By Eric W. Fonkalsrud, M.D., and Michael D. Intriligator, Ph.D.

Exploding costs, limited accessibility and uneven quality of basic health care in the United States have been highlighted as a top priority for early correction by the Obama administration1. The cost of health care represents a significantly higher proportion of national income in the U.S. than in any other industrialized nation. Medical expenses currently consume almost 17 percent of the U.S. gross domestic product, up from 13.5 percent in 19982, and now are the most rapidly escalating expenditure in the federal budget. At the same time almost one-sixth of the U.S. population is uninsured, with many others being underinsured. Market forces have been unable to restrain the downward spiral of medical care delivery or the upward spiral of medical costs.

Recent enormous financial losses posted by General Motors and many other U.S. corporations have been attributed in part to the costs of covering health benefits for active and retired employees. Such costs are not borne by companies in countries with a national health system.

When the accelerating costs of private health care insurance, estimated to be about $14,000 annually for a family of four, are passed on to the employer, large companies are at a significant disadvantage in the international marketplace, and small employers often face bankruptcy. As a result, more and more companies have shifted the growing burden of health care costs to their workers. Over the past five years companies have seen their health care spending rise some 29 percent, while employees have seen their outlays for premiums, co-pays and deductibles rise some 40 percent.

The number of uninsured Americans is increasing rapidly as unemployment figures escalate in the current economic crisis and as companies engage in restructuring layoffs. Family incomes are decreasing, and health insurance premiums are continuing their rise. Even the temporary COBRA provisions for the recently unemployed are unaffordable for a large number of people and are costly for employers.

The burden for underinsured health care is placed increasingly on county, city and charity hospitals, which are already overcrowded, understaffed and progressively underfinanced. Currently over 40 percent of the hospitals in California are financially in the red. Furthermore, routine health care, as well as the treatment of severe disease and critical emergencies, is being funneled through busy emergency rooms where the wait to be seen by a physician may be as long as eight hours.

The federal Medicare program since 1965 has covered almost all citizens over age 65, and it is one of the most popular government programs existing today. Individual state-managed health programs with low reimbursement to caregivers cover additionally most children with congenital malformations and children with many other disorders. For low-income families, the combined federal and state-managed Medicaid program is available for the majority of medical disorders that are not primarily cosmetic. Medicaid’s very restrictive compensation to caregivers causes many of them to opt out of the system. On the other hand, few physicians or hospitals could currently survive without accepting Medicare patients.

During the past three decades, there has been a progressive transition of private health care insurance into a for-profit business with shareholders and extensive marketing expenses and increasing executive compensation that have boosted the overhead costs to well over 25 percent of consumer-provided revenues. The various marketed private health care options are so complex that even the well-trained physician often has great difficulty in interpreting the differences in patient coverage as described in the extensive brochures from each company.

The major ways that insurance companies manage risk and reduce their medical loss rates are reducing covered services, raising deductibles and co-pays, refusing to cover pre-existing conditions, and marketing to the young and healthy (cherry-picking). Some private health insurance companies have followed the pattern of the auto insurance industry, which commonly raises the premium if the policyholder is involved in an accident that is reported to the company. Similarly, patients who develop certain diseases that are expensive to treat may face increased premium charges, and in some cases companies even drop them from coverage plans.

It is increasingly apparent that all Americans should be provided with a standard basic medical benefit package, regardless of their income, employment status, health status, age or where they reside. Increasing numbers of Americans who seek health care just can’t afford it. Indeed, medical expenses have now become the leading cause of personal bankruptcies in the U.S. A current proposal in the health care debate that citizens be mandated to purchase their own medical insurance would, if put into effect, be unlikely to meet the desired goals of standard basic care. The Institute of Medicine has concluded that 22,000 people die annually largely due to lack of adequate medical insurance.

