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The Trouble with Medicare

Tags Big GovernmentHealthU.S. EconomyFiscal TheoryMoney and Banking

12/30/2000Hans F. Sennholz

One of the most difficult chapters in life is the art of growing old thoughtfully and gracefully. While the frailties of age multiply and the pains grow sharper, the lamp of experience hopefully has given us wisdom that allows us to cope with our frailties. Yet many an old temptation may come to us and becloud our vision. We may be tempted especially by politics which always has been the systematic organization of power and privilege.

Both major political parties cater to the interests of the elderly; both favor more federal spending and government care, differing in nuance rather than substance. Both pledge to save Social Security and Medicare programs which, in years to come, may run out of funds. Both have placed the health-care issue in the center of their national agendas. They plan to shore up the finances of the Medicare program, to protect patients from alleged abuses by health-maintenance organizations (HMOs) and managed-care insurance plans, and to bring help to some forty- four million Americans lacking insurance coverage.

The Medicare problem, we are told, is a demographic one. Some forty million elderly and disabled Americans are presently covered by the program costing some $224 billion a year. The massive baby-boom generation born after World War II will soon become eligible for benefits and thereby swamp the program. The system either will require more money - from taxpayers or the elderly themselves - or the benefits will have to be reduced.

While it is easy to diagnose the problem, it is rather difficult to find a political solution. No matter what sums the government is spending, the situation seems to get worse. The spending causes medical prices to soar, which makes health-care services and even health insurance unaffordable for an ever-growing number of Americans. In 1996 there were some 35 million Americans without insurance coverage; today, more than 44 million are said to be without it.

The problem of Medicare actually is not demographic, but ideological and moral. It is an issue of popular ideas that elevate the body politic to the position of universal provider. Its beginnings go back to Germany in the 1880s; to England by 1911, arriving in the United States during the 1930s, when President Roosevelt with his brain trust of liberals set up several welfare agencies. Federal health care first made it appearance as a matching grant program during the Eisenhower Administration.

The Johnson Administration developed the Medicare system as we know it today. It made medical benefits available to virtually all persons 65 years of age and older and Medicaid benefits to all poor people. In 1987, finally, the Reagan Administration reconfirmed and reinforced the Johnson system with "catastrophic insurance." But since the elderly were expected to cover the costs of the program through higher premiums and a surtax, they led a virtual citizen's revolt against the tax. The program was repealed less than a year and a half after it was signed into law. During the Clinton Administration Congress passed legislation allowing individuals receiving Social Security Disability or Supplemental Security Insurance to work without losing their Medicare or Medicaid health benefits.

The future of our body politic is clearly visible in the stresses and strains of the Medicare system. It is a mammoth bureaucracy, born of politics and nurtured with tax revenue. It is both the medical guardian of most seniors and practically the sole buyer of senior services offered by physicians and practitioners. It sits in judgment of the demands and complaints of the beneficiaries, appraises and judges the services rendered, and makes payment it considers adequate.

Since the demand for Medicare services is practically unlimited, given their minimal costs to patients, and the supply is strictly limited in labor and material, there can be no open market allocating the services promptly and fairly according to the value judgments of all participants. Instead, the services must be rationed and allocated by law or decree and the compensation of physicians and practitioners be "administered" by authority. Every aspect of the system is wide open to arbitrariness, abuse, maltreatment, and even corruption. In time, the system is bound to succumb to all these vices.

It is bound to decay on all levels no matter how many safeguards we may want to install. The worst decay is likely to occur in the bureaucracy itself and at the center of power. The possession of political power corrupts almost any man. But few if any safeguards are built against the abuse of this power. Political safeguards primarily aim at producers, the providers of medical services, who are made the primary object of bureaucratic attention. They are subjected to continuous supervision and minute investigations.

The Health Care Financing Administration (HCFA) provides the national data by which the provider services are judged. It defines the appropriate volume and quality of service and the fair rate of compensation. A host of administrators appointed to safeguard the Medicare funds then judge the services and conduct several programs ranging from "focused medical reviews" to investigations of "potentially abusive or fraudulent activities." (Medicare Part B Reference Manuel, October 2000, Revision 046, Chapter 19, Program Safeguards).

Focused Medical Reviews, which were first implemented in 1993, are to "educate the provider community about the Medicare program." To "educate" means to send "educational letters to providers who are found to perform 'aberrant' procedures," that is, services "at a higher volume or reimbursed at a larger percentage of dollars when compared with national data" (Chapter 19.2).

If a letter remains unheeded, a Medical Review (Chapter 19.3) will seek and take actions "where questionable practice patterns are found." Program officials will monitor and evaluate the claims submitted by the physicians in order to identify those "whose utilization patterns differ from medically recognized standards, criteria and peer norms." They will recover any "inordinate" expenditures and, "to prevent further abuse," educate the physicians of Medicare guidelines and policies.

Such education actually is gross intimidation. In constant fear of setting off a "targeted review," which would severely interfere with a going practice, impose painful costs, and impugn the financial integrity of the provider, physicians endeavor to avoid the attention of the administrators. They seek to render average services and charge average fees, and, above all, fall silent in their dealings with the "educators," lest they invite a "targeted review."

Comprehensive Medical Reviews (CMR), finally, may be conducted in case of "suspicion that the physician/provider has an abusive/aberrant practice pattern." Such reviews focus on the physician's entire practice and concentrate on specific issues. "A thorough analysis is conducted on a sample of processed claims and all pertinent data such as medical records and beneficiary payment history." "Physicians and suppliers selected for a CMR are chosen because they exceed established norms within their specialty and locality, submit claims that resemble patterns on Medicare's alert list of abuses, or exhibit other abnormal patterns of practice." If overpayments are discovered, they may be referred to the fraud unit. (19-3).

