05/22/2009 05:12 am ET Updated May 25, 2011

Health Care Reform by Medicare Expansion

By Michael D. Intriligator and Eric W. Fonkalsrud, M.D.

Exploding costs, limited accessibility, and uneven quality of basic health care in the United States have been highlighted as a top priority for early correction by the Obama administration. The cost of health care represents a significantly higher proportion of the U.S. national income than that of any other industrialized nation, most of which cover basic health care costs for all citizens. Medical expenses currently consume almost 17% of the U.S. GDP, and now is the most rapidly escalating expenditure in the federal budget. At the same time almost 1/6 of the U.S. population is uninsured, with the remainder underinsured.

Recent enormous financial losses posted by General Motors and many other major U.S. corporations have been attributed in part to the costs of covering long-term health benefits for active and retired employees, which is not the case in other countries with a national health system. When the accelerating costs of private health care insurance, estimated to be approximately $14,000 annually to cover a family of 4, are passed on to the employer, large companies are at a significant disadvantage in an international competitive market, while small employers with marginal profit can face bankruptcy. The number of uninsured citizens is increasing rapidly as unemployment figures escalate in the current financial and economic crisis, with companies engaging in restructuring layoffs, spendable family incomes decreasing, and health insurance premiums continuing a rising upward spiral. The burden for underinsured health care is placed increasingly on county, city, and charity hospitals, which are already overcrowded, understaffed and increasingly underfinanced. Currently over 40% of the hospitals in the state of California are financially in the red. Furthermore, routine health care, as well as the treatment of severe disease and critical emergencies are being funneled through busy emergency rooms, where the average wait before being seen by a physician may be as long as 6-8 hours.

Almost all citizens over age 65 have been covered by the federal Medicare program since 1965, and additionally most children with congenital malformations and many other children's disorders are covered by state managed health programs, with low reimbursement. For low-income families, the combined federal and state managed Medicaid program, with very restrictive compensation to care givers, is available for the majority of medical disorders that are not primarily cosmetic.

During the past three decades there has been a progressive transition of private health care insurance into a for-profit business activity with shareholders, extensive marketing expenses and increasing executive compensation, which has increased the overhead costs to well over 25% of consumer-provided revenues. The various marketed private health care options are so complex that even the well trained physician often has great difficulty in interpreting the differences in patient coverage from the extensive brochures from each company, which are intended to indicate what is and is not covered. Some private health insurance companies have followed the pattern of the auto industry, which commonly raises the premium if the policyholder is involved in an accident that is reported to the company. Similarly, a patient who develops certain diseases, which may be expensive to treat, may be assessed increased premium charges, and in some cases be discontinued from the plan. It is increasingly apparent that all Americans should be provided with a standard medical benefit package regardless of income, employment status, health status, age, or where they reside. Increasing numbers of Americans who seek health care, just can't afford it. Indeed medical expenses have become the leading cause of personal bankruptcies in the U.S.

With the rapidly escalating costs of medical care in the U.S. and the great disparity in the health care provided to its citizens, President Obama has wisely and clearly stated that health costs must be reduced considerably while basic health care should be provided to all Americans as one of our leading priorities for the future. It is therefore discouraging that the major providers of medical care including hospitals, physicians, nurses, clinical laboratories, pharmaceutical and special equipment companies, and insurance companies have all requested, and in most cases received increasing compensation despite the current economic crisis.

Nationalization of health care with complete coverage in one step would be prohibitively expensive, and unacceptable to many who are fully satisfied with their present private health coverage. The only effective way to correct the many problems of cost and delivery of universal health care in the U.S. is likely to be by a fundamental restructuring of the entire system, with prioritization of the most essential and important types of care to be delivered.

Our proposed reorganization, Medicare Expansion, would build a national care system by expanding on the existing Medicare program for citizens over the age of 65 years, with a gradual phasing out of state administered Medicaid programs. This restructuring would involve gradual changes in the age of eligibility into the Medicare system to include the most needy first, until eventually the entire population is covered. The first step in the Medicare Expansion program would be to enroll children under 5 years of age and pregnant women by the end of 2010. The remainder of the population would be phased in gradually, taking the most needy age groups first, until all persons are covered by the end of the decade. In 2011, those between 5 and 15 would be enrolled and in 2012 those from 15-25 would be included. Those between 15 and 30, as well as those from 60-65 would be added in 2013, while those between 30 and 40 as well as those from 55-60 would be included in 2014. Finally by the end of the year 2015, by adding the remaining population between 40 and 55, the entire U.S. population would be covered by Medicare, so there would be Medicare for all. There would be no limitations based on preexisting conditions, as is common in private insurance plans.

