Medicare, Reagancare and Obamacare: A Brief History of Healthcare Reform

By Greg Naylor
This blog is my attempt to provide some government healthcare history along with a politically independent analysis of Obamacare, treating Democrats and Republicans with equal scrutiny.

  • 1965 – The Social Security Amendments – Medicare

1965 was a good year for socialized medicine. Democrats controlled the presidency and both houses of Congress.  President Lyndon B. Johnson passed the Medicare bill guaranteeing unlimited healthcare for everyone.*  To pay for this new bill, he raised taxes. Government got bigger and taxes went up.                                        *Everyone over the age of 65.

  • 1986 – Reagancare

In 1986 Republicans controlled the Presidency and Senate, but Democrats controlled the House of Representatives. President Reagan expanded socialized medicine through the “Emergency Medical Treatment and Active Labor Act” (part of the better-known COBRA). The “group mandate” of EMTALA required healthcare providers to give away their products and services for free.  It did this by requiring healthcare providers to treat anyone who walks into the Emergency Room. As a result, government statistics show that over half of all emergency room care in the U.S. now goes unreimbursed. Imagine if Ford and General Motors were required by federal law to give away half of the cars they produce for free.  Reagancare, through its “group mandate,” was an expansion of socialized medicine.

  • 2003 – Medicare Part D

Republicans controlled the presidency and both houses of Congress. Presented with this golden opportunity to reduce socialized medicine, the fiscally responsible Republicans acted in dramatic fashion.  Under the leadership of President Bush, the federal government expanded Medicare with Part D for prescription drug coverage. Every single dime of this additional spending has been paid for with foreign borrowing from China and Japan. Fiscal conservatives such as myself have more than a little frustration with this massive spending bill, especially since it was passed by Republicans.

  • 2010 – The First Cuts to Entitlement – Obamacare

Finally we arrive at the present-day reduction of American socialized medicine. Obamacare is the most misunderstood piece of legislation I have ever seen.  Most critics attack it as an expansion of socialized medicine. It is not. Obamacare is a massive reduction of socialized medicine.

Hard to believe?  Please let me explain.

Remember that there are two distinct and separate pieces of Obamacare. First is the piece of legislation that reduces Medicare spending. Second is the piece of legislation that tries to fix the problem of Reagancare. Here is a summary of what is contained in each of the two parts:

Obamacare Part 1: The Medicare Cuts

There is simply no way to exaggerate the massive cuts to Medicare that are contained in Obamacare. They are massive.  So massive, in fact, that the reaction of Richard Foster, Medicare’s chief actuary was basically “No Way, Man!” Have you noticed any changes in your Medicare recently?  No?  No big changes? Great, that means it’s working.  When Obama designed these cuts, he followed the lesson of the frog. If you put a frog in boiling water, it jumps out.  If you put a frog in cold water and slowly increase the heat, it will not.

And that is the secret of the massive Medicare cuts in Obamacare. Every year, Medicare reimbursement rates to doctors and hospitals will be reduced by several percent. In time, many small healthcare providers will be forced to close their doors. In the first 10 years of these cuts, they are projected to save over half a trillion dollars. After that, the savings really start to get big.

For a more detailed explanation of these cuts, you can read the actual bill, or you can read my newsletter from April 2010 – “What Is PPACA Anyway?” – available at www.fiatwm.com

Obamacare Part 2: The Reagancare Solution

The second part of Obamacare is an attempt to fix the Reagancare problem.  Whether or not it was intended, Reagancare’s “group mandate” has created a huge problem since healthcare providers have to treat everyone, and the majority of people do not pay. There are three possible solutions to the Reagancare problem:

A.  Repeal Reagancare

In theory, this would allow hospitals to save money by denying care to those who cannot pay. In practice, even before Reagancare, most healthcare providers recognized a moral imperative to treat the sick and injured. Repealing Reagancare probably would not significantly reduce the current number of unpaid medical bills.

B.  Expand Medicare

When you think about it, Medicare doesn’t make much sense. Why would the government provide healthcare to grandparents, but not grandchildren? Are grandchildren morally less deserving than grandparents?  We could fix Reagancare by simply expanding Medicare to cover everyone.  This would be true socialized medicine. Like socialism in the Soviet Union, it would kind of work for a while, and then inevitably the system would collapse.

C.  Introduce Obamacare

The Obamacare solution affirms a moral obligation for hospitals to treat the sick and injured, and so it affirms the intent of Reagancare. However, it now also requires people to pay. They can do this in one of two ways.  First, the preferable way, is to buy health insurance. Second, the part that really has teeth, the bill says that if you do not willingly buy health insurance, the government will make you pay for your healthcare in the form of a penalty tax.

Some people currently have the following health care plan: I am not going to pay anything, and if I get sick or hurt I am going to the emergency room and the hospital and taxpayers can cover my bills. This plan worked under Reagancare.  It no longer works under Obamacare.

The burden of this change falls primarily on the poor, the uninsured, and the underinsured. It is a bill that introduces personal responsibility into government healthcare policy for the first time. The free healthcare ride for the poor is over. I do not understand why fiscal conservatives aren’t celebrating in the street. 

Conclusion

Not surprisingly, Democrats have not spent a lot of time explaining Obamacare to their constituents. It cuts Medicare. It adds a regressive tax. It just isn’t very “Democraty.”  Republicans, meanwhile, are trying to repeal a bill which requires personal responsibility in healthcare consumption, cuts entitlement spending, and reduces a huge tax on healthcare businesses (the tax of unpaid bills).

Since no one else will say it, I will: Obamacare is a pretty good piece of legislation. Although it raises taxes on the poor, it also raises taxes on the wealthy, so it is balanced in its approach to taxation.  It provides a rational solution for Reagancare’s unfunded “group mandate.” It addresses reality: Medicare cannot continue in its current form. Some seniors will be upset, but most will recognize that a reduction in their benefits is directly paying for healthcare access for their children and grandchildren. Much more needs to be done to address America’s healthcare problems, but Obamacare is a good start.

For Investors

For retirees, and pre-retirees, Obamacare provides an additional challenge. Healthcare will become increasingly expensive over the coming years. Social Security will not be increased, so retirees will increasingly pay their medical bills from their own savings. Government bonds that yield a few percent, CDs, and other conservative investments alone will not be sufficient to cover the increased cost of living. There must also be a growth component to your savings and investments.

About Greg Naylor: Greg is a partner and co-founder of Fiat Wealth Management, an independent financial advisory firm in Long Lake, Minnesota. He has been investing for over 7 years and enjoys sports, reading, singing, and spending time with family. Greg is a 2004 graduate of the University of Minnesota and lives in South Minneapolis with his wife Kat.

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