertarian think tank in Washington.
"Medicare, like all entitlements, will grow and grow because politicians are able to buy votes by handing out benefits. The beneficiaries will always try to maximize the benefits they get," Cannon said.
Making sacrifices
In late July, Medicare quietly marked the 40th anniversary of its creation. On July 30, 1965, in Independence, Mo., with former President Harry Truman at his side, Johnson signed into law one of the pillars of the "Great Society" he had set out to build.
In one key concession as part of the deal to create Medicare, Califano said, Johnson agreed that Medicare would pay hospitals "reasonable costs on a cost-plus basis." This meant that the hospitals, not the government, would determine the price of services. The consequence was to lift pressure from the facilities to hold down costs. The result was a much bigger drain on Medicare resources than LBJ originally anticipated, or, at least, admitted to.
Califano insisted there was no deliberate deception.
"We had no doubt but that Medicare could be sustained and expanded," he said.
"We did miscalculate, however," he added.
Unforeseen circumstances
What Johnson and his aides didn't foresee, Califano said, were the escalation in health care costs -- especially expensive tests that doctors now order, partly to avoid malpractice lawsuits -- the inclusion of more people, such as those with long-term disabilities, into Medicare, and the inability -- or unwillingness -- of Congress to control costs.
Whatever the political reason, Johnson's concession to the doctors and hospitals was a step that paved the way for Medicare's troubles, Califano said.
However, he said, LBJ had no choice if Medicare was to be born.
"That concession softened the opposition of the American Hospital Association. It didn't kill it, but it softened it," said Califano. And the American Medical Association, he said, stepped back from its warning that Medicare was socialized medicine.

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