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Increases in health care costs spurred by Medicare and Medicaid

President Obama discusses health care reform
President Obama discusses health care reform
Photo:AP/J. Scott Applewhite

Prior to the implementation of Medicare and Medicaid in 1965, healthcare costs in the United States remained virtually constant. In 1965, health care costs accounted for 5.9% of the GDP, and by 1994 had more than doubled to 14% of the GDP. The impetus for this huge growth was the impact of government involvement in the healthcare market.

Prior to 1965, doctors performed services, billed the patient and/or the insurance company, and were paid what was billed. Generally, patients were responsible for the balance of medical bills not paid by the insurance company. This allowed medical costs to remain low, because physicians and hospitals were being paid the full amount of the fees they had set for their services.

In 1965, Medicare and Medicaid were enacted and reimbursement schedules were created by the government. Instead of physicians and hospitals setting fees, the government determined how much would be paid for their services when they treated patients covered by these programs.

Today Medicaid pays roughly 56% of what a private insurer pays to doctors, and 67% to hospitals.

The difference between what the provider believes the services are worth and the amount the government pays them is passed along to private patients and insurance companies in the form of increased health care costs across the board.

Over time, more and more of the population was covered by these programs. In 1966, Medicaid covered 10 million Americans and Medicare covered 19.1 million. By 1999, this increased to 37.5 million and 39.5 million, respectively. In 33 years the number of Medicaid recipients increased by 375% and Medicare by 207%, and continues to climb.

As a result of these programs, federal health care spending increased from $39 billion in 1966 to $75 billion in 1971, a 192% increase. The HMO Act of 1973, sponsored by Edward Kennedy, was an attempt to reign in increased federal health care spending. It was responsible for the birth of the private managed care industry and increased regulation of the industry, both of which contributed to escalating health care costs.

The high cost of medical care today can be linked directly to government interference in the health care market. Why would one believe that this time will be any different? There has never been an efficient and profitable government agency, and the agencies and boards established by the current health care reform bill will not be an exception.



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