The Need for Medicare Catastrophic Coverage

A Historical Perspective

In 1965 President Lyndon Johnson signed the Medicare program into law. The need for the new Medicare program was based on senior citizens spending 15% of their annual income on medical bills. Today, with Medicare, seniors are spending 22% of their annual income on medical bills. Health care costs have exploded beyond anyone’s imagination. While Medicare has been a wonderful program for America’s senior citizens, it has some important issues that must be addressed. Foremost among these issues is the need for protection against catastrophic medical costs. To determine how Medicare recipients have been exposed to catastrophic costs it is necessary to look at the historical progression of this problem.

During the 1970’s, most companies signed agreements with the government whereby Medicare would become the primary insurance for retirees over 65 years of age and companies would provide supplemental insurance that would make the total coverage equal to that provided to active employees. During the 1970’s and early 1980’s companies abided by these agreements. Many companies even increased health care benefits for retirees, adding such things as prescription drugs, eye-care, and dental care.

In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) which defined a set of rules designed to protect employee pension funds from corporate malfeasance. However, ERISA contained little protection for retiree health care. At that time the consensus was that medical coverage did not require government protection because the costs were not prohibitive.

Congress Reacts to Escalating Health Care Costs

In the mid 1980’s health care costs began to escalate. Congress realized the need to provide protection against catastrophic medical costs. In President Ronald Reagan’s 1986 “state of the union” address, he called for legislation to protect senior citizens against catastrophic medical costs. Congress responded with the “Medicare Catastrophic Act of 1988”. This law extended the 60 day limit on hospital stays under Medicare A to a full year. Medicare patients paid the hospital deductible only once in a calendar year. The law also placed a cap on the 20% of costs that Medicare patients were responsible for under Medicare B, the program that pays physicians. It added for the first time a prescription drug benefit, which was superior to the current drug benefit provided under Medicare D.

The problem with this new act was that, unlike basic Medicare, all costs for the new benefit were paid by Medicare recipients. These costs included higher yearly premiums and a surcharge on senior’s income tax. The surcharge was 15% in 1989, to be followed by 25% in 1990, 26% in 1991, 27% in 1992, and 28% in 1993. After 1993, the annual surcharge was to be tied to the cost of Medicare increases. Seniors rebelled at these huge costs and the law was repealed in 1989. At that time, many retirees had good Medicare supplemental insurance through their former employers and did not need the costly new Medicare benefit.

Industry Cuts Health Benefits, Leaves Retirees Vulnerable to Catastrophic Costs

In the 1990’s health care costs began to rapidly escalate. Many companies limited their exposure to these costs by placing caps on the amount they would pay for retiree insurance. All costs above these caps were passed along to retirees. President Clinton attempted to address the deteriorating health care situation by proposing a universal health care program in 1994. Unfortunately, his health care plan was subjected to a blistering attack by the health insurance industry and ultimately failed to secure enough support in Congress for passage.

In the 2000’s, health care costs experienced double digit inflation. Since the year 2000, health care costs have risen by an average of 10.6% per year. Many Americans have found themselves facing catastrophic medical costs. A recent study by the Harvard School of Medicine concluded that catastrophic health care costs are responsible for 62% of all bankruptcies filed in the US. Studies have also revealed that while bankruptcies have decreased for persons under 55, they have doubled for those over 65 and quadrupled for those over 85.

Companies looked for other ways to escape from the promises made to retirees on health care benefits. Under intense lobbying from industrialists, the Employee Equal Opportunity Commission (EEOC) formulated a rule that allowed companies to reduce or cancel all health care benefits for persons eligible for Medicare. The American Association of Retired Persons (AARP) launched a lawsuit that blocked release of this rule for several years, but in 2007 the courts ruled in favor of the EEOC and the rule was released.

Some companies immediately began canceling all health care benefits for retirees. The most notable was General Motors (GM) which cancelled health benefits for all retired salaried employees. All US automobile manufacturers are expected to follow suit. Seniors now face a catastrophic situation with health care.

Most Health Care Reform Legislation Excludes Medicare Participants

Seniors can expect little or no help from health care reform legislation currently in Congress. The Rocky Mountain Action Coalition (RMAC) has evaluated the three most prominent health care proposals being discussed in Congress and all exclude Medicare recipients from participating in their enhanced medical benefits.  Most legislators believe that Medicare recipients already have great medical benefits and are not in need of the enhanced benefits proposed for other age groups.

Legislators Must Act to Preserve Medicare

The RMAC strongly believes that it is time to add a catastrophic health care benefit to Medicare. This benefit could be implemented by a yearly maximum out-of-pocket limit keyed to a Medicare recipient’s annual income. The precedent for this has already been established by yearly Medicare premiums that are keyed to a person’s yearly income. A study conducted last year by the Congressional Budget Office (CBO Option 81) concluded that by having a single deductible for Medicare A&B, a maximum out-of-pocket limit could be implemented at no additional cost to the Government.

It is time for the President and members of Congress to recognize the financial burdens that senior citizens face with Medicare; 22% of their annual income consumed by medical costs, catastrophic medical costs that lead to bankruptcy and prescription drugs that are priced beyond the pocket book of many seniors. Additionally, some Medicare health benefits are reduced yearly, while premiums increase and payments to providers remain stagnant. Many doctors now refuse to accept new Medicare patients because of the low payments. The RMAC is calling for our elected officials to recognize these problems and formulate a legislative solution.

Medicare is the only program that holds down the escalating costs of health care. It has low overhead costs of 3%, compared with up to 31% for private health insurance and Medicare applies cost controls to all medical procedures. Some members of Congress have proposed a “Medicare for All’ like program as a public option in the on-going health care reform debate. Before that should be considered, the problems that currently exist with Medicare must be addressed. We believe that catastrophic coverage should be a part of every health care insurance plan. A catastrophic cost benefit must be added to Medicare to ensure the health and financial well being of America’s senior citizens.

John R Kotson; This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Chairman of the Rocky Mountain Action Coalition

July, 2009