The legislative fight over Medicare was emotional and lasted many years before being resolved in 1965. The legislation that emerged was the result of a number of compromises and differed from what was initially proposed. Two parts of the Medicare legislation that were not changed, and that were the basis for much of the conflict, were basing eligibility on age (not income) and financing the program through an additional Social Security–type tax. These two aspects were in fact related. If a person paid into Social Security, then upon retirement he would be entitled to the program's benefits; it would be an "earned right." If, as the bill's opponents preferred, eligibility were based on a means test, then the appropriate financing mechanism would have been general tax revenues.
Attempts at compromise in the years before the passage of Medicare involved the structure of benefits; its proponents were even willing to endorse a catastrophic program. But a comprehensive catastrophic plan that was means tested, proposed by Senator Russell Long, (an opponent of Medicare) was defeated. The one element for which there could be no compromise was the method of financing; it had to be financed by a separate Social Security–type tax. At one point, Medicare opponents proposed an increase in Social Security cash payments to retirees. Medicare proponents were opposed to these higher cash payments because they believed the increase in Social Security taxes to fund the cash payment would prevent later passage of Medicare, which would also have necessitated a similar tax increase.
To understand the reasons for the conflict, why it lasted so long, and the final form of the legislation, one must know who the major interest groups were and how they perceived the proposed legislation would affect their economic interests. The battle over Medicare was a battle over economic self-interests.
The major protagonists were health providers, spearheaded by the AMA, and the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) unions. Organizations representing the elderly also became active, stimulated by the AFL-CIO. There were many important participants, particularly Wilbur Mills, chairman of the House Ways and Means Committee, and Senator Robert Kerr, who, until his death in late 1962, was a strong opponent of Medicare. And finally, when President Johnson was elected in 1964, the resulting Democratic landslide changed the composition of Congress, thereby increasing the prospects for passage of Medicare.
The AFL-CIO's interest in this legislation was its desire to increase the wages of their working members. The AFL-CIO unions, such as the UAW, generally had the highest-paid employees and the most generous employer-paid health benefits. Retirees' health costs were paid by the employer (negotiated by the union) and represented a growing labor cost to the firm. Covering union retirees with Medicare would decrease employer payments. Medicare would substitute government financing of health care for the employers' health insurance payments. Reducing such employers' payments would lower the cost of labor to the firm. The released funds could then be used to increase workers' wages.
As a side note, retiree health benefits were not prefunded; they were paid out of current labor costs to the firm. The union and the employer negotiated a total labor cost package, which included payments to union retirees. The employer's interest is in the total cost of labor, not how it is divided among current or former union members. If, for example, 20 percent of those labor costs were paid for retirees' health costs, that meant current union workers would receive 20 percent less than if someone else (taxpayers) paid their retirees health costs. After eventually achieving Medicare coverage of their retirees, the union's policy goal was to have the government (taxpayers) cover the health costs of their union members under a comprehensive national health insurance system. If the firm no longer had to pay health benefits for employees, which is part of the cost of labor, then labor could receive higher wages.
The unions' insistence on using the Social Security (payroll tax) mechanism to finance Medicare can be explained within the context of union self-interest. Although union members might have favored Social Security financing for noneconomic reasons, it is unlikely that this approach would have received such strong union support unless it was also consistent with the union's economic self-interest. Social Security financing would have determined eligibility for Medicare. All union retirees would therefore be eligible.
Basing eligibility on a means test would have excluded large numbers of retirees from those unions that were part of the AFL-CIO. From the unions' perspective, even though Social Security is a regressive tax with the heaviest burden falling on low-income workers, the unions' retirees would, at no additional cost, immediately become eligible to receive the benefits, as would the rest of the unions' workers when they retire. The Medicare Part A payroll tax was three tenths of one percent of earned income up to $6,000 income. Thus, this separate Social Security tax to fund Medicare Part A was regressive because the tax represented a greater portion of the wage for a low-income worker than a high-income worker.
Although the unions insisted on a separate payroll tax up to a specified income limit for financing Part A of Medicare (hospital services), they were not opposed to using general federal taxes to finance Part B (physician services). The likely reason for this inconsistency is that eligibility for Part B was already determined by Part A. Therefore, the union's members would have been eligible because they contributed to Social Security. Increased Social Security taxes on union employees to pay for Medicare (or for a comprehensive national health insurance program, such as the UAW desired would have cost the unionized employee less than the amount the employer was paying for health insurance on behalf of UAW members. Thus, there would be a subsidy from low wage–low health users in other industries to high wage–high health users, such as UAW employees. This type of crosssubsidy, which is clearly inequitable, has in fact occurred under "community rating" by Blue Cross in Michigan to UAW employees.
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