What the Medicare Debate of 1965 Promised and What the Program Became

Folks, I want you to picture the most polite political fight in American history. A Southern Democrat who chaired the House Ways and Means Committee, a Republican from Wisconsin, the American Medical Association and a president with a landslide in his pocket all wanted to give older Americans help paying for medical care. They fought for years over how. Then, in one spring, they did what Washington does best when it cannot decide between three good ideas. They passed all three.

That is the real story of Medicare, and it is a better story than the one told in textbooks, where the program arrives like a sunrise and the only people who object are cranks. The cranks, it turns out, had a point or two. Let me take you through it in order, and I promise to keep the history straight and the jokes at the expense of institutions.

Before Medicare: the plan conservatives actually backed

Start in 1960, because the 1965 debate did not begin in 1965. In 1960 Congress passed the Kerr-Mills Act, named for Senator Robert Kerr of Oklahoma and Representative Wilbur Mills of Arkansas, as part of that year's Social Security Amendments. It created a program called Medical Assistance for the Aged. The idea was simple and, for its time, rather modern: the federal government would send matching money to the states so that they could pay the medical bills of older people who could not afford them. It was a targeted, means-tested program run through the states.

That is the conservative principle in one sentence. Help the people who need help, let the states design the delivery, and do not hand a government benefit to the retired banker and the retired janitor alike. A program that tries to help the person who cannot pay is a charity with a tax behind it. A program that helps everybody is an entitlement, and entitlements have a way of growing.

Kerr-Mills had weaknesses, and a fair account says so. States took it up unevenly. Participation was voluntary, some states did not take it up at all, and others set up programs that reached few people. Critics said, with some reason, that a patchwork was not a plan. The administration's allies in Congress argued that it was too slow and too uneven for the millions of older Americans without coverage, who in those years were often uninsured because private insurers did not eagerly sell to the old. Those are the facts the other side leaned on, and I do not wave them away.

But notice what the argument actually was. It was a debate over whether to fix the gap by building on a means-tested, state-based program or by creating a new national program funded through the Social Security payroll tax. Both sides wanted older Americans to be able to see a doctor. They differed on who should pay, who should be eligible and who should decide.

Operation Coffee Cup

In 1961 the American Medical Association launched a campaign against the administration's King-Anderson bill, the proposal to provide hospital insurance for Social Security beneficiaries. The campaign, "Operation Coffee Cup," was run by the AMA's Women's Auxiliary, the doctors' wives. The idea was that they would invite friends to their homes, serve coffee and play a recorded message, and then ask those friends to write to their members of Congress.

The recording featured Ronald Reagan, then an actor and a spokesman for several organizations, years before he held public office. His message, in short, was that this kind of program would be the start of a slide toward socialized medicine, and that the freedoms Americans took for granted could slip away one program at a time. I will paraphrase rather than quote, because the point is the argument, not the line.

I will give you the fair assessment of that record. The warning about "socialized medicine" has been mocked ever since, and the mockers have a point as far as it goes: Medicare did not make doctors into federal employees, and the sky did not fall in 1966. But the warning was never really about the first year. It was about the direction of travel, the claim that once the government paid for everyone's care it would eventually decide what care was paid for and at what price. Hold that thought. We are going to come back to it in 1983.

Also note the methods. A campaign built on coffee, a record player and letters to Congress is a grassroots effort in a very old-fashioned sense. Say what you like about its politics, it was a citizens' campaign using the First Amendment's right to petition. The coverage of the time treated it as a curiosity. I would argue that it deserves to be treated as a case study in how citizens organize.

The three-layer cake

The debate came to a head in 1965. After the 1964 election, in which Lyndon Johnson won in a landslide and the Democrats gained large majorities in both chambers of the 89th Congress, the administration's proposal for hospital insurance under Social Security was essentially assured of a vote. The question was what else would be added.

Here is where Wilbur Mills, the same man whose name was on the Kerr-Mills Act, did something remarkable. Three proposals were on the table, and he combined them. They became known as the three-layer cake.

