February 01, 2012
8 min read

Health care reform in the United States: Where we came from and where we are going

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In 2010, federal spending was approximately $3.5 trillion with revenue of $2.2 trillion – 41% of which was made up of individual income taxes. Thus, the annual deficit of $1.3 trillion will add onto the $15 trillion of debt that we already have. The U.S. debt to gross domestic product (GDP) ratio in 2010 was approximately 63%. In 2011, the ratio of public debt held to GDP increased to 68.5%, which means that severe inflation is pending within the next 5 years to 7 years unless spending is significantly reduced or revenue is dramatically increased. The government is going to be forced to reduce Medicare and Medicaid spending. Although the physician component of health care costs is about 13% of the total Medicare expenditures, across-the-board Medicare cuts are inevitable in attempts at reducing the increasing costs of health care. A. Alex Jahangir, MD, and Manish K. Sethi, MD, review the history of health care reform, and the effect of the Patient Protection and Affordable Care Act on the future of orthopedic surgeons.

— Jack M. Bert, MD
Business of Orthopedics Section Editor
Orthopedics Today

One of the most concerning issues facing the United States is the national debt that has reached to more than $15 trillion. The national debt will continue to increase as the country runs an annual budget deficit of nearly $1.3 trillion. To address this deficit, it is vital for legislators to evaluate and address all aspects of the federal budget that add to this growth.

A large portion of the budget, and therefore the national debt, is entitlement programs, including Medicare and Medicaid. In fact, Medicare and federal Medicaid spending in fiscal year 2010 contributed to 22% or $724 billion of the total federal budget — a significant increase from 1966 when Medicare spending contributed to 1% of the budget or in 1986 when it was 10% of the federal budget. When one takes into account Social Security, which costs $707 billion or 20% of the federal budget, and other entitlement programs, including unemployment insurance ($553 billion or 16% of the federal budget), it is clear to see why any legitimate attempt to reduce the debt will need to include cuts in entitlement programs such as Medicare, Medicaid and Social Security.

As health care costs continue to increase at a rate greater than inflation, true reform to the American health care system is necessary to control the federal debt. In order to fully understand the potential future of U.S. health care and potential cost-saving mechanisms, it is critical that one comprehend the evolution of health care in the United States.

Health care reform in the United States is not a new idea. In 1945, President Harry Truman first proposed expanding the Social Security system to include national health insurance coverage. At the time, and much like today, this proposal was strongly resisted by Congress and others who viewed President Truman’s proposal as a form of “socialism.” During the next 20 years, the idea of a national health insurance plan was resisted. It was not until July 30, 1965, when President Lyndon Johnson was able to pass and signed the Social Security Act Amendments of 1965, establishing Medicare and Medicaid, that national health care coverage became a reality.

As recognition for his contribution, President Truman was present at the signing of the law and was the first recipient of Medicare. When initiated, Medicare provided coverage for inpatient hospital care (Part A), and consumers had the option to pay a premium of $3 per month to receive coverage for outpatient doctors services (Part B). Furthermore, the eligibility age for Medicare in 1965 was 65 years old – similar to today. However, the average life expectancy in 1965 was of 69 years instead of 79 years as it is today.

After Johnson presidency, there were minor changes to national health care reform. President Richard Nixon signed the Health Maintenance Organization (HMO) Act of 1973 that required employers with 25 or more employees to offer federally certified HMO options if the employer offered traditional health care options. Furthermore, in 1985 President Ronald Reagan signed the Consolidated Omnibus Budget Reconciliation Act (COBRA) that gave some employees the ability to continue health insurance coverage after leaving their employers.


It was not until President Bill Clinton that major health care reform was in the national discussion again. President Clinton made health care reform, specifically universal coverage for all Americans, one of the highest priorities of his administration and he charged the First Lady to chair the Task Force on National Health Care Reform. This effort was strongly resisted by conservatives and the health insurance industry resulting in its defeat.

While President Clinton failed to pass a major overhaul of the U.S. health care system, he was able to make some important changes. The first initiative was the passage of the Health Insurance Portability and Accountability Act (HIPPA), which set national non-discrimination and portability standards for individual health insurance coverage, HMOs and group health plans. Secondly, President Clinton signed into law the Children’s Health Insurance Program (CHIP) program that assured all children have health coverage by providing matching funds to states for health insurance to families with children. This program now covers more than 7.4 million children. Finally, under the Balanced Budget Act of 1997, President Clinton established the “Medicare + Choice” program, which gave beneficiaries the freedom to enroll in private health programs, including HMOs and PPOs, while simultaneously cutting costs.

