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Research Paper on Medicare and Medicaid


Many lessons can be learned from the events of the recent financial crisis. One remarkable insight refers to the liability of the federal government to the well-being of the nation, a commitment that goes far beyond the classical role of the government in the American legislative and economic tradition: just like a doctor, the government can and should regulate the nation’s health; its involvement is not always necessary, but becomes irreplaceable on a cloudy day.

The establishment of Medicare in 1965 has revolutionized the liability of the federal government to its citizens. The program is much more than a public health insurance policy; it is a nation-wide social contract, which aims to protect the American society`s most vulnerable members – its elderly, sick and disabled persons – whose entitlement to the program is based merely on their physical state.

This paper does not aim to describe Medicare as an insurance program or to review its financial or medical features. Instead, I will analyze the main effects of program on its recipients and the general population. Furthermore, I will argue that despite its lucid drawbacks, the contemporary Medicare program is still the best solution for proving medical services under the framework of the US Social Security and has a unique place in the social contract between the federal government and its citizens.

An Overview on Medicare

Medicare is an entitlement program designed to serve three groups of US citizens: elderly above 65 years of age, disabled persons entitled for Social Security benefits and chronic patients with end stage renal disease (ESRD) or amyotrophic lateral sclerosis (ALS).

In short, the coverage is based on two programs, namely the hospital insurance (HI, part A) and the supplementary medical insurance (SMI, part B). Part A is mandatory and covers hospitalization services for a time limit of 90 days. Outpatient treatment and diagnosis services are covered in the voluntary Part B, for which most of Medicare patients choose to pay a premium.

The main source of financing of the program, in addition to premiums paid for Part B and other copayments and deductibles, is a payroll tax, a part of the Social Security tax that is paid by both employers and employees (1.45% each).

Medicare vs. Medicaid

Medicare is a unique national medical coverage scheme. As discussed below, mainly due to the fact that its eligibility thresholds are determined only by age and/or severe medical conditions. This rule distinguish Medicare from other public medical insurance policies such as the European model, which has similar financing sources (namely payroll taxes), but covers all the country’s residents.

In addition, Medicare should not be confused with Medicaid, its “twin” healthcare coverage program, whose objectives and implementation methods are essentially different from those of Medicare. Patel & Rushefsky (2006) shed light on some of the main differences between the two programs:

First, although the two programs were adopted at the same time, Medicaid was designed to pay for services not covered by Medicare (e.g. nursing home care) and to expand the coverage for indigent Medicare patients as well as for poor citizens, which are not eligible for Medicare coverage.

Second, due to the different target populations, Medicare is perceived as contributory in nature (i.e. a part of Social Security), whereas Medicaid has an image of a welfare program. Thus, Medicare receives much more support from the public.

Third, Medicare is financed and regulated solely by the federal government and has a nation-wide, uniform coverage program. In contrast, Medicaid receives funds from both the federal and state government; it gives the state freedom to make decisions on coverage and eligibility, bringing about inequalities among and within states. In addition, very few physicians participate in Medicaid due to its considerably lower reimbursement compared to the Medicare program.

Medicare as Social Contract

Medicare is a social contract between the federal government and the citizens, aiming to pay for the health needs of vulnerable groups that cannot be met by the private healthcare system (Linn, 2007). As suggested by Skocpol, the underlying concept of Medicare’s social contract is a “national commitment to fund a consistent set of health services with maximum choice of providers.” (1998)

The second party to this agreement, mainly the general public, shares the costs and constraints of the program. To illustrate and simplify this point it can be argued that the public’s contribution to the program is twofold:

First and probably most obvious, it is taxpayers’ money that finances the program. We can safely assume that most (but not all) taxpayers, being at working age and physically fit to work, are not eligible for Medicare; hence, an interesting point here is that the contract is not only between the government and the public, but also among the relatively weak and strong groups of Americans. In other words, Medicare should not be seen as an insurance policy or as a savings account. It is rather a dynamic system of mutual benefits involving all American citizens.