1. The first layer was the administration's plan: compulsory hospital insurance for people 65 and over, financed by a payroll tax and paid through the Social Security system. This became Part A.
2. The second layer came from the Republican side. Representative John Byrnes of Wisconsin, the ranking Republican on Ways and Means, had proposed a voluntary program covering physician services, funded partly by premiums paid by beneficiaries and partly by general revenue. Mills took the idea, and it became Part B. It was voluntary, which mattered then and matters now.
3. The third layer expanded the Kerr-Mills approach into a joint federal-state program of medical help for the poor, covering far more people and services than Kerr-Mills had. This became Medicaid.

So the 1965 law was not just "Medicare." It was a package that created Medicare Parts A and B and Medicaid in one bill, the Social Security Amendments of 1965. The AMA had its own competing plan, called Eldercare. Mills folded elements of the rival proposals together, and the package that passed was his.

Here is the joke you are entitled to: when a committee cannot choose between a program for everyone, a program for the poor and a program for people who volunteer, it builds a program for everyone, a program for the poor, and a program for people who volunteer, and then calls it a compromise. The taxpayer has been paying for the compromise ever since.

On July 30, 1965, President Johnson signed the bill at the Harry S. Truman Library in Independence, Missouri. It was a deliberate piece of theater, and good theater: Harry Truman had proposed national health insurance as president and been stopped, and Johnson later honored the former president and his wife by presenting them Medicare cards #1 and #2, on a return visit to the library in January 1966. As political stagecraft, I give it a ten. It also tells you what the debate was really about. The people in that room had been fighting over this for years.

What the law promised

The promises in the 1965 act were specific, and worth reading in the text.

First, Medicare was sold as a program for older Americans with a limited, definable benefit. Part A covered hospital care and related services. Part B covered doctors and outpatient services. No prescription drug benefit. No coverage for the non-elderly disabled until 1972, when Congress extended eligibility to people receiving disability benefits and to those with end-stage renal disease.

Second, and this was the promise that mattered to its conservative critics, the law said that nothing in it should be read to authorize any federal officer or employee to exercise any supervision or control over the practice of medicine or the manner in which medical services are provided. That language is in the opening section of the Medicare title of the Social Security Act, section 1801. It was a reassurance to doctors and to the public that Washington was going to pay the bills and keep its hands off the practice.

Third, the early payment method was generous. Hospitals were paid their reasonable costs, and physicians were paid largely on the basis of their own charges. That is another way of saying that the government agreed to cover what providers said they spent, with limits that were not tight. If you were designing a system to reward spending, you could hardly do better than to say: spend what you like, we will reimburse what is reasonable, and you will be the one defining reasonable.

Here is the observation any host should make. A program that pays costs, with no cap, rewards cost. Nobody had to be a villain for this to happen. Hospitals did what any institution does when the payer says "send us the bill." They sent the bill.

The thing that happened to the promise

By the early 1980s the cost-based system was under strain, and Congress did what people do when an open-ended promise meets a closed budget. It changed the rules, in the Social Security Amendments of 1983, signed by President Reagan on April 20, 1983. The change created the inpatient prospective payment system. Instead of paying hospitals for whatever they reported as their costs, Medicare would pay a fixed amount per admission, set in advance, according to the patient's diagnosis-related group, or DRG. A hospital that treated a patient for less than the fixed payment kept the difference, and a hospital that spent more lost money.

I want to be fair to the reform. It was a conservative-minded idea in one respect: it replaced a blank check with a price, and it gave hospitals a reason to be efficient. Many economists regard it as one of the more successful payment reforms in the program's history. I think that is right.

But look at what had happened. In 1965 the pledge was that the government would not control the practice of medicine or interfere in how services were provided. By 1983 the government was setting the price for each category of hospital admission, in advance, from a table it wrote. Administered pricing is, whatever you call it, a form of price control. The promise of 1965 and the practice of 1983 were not in the same universe. That is the dynamic the skeptics had warned about, and while no one could have predicted the DRG table, the direction of travel was what the doctors' wives' coffee mornings were about.

And it did not stop. Physician payment later moved to a government fee schedule. The next decades brought more rules, more payment formulas and a growing apparatus of quality measures and audits. I am not telling you that each of these was a mistake. I am telling you that every one of them was a consequence of the same structure: when a third party pays the bills with public money, the public, through its government, will eventually want to set the prices.

