American healthcare didn’t collapse overnight. Its current dysfunction began with a single moment in time: the introduction of Medicare in 1965. What started as a well-meaning program to provide healthcare for seniors soon became a systemic poison pill. By baiting providers with high reimbursement rates early on, then switching to paying below the cost of care, the federal government created a healthcare crisis that rippled through the entire system. Today, this bait-and-switch explains why healthcare costs have exploded and why providers are forced to inflate prices—not out of greed, but to keep their doors open.
JFK’s Vision vs. LBJ’s Reality
In the early 1960s, President John F. Kennedy proposed a cautious and incremental approach to healthcare for seniors, tying it directly to Social Security. JFK’s plan aimed to cover catastrophic costs while minimizing market disruptions. It was an approach that acknowledged fiscal realities and respected the balance between public and private systems.
After JFK’s assassination, Lyndon B. Johnson took up the cause but delivered something very different. Medicare, introduced as part of LBJ’s Great Society programs, promised sweeping coverage and generous reimbursement rates. However, these initial rates were unsustainable and grossly underestimated. While LBJ’s plan achieved its political goals, it planted the seeds of the healthcare system’s current dysfunction by introducing a program that promised far more than it could sustainably deliver.
Medicare’s False Start
When Medicare was introduced, its creators projected a modest annual cost of $9 billion by 1990. But by that year, Medicare’s actual costs had ballooned to over $110 billion—a 1,122% miss. This wasn’t just bad math; it revealed a fundamental flaw in the program’s design.
Initially, Medicare reimbursed providers generously, often paying more than private insurance. This over-reimbursement was intentional, winning hospitals and doctors’ support for the program. But this generosity didn’t last. Over time, Medicare reimbursement rates stagnated, often falling well below the actual cost of care. By the 1980s, providers were receiving only a fraction of what their services were worth.
The result? A massive shortfall in revenue that providers couldn’t afford to absorb. They had to find a way to make up the difference, and they couldn’t charge Medicare patients more directly because of federal rules (see Medicare’s balanced billing restrictions: https://www.cms.gov).
The Cost-Shift Spiral
Medicare’s rules prohibit providers from billing patients directly for the difference between what Medicare reimburses and the actual cost of care. This leaves providers with only one option: inflate prices to cover the shortfall. Here’s how the math works:
Imagine a hospital provides $50,000 worth of services to Medicare patients and $50,000 worth of services to privately insured patients. In a fair system, the hospital would receive $50,000 from Medicare and $50,000 from private insurance, totaling $100,000 to cover its costs. However, Medicare reimburses only $30,000 for its share, leaving a $20,000 shortfall. To cover that gap, the hospital inflates the charges for both Medicare and private patients to $70,000 each. Medicare still reimburses only $30,000, but private insurers are now billed $70,000 for their share. This ensures the hospital receives the full $100,000 it needs to break even.
This shift forces private insurers to absorb the Medicare shortfall, effectively subsidizing the government program. To recoup these costs, private insurers raise premiums, deductibles, and out-of-pocket expenses for their customers. Meanwhile, patients without insurance are hit the hardest, as they’re charged the full inflated “list price,” driving many into debt.
Non-Profits Aren’t the Problem
Contrary to popular belief, most hospitals in the U.S. are non-profits, not for-profit entities. According to the American Hospital Association, 57% of hospitals in the U.S. are non-profit, 20% are government-run, and only 23% are for-profit.
Non-profit hospitals are legally required to reinvest any surplus revenue into their operations, whether that’s upgrading equipment, expanding facilities, or providing charity care. They also bear the brunt of Medicare and Medicaid underpayments, often while serving large populations of uninsured or underinsured patients.
Private practices and independent physicians, while for-profit, operate on slim margins. Many are being driven out of business by the same systemic pressures—rising costs, shrinking reimbursements, and crushing administrative burdens.
In other words, the skyrocketing cost of healthcare isn’t about greed. It’s about survival.
Why Healthcare Costs Have Exploded
The root cause of today’s soaring healthcare costs lies in Medicare’s underfunding and the hidden tax it imposes on the private sector. This system distorts market dynamics by forcing private insurers to subsidize government shortfalls, drives premiums and deductibles to unsustainable levels, and pushes self-pay patients into financial ruin due to inflated “list prices.”
The result is a system that feels broken for everyone, even as most providers—especially non-profits—are simply trying to keep their doors open.
The Doom-Laden Trajectory
Politicians frequently promise to “save Medicare,” but at its current trajectory, the system is headed for collapse. The constant underfunding and cost-shifting are unsustainable. As more private insurers and providers struggle to stay afloat, we face a grim choice: collapse of the private system or a full government takeover. A single-payer system will be proposed as the only solution, but it will come at the cost of competition, innovation, and patient choice.
Without systemic reform, the bait-and-switch that began in 1965 will finish its work, leaving behind a healthcare system that fails patients, providers, and taxpayers alike.
A Path Forward
To stabilize healthcare, we must address the root causes. Medicare must pay providers at rates that reflect the true cost of care. Patients and taxpayers need a clear understanding of how healthcare dollars are spent. Streamlining billing and compliance could reduce costs across the board.
The clock is ticking. Unless we confront Medicare’s systemic flaws, the very system designed to save healthcare may ultimately destroy it.
Dave Soulia | FYIVT
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