The Benefit Integrity Unit (BIU)is responsible for preventing, detecting, and deterring fraud and abuse. It defines "fraud" as an intentional deception or misrepresentation resulting in some unauthorized payment or service, such as "misrepresenting the diagnosis for a patient to justify the services or equipment furnished." It defines "abuse" as a service "inconsistent with accepted sound medical practice," resulting in unnecessary costs to Medicare. Claims for services "not medically necessary" may be abusive; similarly, claims for consultation services which are "not medically necessary," and "increasing charges to Medicare beneficiaries but not to other patients."

The Office of Inspector General (OIG) in the Department of Health and Human Services (HHS) conducts and supervises the audits, investigations, inspections and evaluations. Within OIG itself the Office of Investigations is staffed with professional criminal investigators who are responsible for all HHS criminal investigations. If the investigators find "improperly filed claims," they may seek a penalty of not more than $2,000 for each case, "in addition to any other penalties that may be prescribed by law." (Title 42, Section 1320a-7a of the United States Code.)

If a physician has made or caused to be made "false statements or representations, he or she may be guilty of a felony and be fined not more than $25,000 or imprisoned for not more than five years. If a person in his or her employment is found to have made such statements or representations, he or she may be fined no more than $10,000 or imprisoned for one year.

If a Medicare or Medicaid provider is found to have received an "illegal remuneration," he or she may be fined no more than $25,000 or imprisoned for not more than five years.

If a provider is found to have made false statements with respect to condition or operation of an institution (hospital, rural primary care hospital, skilled nursing facility, or home health agency), he or she may be fined no more than $25,000 or imprisoned for not more than five years, or both.

If a physician is found to be responsible for illegal patient admittance or retention in such institution, he or she may be fined no more than $25,000 or imprisoned for not more than five years, or both (United States Code Annotated, Title 42, #604-1381. West Publishing Co., St. Paul, Minn.)

Nearly all such charges are open to heedless and willful interpretation and explanation by criminal investigators and their attorneys. What is an "improperly filed claim" or an "incorrect statement or representation"? A physician's answer may differ from that of his investigators. Surely, both are liable to make mistakes. If made by investigators, they may or may not apologize. If made by a physician, he or she may be fined $25,000 and be committed to a penitentiary for five years.

Even if no mistake was made and the physician is unimpeachibly honest, the investigator may not be beyond temptation. Wielding this frightful power over his charges, he may be guided by considerations and motives other than the solvency of Medicare. And even if a physician should be legally exculpated of all charges, his reputation may be blemished forever and his practice irreparably impaired.

Nothing is more estimable and noble than the work of healing the human mind and body. It is the crown of our Judeo-Christian civilization. Yet, it must be ever more frustrating and even frightening to practice the medical profession under the watchful eyes of a political bureaucracy and the ever-present threat of such draconian penalties. It cannot be surprising, therefore, that medical services tend to be rendered at an average level of quantity and quality acceptable to the authorities.

Highly gifted physicians may be tempted to opt out of the Medicare program in order to escape not only the ever-present danger of altercation with the authorities but also the painful costs of regulation and review. If they should dare to charge a premium for such cost and risk, they could be found guilty of a felony and be fined $25,000 and incarcerated for five years.

The Balanced Budget Act of 1997 fortunately gave them the option to terminate their Medicare service for periods of two years at a time and freely enter into private contracts with senior patients. In such contracts seniors agree to give up Medicare benefits for services furnished by a physician or practitioner and make payment without regard to any limits set by Medicare. As more and more physicians are likely to opt out in the future and more and more seniors eagerly enter into private contracts with their physician in order to secure quality health service, the Medicare system is likely to deteriorate further in service and public acclaim.

The future of Medicare is clearly visible in the 1999 findings of the National Bipartisan Commission on the Future of Medicare co- chaired by Senator John Breaux and Representative Bill Thomas. Although its proposals were not enacted, they point to changes to come. They are changes in form, but scarcely in substance. The Commission proposed that Medicare should no longer be run directly by the federal government, but should consist of private plans competing under the supervision of a quasi-independent board of Medicare directors wielding the very powers of the present system.

Several members of the Commission disagreed with the proposal because it did not offer enough. Their chief complaint was the failure of the proposal to make prescription drugs universally available to beneficiaries. Medicare's lack of drug benefits continues to be a point of contention not only to the elderly but also to the politicians who depend on their votes. Many politicians like to hammer on the issue. They are eager to use the temporary surplus in the Social Security trust fund to bolster Social Security benefits and expand Medicare.

In the coming years we must brace for the gradual radicalization of the health care system. As the system deteriorates despite massive boosts in federal spending, its promoters are likely to propose ever more forceful coercion. Unfortunately there are no political solutions, only temporary truces wherever legislation creates classes of beneficiaries and victims. The beneficiaries vie with each other for the kind and magnitude of the spoils; and the victims not only oppose the extractions but also quarrel with each other about their shares of the burden. The welfare state breeds insoluble political and social conflict. Though there may be a truce, only freedom keeps peace.



Hans F. Sennholz

Hans F. Sennholz (1922-2007) was Ludwig von Mises's first PhD student in the United States. He taught economics at Grove City College, 1956–1992, having been hired as department chair upon arrival. After he retired, he became president of the Foundation for Economic Education, where he served from 1992-1997. He was an adjunct scholar of the Mises Institute, and in October 2004 was awarded the Gary G. Schlarbaum Prize for lifetime defense of liberty.

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