Privatization of Medicare: Urgency of the Latest Threat

This is a dangerous time for Medicare. The bill passed by the House on March 27, by a surprising bipartisan majority of 392-37 – H.R. 2, the Medicare Access and CHIP Reauthorization Act of 2015 – threatens to end traditional Medicare as a social insurance program that protects seniors in a single large risk pool. The Senate is set to vote on the bill in two weeks.

The timing could not be more ironical. Medicare was passed 50 years ago by overwhelming bipartisan support in Congress – by votes of 302-116 in the House and 70-24 in the Senate. Since 1965, it has provided a set of comprehensive benefits as an earned right without regard to health conditions or income, with all beneficiaries paying into the program through mandatory contributions from individuals and/or employers. (1) For the last 50 years, Medicare has been a solid rock of coverage in a shark-infested sea of unstable and expensive private plans.

But all that can go away if Republicans (and many Democrats) recklessly pass H.R. 2 without concern for its long-term implications. There are many problems in this bill, crafted as it is to serve the agenda of politicians waving the false flag of “entitlement reform” and lobbyists for organized medicine, private insurers, the drug industry, and other corporate stakeholders in the medical-industrial complex. As is typical in a large legislative package that is difficult to understand, and many legislators have not read, the devil is in the details.

H.R. 2 does have one useful goal – to replace the flawed Sustainable Growth Rate (SGR) formula for setting Medicare payment rates for physicians. The SGR formula was set in 1997 in a deficit-reduction law that ties payment rates to economic growth, which since then has led to recurrent last-minute budget crises, known as the “doc fix” over cuts in physician reimbursement. There have been 17 short-term “fixes” over the last ten years, each time kicking the can down the road without resolving how to proceed.

H.R. 2 eliminates the SGR formula, and proposes different ways to pay physicians, including expanded use of capitation, accountable care organizations, bundled payments, and various ways to implement “pay for performance” incentives. These are all supposedly aimed to improve quality of care and contain costs through a “merit-based incentive payment system” (MIPS). But are all untested, unproven, and unlikely to either increase quality or contain costs while adding greatly to administrative complexity. In his 2014 Health Affairs blog, Jeff Goldsmith warned us about this approach:

With this legislation, Congress is preparing yet again to enshrine in statute another payment strategy that is both unproven and highly controversial. The proposed legislation casts in concrete an almost laughable complex and expensive clinical record-keeping regime, while preserving the very volume-enhancing features of fee-for-service payment that caused the SGR problem in the first place. The cure is actually worse, and potentially more expensive, than the disease we have now. (2)

Among the many structural changes in this massive bill are two that, if adopted, will seriously undermine the future integrity of Medicare: (1) its limits on first-dollar supplemental Medigap insurance coverage, and (2) introduction of means testing whereby higher-income Americans would pay more for their Medicare coverage. (3)

The first will hurt the approximately 12 million of the 50 million Medicare enrollees who rely on Medigap. Based on the already disproven premise that “more skin in the game” reins in unnecessary health care, the bill would prohibit plans from covering Part B deductibles. That would transform the whole concept of comprehensive, universal coverage of seniors over 65 with a consumer-directed approach to financing that care, thereby enabling further privatization of Medicare. Medicare patients could expect to face ever-higher deductibles, unaffordable for many, who would end up forgoing necessary care. The Medicare Rights Center, a national, nonprofit organization, has this to say about H.R. 2: “[it] does not represent a fair deal for people with Medicare – expecting too much from beneficiaries in return for too little.” (4)

The second big change – means testing – may seem innocuous, or even a good idea on first blush, but has the potential to unravel the large Medicare risk pool, leading to higher prices, further privatization, and fewer benefits. H.R. 2 would increase payments, permanently, that higher-income seniors would pay for their Medicare coverage, thereby establishing a precedent for future increases. But that could have detrimental impacts on the overall Medicare risk pool, thereby threatening the coverage of lower-income beneficiaries. Jacob Hacker and Theodore Marmor, who have studied the Medicare program over many years, tell us that affluent Medicare enrollees account for only about 1 or 2 percent of Medicare’s total costs. But with this change, affluent seniors would likely shift over to private programs that they could easily afford, thereby breaking up the Medicare risk pool and compromising the universality of Medicare coverage. The end result of that, of course, is increasing costs of coverage by adverse selection, a downward spiral of coverage, and erosion of broad political support for Medicare. (5)

Conservatives have pushed for privatization Medicare as an “entitlement program” for many years, by shifting it from a defined-benefits program to one with defined-contributions. As new Speaker of the House in 1994, Newt Gingrich famously declared that this “could solve the Medicare problem and cause it to wither on the vine.” (6) Recent years have already seen continuing privatization of Medicare – including the Medicare + Choice HMOs in the 1990s (discredited by excesses of managed care), its sequel, Medicare Advantage, and the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA). Each of these have benefitted insurers, drug companies and other corporate stakeholders more than patients.

Republicans have attached the above two “poison pills,” plus other changes not being reported, to a goal that both parties support – eliminating the unworkable SGR formula. But H.R. 2 will continue the unraveling of traditional Medicare, and lead to higher costs that will be unaffordable for many seniors and disabled enrollees. Both parties are congratulating themselves on bipartisanship as they oversell the SGR part of the problem. It is unfortunate and misguided that Democrats are taken by this SGR ruse to transform Medicare. They are seeming to cave to the Republicans without concern for the bill’s long-term implications. They need to read the bill and stand up in defense of traditional Medicare. It is inappropriate for them to congratulate themselves on a “transformative” success that is such a long-term threat to the most vulnerable among us.

H.R. 2 will go to the Senate, which returns from recess on April 13th. While it is expected to pass there, there is a big risk that its poison pills will not be recognized and dealt with by legislators. It may well be acted upon quickly as the Senate decides what to do with the austere conservative budget passed by the House that would repeal the Affordable Care Act, cut Medicaid, food stamps, and other safety-net programs.

House Republicans want to convert Medicare into a voucher program, and would like to see the Senate concur. All this ties together as the biggest threat to health care for seniors and the disabled that we have yet seen. Democrats need to discover their spine!


1. Study Panel on Medicare’s Larger Social Role, Final Report. Washington, D.C.: National Academy of Social Insurance, 1999, pp. 1-2.

2. Goldsmith, J. Primum non nocere: Congress’s inadequate Medicare physician payment fix. Health Affairs blog, January 24, 2014.

3. Editorial Board. The House may be about to finally fix the ‘doc fix.’ Washington Post, March 25, 2015.

4. Response to House Legislative Package to Repeal and Replace the Sustainable Growth Rate (SGR) Formula (H. R. 2). New York. Medicare Rights Center, March 26, 2015.

5. Hacker, JS, Marmor, TR. Medicare reform: fact, fiction, and foolishness. Public Policy & Aging Report 13 (4): 1, Fall 2003.

6. Gingrich, N., as cited by Smith, DG. Entitlement Politics: Medicare and Medicaid 1995-2001, New York. Aldine de Gruyter, 2002: 71, citing Congressional Quarterly Almanac, 1995, pp. 7-13.,+New+York.+Aldine+de+Gruyter&source=bl&ots=tRt2UsWT3H&sig=bnCCf3zmpMR2l579RyXzWwjlwhc&hl=en&sa=X&ei=ztgaVd32EpGtogS1jYLQBA&ved=0CB8Q6AEwAA#v=onepage&q=Medicare%20and%20Medicaid%201995-2001%2C%20New%20York.%20Aldine%20de%20Gruyter&f=false