Amid the great disparity in the health care provided to Americans, President Obama has wisely and clearly stated that health costs must be reduced considerably and basic health care should be provided to all, and he regards these goals as being among his leading priorities. It is therefore discouraging that the major providers of medical care — including hospitals, physicians, nurses, clinical laboratories, and pharmaceutical, special equipment and insurance companies — have all requested, and in most cases have received, increasing compensation despite the economic crisis.Nationalization of health care with complete coverage in one step would be prohibitively expensive and unacceptable to many who are satisfied with their present private health coverage, as well as to Congress. We believe that the most effective way to correct the many problems of cost and delivery of universal health care in the U.S. is through a fundamental restructuring of the entire health care system, with prioritization of the most essential and important types of care to be delivered.

Our proposed reorganization, “Medicare Expansion,” would build a national care system by expanding on the existing Medicare program for citizens over the age of 65 years, with a gradual phasing out of the very uneven and underfunded state-administered Medicaid programs3. This restructuring would involve gradual changes in the age of eligibility for the Medicare system, with the most needy becoming eligible first and eventually the entire population covered.

The first step in the Medicare Expansion program would be to enroll children under 5 years of age, pregnant women and those with lifelong illnesses by the end of 2010. The remainder of the population would be phased in gradually, taking the most needy age groups first, until all persons are covered within five years. In 2011, those between 55 and 65 would be enrolled, and in 2012 those from 5 to 15 and those from 45 to 55 would be included. Those between 15 and 25 as well as those from 40 to 45 would be added in 2013. Finally, by the end of 2014, by adding the remaining population between 25 and 40 the entire U.S. population would be covered: There would be Medicare for all in a single-payer system. There would be no limitations based on pre-existing conditions, as is common in private insurance plans.

The changes proposed under the Medicare Expansion program would be relatively easy to make from an administrative standpoint since age is easily verified and the basic system is in place and functioning. The Medicare program has established an effective track record during the past 43 years, covering almost 20 percent of the population, primarily the elderly and the disabled, who use medical resources much more than any other age group. Physicians, community hospitals and major academic centers have adjusted to this program and continue to provide high-quality care on a fee-for-service basis.

Increasingly, both physicians and patients strongly desire a fundamental change in the present system of health care delivery, which involves multiple providers, opaque and diverse policies regarding coverage, and excessive paperwork. Both groups see Medicare as offering easy access and as both cost-effective and successful.

Medicare permits patients a choice of physicians and hospitals, but places a cap on reimbursement for both, similar to that for private insurance plans. Our proposed phased expansion of Medicare into a system of national health care would be an important basis for rationalizing the allocation of health resources, including greater use of preventive medicine; widespread use of comprehensive electronic records (which are easier to establish in a national program, e.g. VA hospitals, than in diverse community hospitals and are currently used in only 1.5 percent of U.S. hospitals surveyed); more emphasis on primary care; and limits on the treatment of patients who have conditions with a hopeless prognosis4. Credentialing of physicians, training programs and hospitals would be facilitated with electronic records. Caution must be taken to maintain vigilant privacy of patient records as mandated by the federal HIPAA legislation.

The program would utilize existing hospital facilities, with emphasis on more efficient administration. It would eventually lead to a single-payer system, and it would provide for care in rural as well as urban areas. Costs of marketing and middle management would be low as compared with the present system. Only slightly over 3 percent of current health care expenditures for the Medicare program is spent for administrative costs, whereas the figure may be up to 25 percent or even higher for private insurance plans.

Just shifting many people from private health care plans to Medicare would generate significant immediate savings that could be used to fund the new system. The extensive overhead costs of physician and hospital billing would be reduced markedly, and patients would have a much better understanding of what is and is not included among their health care benefits. Medications provided under the expanded Medicare program should in most cases be generic, with the government negotiating for the lowest price with competing pharmaceutical companies.

The Medicare program should in most cases encourage the use of hospitals that have more than one patient per room, unless there are specific indications for isolation or intensive care, in order to lower hospital and nursing costs.