The changes we are proposing under the Medicare Expansion program would be relatively easy to make from an administrative standpoint since age is easily verified and the basic system is in place and functioning. The Medicare program has established an effective track record during the past 43 years, covering almost 20% of the population, primarily the elderly and the disabled who utilize medical resources much more than any other age group. Physicians, community hospitals, and major academic centers have adjusted to this program and continue to provide high quality care on a fee-for-service basis. Physicians as well as patients strongly desire a fundamental change in the present overall system of health care delivery that involves multiple providers, unclear and diverse policies regarding coverage, and excessive paperwork. Both groups consider Medicare to provide easy access, and see it as cost effective and successful. Medicare permits patients a choice of physicians and hospitals, but places a cap on reimbursement for both. This phased expansion of Medicare into a system of national health care would be the basis for rationalizing the allocation of health resources, including greater use of preventive medicine, widespread use of electronic records, more emphasis on primary care, and limits on the treatment of patients who have conditions with a hopeless prognosis.

The program would utilize existing hospital facilities with emphasis on more efficient administration. It would involve a single payor and it would provide for care in rural as well as urban areas. Its costs of marketing and middle management would be minimal as compared with the present system. Only slightly over 3% of current health care expenditures for the Medicare program are spent for administrative costs, whereas this figure is over 25% for private indemnity insurance companies. Medicare expansion thereby has the likelihood of reducing the overall cost of health care, while at the same time providing greater access to care. Just shifting people from private health care plans to Medicare would generate significant immediate savings. The extensive overhead costs of physician and hospital billing would be reduced markedly, and the patients would have a much better understanding of what is and is not covered in their health care benefits. Medications provided under the Medicare program should in most cases be generic, with the government negotiating for the lowest price with competing pharmaceutical companies. The Medicare program should in most cases encourage the use of hospitals that have more than one patient per room, unless there are specific indications for isolation or intensive care, in order to lower hospital and nursing costs.

With the expanded Medicare system, all citizens would be covered regardless of preexisting conditions and would have complete portability of care and medical records throughout the entire country. Those persons who desire more extensive coverage, e.g. cosmetic surgery, and many other conditions for which very expensive care of occasionally questionable benefit, or self-inflicted disorders are placed lower on the list of covered disorders, with all citizens having the option of purchasing supplemental private insurance for these conditions, as now exists in the current Medicare program. Further expansion of the national quality and assessment programs together with outcomes research studies will play an important role in eliminating unnecessary and ineffective services and treatments, and standardize health care delivery throughout the nation. The very erratic and incomplete employer provided health insurance could be gradually phased out to reduce costs and to make businesses more competitive with those in other nations.

The Medicare Expansion program has some similarities with the Canadian health care program, however it differs in a few major aspects. There would be no governmental limitation of total physicians produced or of entry into specialty training programs in the U.S. and the government would not own the hospitals. The Canadian single payer system has been efficient, entailing minimal paperwork and middle management, while providing rapid and predictable reimbursement. Physicians are generally busier with direct patient care than their counterparts in the U.S., while their incomes, in many specialties, are currently very similar.

In designing a package of basic health care benefits, the Administration must not only strike a balance between high-powered competing interest groups, but also guard against offering too much - or too little. Too extensive a package of benefits could bankrupt the system that is already heavily committed. Conversely, too skimpy a package without adequate coverage of medical disorders may lead to delays in seeking care until illnesses require much more extensive and expensive therapy. Considerable attention needs to be directed to what physicians and the government consider to be "basic care," with reduction of excessive expensive testing and services, based on professional rather than primarily economic or legal considerations, the latter including defensive medicine.

Multiple payer health insurance programs, regardless of how administered, would not eliminate the majority of problems with the present system. By contrast, Medicare Expansion builds around an efficient and well-established one payer system, and the incentive driven but controlled fee for service mechanism supplemented by a private partnership for nonbasic supplementary care. Medicare Expansion would thus establish a system of national health care in the United States, which would both control costs and provide quality basic health care to all Americans.

Michael D. Intriligator is a Professor of Economics, Political Science, and Public Policy at UCLA.
Eric W. Fonkalsrud, M.D. was formerly the Chief of Pediatric Surgery at UCLA.