U.S. and World Politics

Medicare’s Rollout vs. Obamacare’s Glitches Brew

By David Himmelstein and Steffie Woolhander

The smooth and inexpensive rollout of Medicare on July 1, 1966 provides a sharp contrast to the costly chaos of Obamacare.

We won’t rehearse the chaos part here, just the costs.

As of March 2013, federal grants for Obamacare’s state exchanges totaled $3.8 billion.1 Spending for the federal exchange is harder to pin down because funding has come from multiple accounts, including: the $1 billion Health Insurance Implementation Fund; Department of Health and Human Services’ (DHHS) General Departmental Management Account and General Departmental Management Account; Centers for Medicare & Medicaid Services (CMS) Program Management Account and the Prevention and Public Health Fund. CMS estimates fiscal 2014 spending for the federally-operated exchanges at $2 billion.2 So it’s safe to say that the costs of getting the exchanges up and running, and (hopefully) enrolling seven million people in the program’s first year will exceed $6 billion.

Bear in mind that the exchanges won’t actually pay any medical bills, just sign people up for coverage. So billions more in overhead costs will show up on the books of the private insurers and state Medicaid programs that will actually process medical claims.

Back in 1966, Medicare started paying bills for 18.9 million seniors (99 percent of those eligible for coverage) just 11 months after Pres. Johnson signed it into law. Overhead costs for the first year totaled $120 million3 (equivalent to $867 million in 2013—all subsequent figures are given in 2013 dollars). But that figure includes the cost of processing medical bills, not just the enrollment costs.

Moreover, Medicare and Medicaid (which was passed at the same time) displaced several smaller federal health assistance programs, saving about $376 million on their overhead costs.

Signing up most of the elderly for Medicare was simple; they were already known to the Social Security Administration, which handled enrollment. To find the rest,4 the feds sent out mailings to seniors, held local meetings, and asked postal workers, forest rangers and agricultural representatives to help contact people in remote areas. The Office for Economic Opportunity spent $14.5 million to hire 5,000 low-income seniors who went door-to-door in their neighborhoods.

Despite predictions of chaos, and worries that the newly-insured seniors would flood the healthcare system, there were few bottlenecks. Hospitals continued to operate smoothly and no waiting lists materialized. The only real “glitch” was that many hospitals in the Deep South initially refused to integrate their facilities—which Medicare required for certification and payment. But by the end of the first month, 99.5 percent of hospitals had signed on.

Obamacare’s start-up has been rocky because complexity is “baked in” to the design, just as simplicity was “baked in” to Medicare. Obamacare’s exchanges must coordinate thousands of different plans, with premiums, co-payments, deductibles and provider networks that vary county-by-county; Medicare offered a single, uniform plan. The exchanges must calculate subsidies for each applicant after first verifying income, family size and immigration status; Medicare offered free hospital coverage, with a minimal ($22) uniform premium for doctor coverage. Instead of setting up a new bureaucracy to collect premiums from millions of enrollees and funnel them to private insurers, Medicare relied on the existing payroll and income tax system to garner funds.

Obamacare’s byzantine complexity reflects the contortions required to simultaneously expand coverage and appease private insurers. And private insurers will exact a steep ongoing toll. Medicare’s overhead is just two percent,5 vs. an average of 13 percent for private plans (on top of the Exchanges’ costs, roughly three percent of premiums). A single payer plan that excluded private insurers could save hundreds-of-billions in transaction costs.

Medical quality improvement experts often advise hospitals to “avoid workarounds;” fix system defects rather than force doctors and nurses to sidestep problems like faulty equipment, understaffing, or illegible handwritings. This advice is equally valid for health reform. To avoid glitches and wasteful expense, design the system right; eliminate private insurers and cover everyone under a single payer program.

David Himmelstein is a professor of public health at the City University of New York, a visiting professor of medicine at Harvard Medical School, and a cofounder of Physicians for a National Health Program with Woolhandler. He received a medical degree from Columbia University; completed a medical residency at Highland Hospital in Oakland, California, and a fellowship in general internal medicine at Harvard University; and has practiced primary care internal medicine for three decades in Cambridge and the South Bronx.

Dr. Steffie Woolhandler has earned degrees from Stanford University (BA Economics), LSU Medical Center (MD), and U.C. Berkeley (MPH) as well as an honorary degree from Harvard (MA). She has worked as a primary care internist for decades, has authored over a hundred scientific articles on health and health care policy, and is a well-known advocate for non-profit, single-payer national health insurance. She is currently a professor of public health at CUNY School of Public Health at Hunter College.

Health Affairs Blog, January 2, 2014

1 Federal grants for Obamacare’s state exchanges totaled $3.8 billion:

2 CMS estimates fiscal 2014 spending for the federally-operated exchanges at $2 billion:

3 Overhead costs for the first year totaled $120 million:

4 To find the rest:

5 Medicare’s overhead is just two percent: