Hospital Care Post Medicare: Rapid Increases in Demand, Costs, and Desegregation. Part IV

1965. Medicare and Medicaid were enacted as Title XVIII and Title XIX of the Social Security Act, providing hospital, post-hospital extended care, and home health coverage to almost all Americans aged 65 or older. At the time, seniors were the population group most likely to be living in poverty; about half had health insurance coverage. I9 million Americans signed up for Medicare benefits in 1966. Literally overnight most of the costs for hospital care were covered, and a burden for half of Americans over age 65 had been lifted.

The first check Medicare ever cut was for $331.71. The payment covered an operation on Mary B. Augustus, a 68-year-old woman in Hartford, Conn, who became the program's first beneficiary. Her surgery -- the details of which appear lost to history -- took place July 1, the day Medicare took effect throughout the United States.

Augustus had to pay a $40 deductible. But the nation's newest safety net took care of?the rest, delivering?a prompt payment to officials at Hartford Hospital in Connecticut. (Figure 1)

Interestingly, the $337.71 check would be cut for an inflation adjusted increase to $3,216.51 in 2024. Her $40 deductible would be $387.87 in 2024. As Bob Dylan said, "The Times They Are A-Changin'. Indeed.

In just twenty years, government legislation transformed healthcare with the passage of Hill-Burton in 1946 and Medicare in 1965. When the Medicare program began, it paid hospitals their reimbursed costs plus 2% for non-profits and plus 1.5% for for-profits. The “plus factor” amounts were called “return on capital” (ROC) payments. The rationale of ROC payments was to compensate for hospital expansion. Additionally, for-profits received a “return on equity” (ROE) payment of 2% of equity. The rationale seems to have been to compensate investors in for-profit hospitals with a return on their invested capital. Hospital care expenses exploded from 1966 to 1973 as this form of reimbursement in the setting of increased demand and continued advances in care led to medical inflation. With guaranteed reimbursements, hospital projects and expansions moved forward at a rapid pace.

An important change with Medicare passage was the forced desegregation of hospitals in order to receive Medicare funding. Many hospitals in the South resisted and fought this effort, but with the Civil Rights Act, passed in 1964, the time was right to eradicate segregation in hospitals. Johnson’s assistant secretary of health, Philip Lee, MD, championed the cause by insisting that hospitals receiving the new Medicare funding for their elderly patients follow the Civil Rights Act by ending discrimination against their patients on the basis of race.

His role as the architect of Medicare — and in telling some 7,000 hospitals, “No Black patients, no Medicare funding” — would become his greatest legacy. In a 2015 article in the Journal of the American Society on Aging, Lee wrote that in 1965 a cardiologist at Georgia Baptist Hospital told him that if he put a Black patient in with a white one, his white patient “would die of a heart attack.” Lee responded to him and other hospital administrators who balked at admitting Black patients: “Well, it’s the law; there’s going to be no Medicare money if the hospital doesn’t desegregate.” By February of 1967, Lee wrote, 95% of hospitals were receiving Black patients. Eliminating racial injustice and addressing inequities in care got a jumpstart with Medicare.

However, the 'Medicare Monster' emerged. Projected spending on the program was wildly inaccurate. At its start, in 1966, Medicare cost $3 billion. The House Ways and Means Committee estimated that Medicare would cost only about $12 billion by 1990. This estimate included an allowance for inflation. However, in 1990 Medicare actually cost $107 billion. Between 1966 and 1969, Medicare expenditures grew by 32% annually and spending was now on a path of unsustainable growth.

The rapid increase of utilization of inpatient hospital care and the associated increase in expenses laid the foundation to begin a shift to provide less expensive outpatient care. A new era of preventative care emerged. The influences of private payers, private insurance, Medicare, and increasing use of technology put pressure on the healthcare system and the Medicare program to reduce costs. The first real effort at medical cost containment and way to curb medical inflation started with the passage of the HMO Act in 1973.

In the next article, I will explore the role of hospital care from the early 1970's through 1982 and the passage of TEFRA under the Reagan Administration.