One more footnote from the record of seniors themselves. In 1988 Congress passed the Medicare Catastrophic Coverage Act, which expanded benefits and financed them partly through an income-related surtax on the seniors who would use them. Many of those seniors objected to paying for it, and Congress repealed the law in 1989. That is not a conservative principle; it is a human one. People who are told a benefit is free will defend it, and people who are shown the bill will complain about it, loudly and effectively.

The conservative argument, in numbered form

Let me set out what I think the history shows.

1. A targeted program was an available alternative. Kerr-Mills, the Byrnes proposal and the AMA's Eldercare all aimed assistance at those who needed it. The argument was never between helping the old and abandoning them. It was between help for the needy and a universal entitlement.
2. Open-ended payment rewards spending. The cost-based system did not need a bad actor. It needed only a payer who reimbursed what was spent.
3. The promise of no control did not survive the bill. When the cost became a budget problem, the government answered with administered prices. That is not a scandal; it is an inevitability that the original sales pitch did not mention.
4. Voters respond to visible costs. The 1989 repeal shows that when beneficiaries see what a benefit costs, they push back, which is an argument for visibility in every health reform. The related problem of invisible financing is the subject of Medicare's Two Trust Funds and the 45 Percent Warning Congress Keeps Ignoring.

The best argument for 1965

I owe the other side its due. The best case for the program is that before it, a great many older Americans were uninsured, and that a means-tested system with eligibility tests and state variation left people out. The program reached nearly every older American, and a retiree no longer had to prove poverty to see a doctor. The dignity argument cuts both ways: a program that does not make you declare yourself destitute respects you. Advocates also point out that Medicare's popularity is the strongest argument for it. It is a program that Americans, once they have it, do not want to lose.

I accept most of that. What I do not accept is the conclusion that the design was the only option, or that its costs were an unforeseeable accident. The Founders gave Congress the power to tax and spend for the general welfare in Article I, Section 8, and the argument over what that phrase permits was already old when Madison and Hamilton disagreed about it, as told in Madison and Hamilton Fought Over Two Words, General Welfare, and We Still Pay. The question the 1965 debate asked, which the Constitution does not answer for us, is a prudential one: when you promise a benefit with no limit, who ends up setting the limit?

The post-war history of health insurance shows how often the unplanned shape of a program is what lasts. See How World War II Wage Controls Tied Your Health Insurance to Your Job for how a wartime wage rule created the employer-based system the 1965 law worked around.

What the history means for the next reform

The lesson I draw is a modest one, and I think it is right. The right time to design a limit is before you make the promise. Medicare was designed with no meaningful brake on cost, and it has relied since on repeated, painful patches. Any reform that expands coverage without saying who pays and how much is repeating 1965 with a bigger number.

And there is the other lesson, which is more hopeful. The 1965 law was a compromise that borrowed from the Republican Byrnes proposal and the voluntary principle. The history of the program includes plenty of examples of ideas from the center-right becoming part of the structure: voluntary participation in Part B, the prospective payment system, private plan choice under Medicare Advantage, as in Medicare Advantage Proves Seniors Will Choose Private Plans When Allowed. Our side has not only warned. It has built.

The case in brief

1. The Kerr-Mills Act of 1960 offered a means-tested, state-run alternative to a universal entitlement, and conservatives argued for building on that principle.
2. The 1961 "Operation Coffee Cup" campaign warned that a federal program would grow into a government that sets prices, and the 1983 prospective payment system, with its government-set DRG payments, shows the direction of travel.
3. Wilbur Mills's three-layer cake of 1965 combined hospital insurance, a voluntary Republican-origin physician plan and expanded aid for the poor, and Johnson signed it at the Truman Library on July 30, 1965.
4. Open-ended payment rewards spending, and the lesson for every reform is to design the limit before the promise.

What you can do: read the original 1965 text of section 1801 of the Social Security Act on Congress.gov or the Social Security Administration's website, and ask your representative's office whether any bill they support says in plain language how it would limit its own cost.