Second, the Medicare program imposes additional costs on the beneficiaries themselves. Some of these costs are of financial nature (e.g. Part B premiums and other copayments), while others incur due to the limited choice of services and providers. The perceived and real risk for the citizens is clear: since Medicare will not pay for all services, some beneficiaries would find it hard to receive all the services they need or want despite long years of payments.

Overcoming the Drawbacks of Medicare

Medicare advantages for the ageing American and for the disabled person are clear and straightforward. Its modular but stable coverage scheme offers the mainstream of medical care, from critical surgery to dentistry, contributing to prolonging and improving life (Patel & Rushefsky 2006).

The program is not stagnant program, but rather dynamic and responsive to criticism and changes in the healthcare environment. According to Jones (2006), the emerging Medicare program changes its nature from a politically motivated to a market driven, less flexible and more efficient coverage scheme. For example, Medicare patients will be asked to select a health plan best fits for their needs, instead of the unlimited choice of services offered today.

Such steps are clearly a response for the growing concern regarding the financial stability of the program while the “Baby Boomers” are about to retire. Nevertheless, it is not certain that privatization is the panacea to heal the system.

Reviewing Dr. John Geyman’s 2006 Shredding the Social Contract: The Privatization of Medicare, Linn (2007) presents an established empirical body of research, which indicates the extent to which Medicare’s services do not only deteriorate in quality, but also become more costly. Some examples for the damages that profit incentives may bring about are “denial of services, undertreatment, insufficient coordination of care, physician turnover, discontinuity of care and lowering the medical expense ratio (more administrative overhead).”

One should also not ignore the influence of Medicare and Medicaid on the broad healthcare market. The government’s role as the prominent purchaser of medical services has a significant influence on non-Medicare patients’ access to medical services and pharmaceuticals, as argued by by McKenzie & Lee: (2006) First, the programs have increased the demand for medical services among low-income patients. The increased demand has brought about higher prices for private health insurance; as a result, many young and low-income patients are deprived from receiving an appropriate medical care.

Second, the market asymmetry created by the strong government involvement in the market may increase both public and private expenditure on drugs. One known example is the 1990 Congress law, stipulating that Medicaid will receive a most-favored customer prices for branded drugs. But since pharmaceutical companies were still able to set their prices, the discounts they had to make were offset by a 5-9 percent price raise on the whole market.


For more than four decades, Medicare is the medical wing of the American social backbone, namely Social Security. It provides fair and rather effective medical coverage for the elderly and the severely ill and tries to improve itself in response to changes in needs and abilities.

Criticism on the program is plentiful and often necessary. There is no doubt that Medicare requires many changes in its structures and policies in order to face the coming challenges, furthermost the ageing baby-boomers. But those changes do not indicate that the very essence of the program is wrong; in fact, as argued in the introduction, we should reassess some of the market principles that defaulted during the summer of 2008 and consider the US should not only strengthen the Medicare program, but perhaps it is the time to expand Medicare’s underlying principles towards a public medical coverage for all US citizens.


  • Jones, S. (1998). The medical beneficiary as consumer. In Reischauer, R. D., Butler, S. & Lave, J. R. (eds), Medicare: preparing for the challenges of the 21st century (pp. 61-74). Washington, DC: Brookings Institution Press.
  • Linn, J. G. (2007). Book Review: Shredding the Social Contract: The Privatization of Medicare. Journal of the National Medical Association, 99(2), pp. 117-8. Retrieved June 15, 2009 from:
  • McKenzie, R. B. & Lee, D. R. (2006). Microeconomics for MBAs: The Economic Way of Thinking for Managers. Cambridge: Cambridge University Press.
  • Patel, K. & Rushefsky, M. E. (2006). Health care politics and policy in America. Armonk : M. E. Sharpe.
  • Skocpol, T. (1998). Pundits, people, and Medicare reform. In Reischauer, R. D., Butler, S. & Lave, J. R. (eds), Medicare: preparing for the challenges of the 21st century (pp. 19-26). Washington, DC: Brookings Institution Press.
July 3, 2012Tags: , ,