Medicare Expansion thereby has the likelihood of reducing the overall cost of health care, while at the same time providing greater access to care. Caution will be required to maintain equitable reimbursement for physicians and nurses to encourage high-quality care and to encourage bright young people to enter the field. Since the current Medicare program is expected to be bankrupt by 2017, the urgency of extensive health care reform is apparent — reform in which the emphasis is placed on efficient, effective, high-quality, no-frills basic care.With an expanded Medicare system, all Americans would be covered regardless of pre-existing conditions, and they would have complete portability of care and medical records throughout the nation. Those people who prefer more extensive coverage for desirable but not essential procedures such as cosmetic surgery, and many other conditions for which very expensive care provides questionable benefit, or self-inflicted disorders, would be placed lower on the list of covered disorders, similar to what Oregon has provided for more than a decade. All citizens would have the option of purchasing supplemental private insurance for these conditions, as now exists in the Medicare program.

Further expansion of the national quality and assessment programs together with outcomes research studies would play an important role in eliminating unnecessary and ineffective services and treatments and standardizing health care delivery throughout the nation. The very erratic and incomplete employer-provided health coverage would be gradually phased out to reduce costs and to make businesses more competitive with those in other nations. Retiree health benefits were first offered in World War II during a period of wage and price controls when many companies had a young work force with few retirees. Today, however, it’s the reverse, particularly in old-line industries. For example, Detroit’s Big Three automakers currently have more than four times as many retirees as active hourly workers.

The Medicare Expansion program has some similarities with the Canadian health care system, although it differs in some major aspects. There would be no governmental limitation of total physicians produced or of entry into specialty training programs. The individual provinces administer the Canadian single-payer system, and it is a more efficient system than the U.S. Medicaid program. It entails minimal paperwork and middle management, while providing rapid and predictable reimbursement. Prompt care is provided for disorders requiring urgent treatment; some delays may occur for patients seeking elective procedures. Physicians are generally busier with direct patient care than their counterparts in the U.S., while their incomes in many specialties are currently very similar. Canadian physicians and patients have repeatedly voted to continue their current health care system.

In designing a package of basic health care benefits, the Obama administration must not only strike a balance between high-powered competing interest groups but also guard against offering too much or too little, and must seek to reduce fraud and abuse. Too extensive a package of benefits could bankrupt a system that is already heavily committed. Conversely, a package without adequate coverage of medical disorders may lead to people delaying in seeking care until illnesses require much more extensive and expensive therapy.

Considerable attention needs to be directed to what physicians and the government consider to be “basic care,” with reduction of excessive expensive testing and services, based on professional rather than primarily economic or legal considerations, the latter including defensive medicine5. Self-inflicted medical disorders such as obesity could be discouraged somewhat by a low tax on known harmful foods, such as the recently recommended tax for sugar-sweetened soft drinks6, and possibly levies on ammunition for firearms.

The current complex patchwork multiple-payer health insurance programs are much more expensive, regardless of how administered, and do not eliminate the majority of problems. By contrast, Medicare Expansion builds around an efficient and well-established single-payer system, and the incentive-driven but controlled fee-for-service mechanism supplemented by a private partnership for nonbasic and more extensive desired care. Medicare Expansion would thus establish a system of national health care in the United States that would both control costs and provide quality basic health care to all Americans.

This report was written by Eric W. Fonkalsrud, M.D., emeritus professor of surgery and chief of pediatric surgery at UCLA, and Michael D. Intriligator, Ph.D., professor of economics, political science and public policy, UCLA.


1. Iglehart, J., “The struggle for reform – challenges and hopes for comprehensive healthcare legislation.” N Engl J Med 2009; 360:1693-95.

2. Oberlander, J., “The US healthcare system: on a road to nowhere?” J Can Med Assoc, July 23, 2002.

3. Intriligator, M.D., and Fonkalsrud, E.W., “Healthcare reform by Medicare expansion” (blog), 2009-04-21.

4. Ashish, K.J., DesRoches, C.M., and Campbell, E.G., et al, “Use of electronic health records in US hospitals.” N Engl J Med 2009; 360:1628-38.

5. Medicare payment policy. Report to the Congress. Washington, D.C.: Medicare Payment Advisory Commission, March 2009.

6. Brownell, K.D., and Frieden, T.R., “Ounces of prevention – the public policy case for taxes on sugared beverages.” N Engl J Med 2009;360:1805-08.

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