The Medicare program was established in 1966 to provide medical care to the elderly and was later extended to the disabled. However, the Health Care Financing Administration (HCFA), the federal agency responsible for the program, must control the cost of enrollee care in a structure that offers no incentive to Medicare recipients to economize on their use of the system and provides perverse economic incentives to providers for cost control. The spiraling cost of health care, the aging population, and the political reality that the Medicare program is seen as sacred by the powerful lobby that represents its recipients, suggests the need for a new approach to Medicare financing. Ronald Vogel examines the political and economic considerations of program reform and shows how Medicare could employ the managed care model for cost control to address the supply side of the equation. More importantly, the pricing problem could be solved by requiring providers to submit...

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