The largest evolutions in the U.S. health care system in general, and Medicare specifically, since the Johnson administration occurred in 2003 with the passage of the Medicare Prescription Drug Improvement and Modernization Act (MMA). As part of this legislation, Medicare was expanded to include Medicare Advantage and Medicare Part D. Medicare Advantage was an extension of the “Medicare + Choice” plans and required that plans provide all of a beneficiary’s Part A (hospital) and Part B (medical) coverage and also provide at least the same benefits as the original Medicare program. These plans most frequently take the form of HMOs, PPOs or private fee-for-service (PFFSs) plan types. Medicare Part D, otherwise known as the Medicare Prescription Drug Act, was created to help cover the costs of prescription drugs for senior citizens. Under Part D, prescription drug coverage is offered only by private companies that contract with Medicare through stand-alone plans for beneficiaries who have original Medicare and through HMOs, PPOs and PFFSs for beneficiaries who have a Medicare Advantage plan. In turn, the Centers for Medicare & Medicaid Services (CMS) reimburses the companies.

New reforms

During his presidential campaign and early in his presidency, President Barrack Obama made health care reform one of his top priorities. The President’s goals with health care legislation were to increase access to affordable health coverage, improve the quality and delivery of care, and curb the growth of health care costs. On March 23, 2010, the Patient Protection and Affordable Care Act (PPACA) passed by a small margin with no Republican support. While a detailed review of the PPACA is beyond the scope of this article, the PPACA will require most Americans to acquire health insurance coverage through their employer, existing government programs or health insurance exchanges. At the time of passage, the non-partisan Congressional Budget Office (CBO) estimated that the law would cost $940 billion during the next 10 years, but would provide insurance coverage to an additional 32 million people while reducing the deficit $138 billion.

Revenue from this program would come from several sources, including nearly $60 billion from penalties by individuals and employers who do not purchase insurance, $196 billion in reductions to the Medicare scheduled payments, $132 billion in cuts to the Medicare Advantage Plans and $32 billion from a 40% tax on high-cost health plans, which is considered $10,200 for an individual and $27,500 for family. An additional revenue of $210 billion would come from a Medicare tax on wages, as well as fees and taxes on insurance companies and pharmaceutical and medical device companies.

Patient Protection and Affordable Care Act

One of the main purposes of the PPACA is to increase insurance coverage for the approximately 47 million uninsured people in the United States. When one studies the demographics of the uninsured, it is worthy to note that while 36% of the uninsured live below the federal poverty line, which is considered $22,350 for a family of four, 11% of the uninsured make more than 400% of the federal poverty line. Under the PPACA, Medicaid enrollment will be increased by 18 million people by raising the eligibility to 133% the federal poverty limit. Furthermore, the federal government will provide subsidies for Americans who make up to 400% of the federal poverty limit. This will provide insurance coverage to nearly 16 million additional Americans. The PPACA will increase coverage for Americans who previously did not have insurance, a fact confirmed by Richard Foster, the current CMS actuary.

Foster had some concerns regarding the PPACA in a memorandum with estimates of the financial and coverage effects of PPACA through fiscal year 2019. First, he estimated that the net federal expenditures will increase by $366 billion under this bill during the first 10 years instead of cutting it by $138 billion as was originally stated by the CBO. This increase in cost will occur mainly because of greater use of health care services by individuals becoming newly covered. Furthermore, he predicted that nearly 14 million people will lose employer coverage by 2019 as smaller employers terminate coverage.

He also suggested these workers will then enroll in Medicaid, which increases the government’s financial burden. Furthermore, Foster estimated that the current health care system will find it difficult to meet a significant portion of the increased demand for Medicaid, particularly during the first few years. Finally, Foster concluded that new fees and taxes on medical device makers will “generally be passed through to health consumers in the form of higher drug and devices prices and higher premiums” with an increase of approximately $11 billion per year in overall national health expenditures beginning in 2011.

Our reality

Health care reform in the United States has become a reality. Even though there are currently legal challenges to this law, only time will tell how much this new legislation will impact the fundamental problems facing the country both in terms of health care and federal budget.

It appears that the PPACA will increase coverage for 34 million Americans. However, the PPACA fails to address a fundamental problem with the U.S. health care system — increasing health care costs. Without addressing this issue, the PPACA will not truly bring reform to our national health care nor solve the problem of national debt.

  • A. Alex Jahangir, MD, can be reached at The Vanderbilt Orthopaedic Institute Center for Health Policy, Medical Center East Suite 4200, Nashville, TN 37232, 615-327-5503; email: alex.jahangir@vanderbilt.edu.
  • Manish K. Sethi, MD, can be reached at The Vanderbilt Orthopaedic Institute Center for Health Policy, Medical Center East Suite 4200, Nashville, TN 37232, 615-327-5503; email: manish.k.sethi@vanderbilt.edu.
  • Disclosures: Jahangir and Sethi have no relevant financial disclosures.