Rethinking the Medicare Eligibility Age
Medicare Series Report #1
The National Bipartisan Commission on the Future of Medicare is scheduled early next year to make recommendations on how to ensure the financial integrity of the Medicare program through 2030. As part of its deliberations, the Congress requires the Commission to “make recommendations on modifying age-based eligibility to correspond to changes in age-based eligibility under the OASDI program and on the feasibility of allowing individuals between the age of 62 and the Medicare eligibility age to buy into the Medicare program.”
This analysis indicates that increasing the Medicare eligibility age would leave many newly ineligible individuals without health insurance because many of these individuals would not be able to afford the high cost of private coverage for this age group. Also, increasing the retirement age would increase the cost of employer-sponsored retiree coverage, which could cause some employers to discontinue these benefits leaving still more retirees uninsured.
Allowing individuals to buy into Medicare prior to reaching the Medicare eligibility age would offset some of this loss of coverage. However, the buy-in would be unlikely to help many of the uninsured age 62 and older because most of the uninsured in this age group have relatively low incomes and would not be able to afford the Medicare buy-in premium. Premium subsidies would be needed for the buy-in to have a significant impact on the number of older Americans with health insurance.
Increasing the Medicare Eligibility Age to 67
Increasing the Medicare eligibility age (to 67 by 2020) would reduce Medicare costs by effectively reducing the number of beneficiaries and inducing later retirement resulting in increases in payroll tax revenues. Studies have shown that cost savings for the government would be moderate, especially in the short term. One study predicts that it would result in a 6.2 percent reduction in Medicare spending and an 11.3 percent reduction in Medicare enrollment. State and federal Medicaid costs would also increase because Medicaid would have to cover costs for aged enrollees that otherwise would have been covered under Medicare for persons age 65 and 66. However, federal tax revenues could increase as workers delay retirement to the new Medicare eligibility age.
While the savings to Medicare could be substantial, increasing the Medicare eligibility age would increase costs for employers. Retiree health benefits often offer full coverage prior to Medicare eligibility, and may or may not include “wrap-around” or Medigap coverage once the employee has enrolled in Medicare. Employers would face higher costs in their retiree health benefits program because they would provide an additional two years of full coverage for retirees aged 65 and 66 resulting in an estimated 16 to 18 percent increase in retiree health benefits costs. This would be likely to fuel the existing trend for employers to drop or restrict retiree health care benefits.
The available evidence suggests that increasing the Medicare eligibility age would have a significant effect on health care insurance availability for those aged 65 to 66. It is likely that many workers would decide to remain in the workforce longer as a result of the legislation in order to maintain their insurance coverage. However, many individuals age 65 and 66 would become uninsured because they could not afford private insurance. In addition, many employers might drop their retiree benefits due to the increase in costs to these programs, resulting in an additional increase in the number of uninsured. Thus, some form of subsidy would be needed to ensure that persons who were displaced by the increase in the Medicare eligibility age were able to obtain coverage
The buy-in program would have little impact on the uninsured near-elderly population. This is because the average income of uninsured persons age 55 to 64 is estimated to be only $9,600. This means that the buy-in premium would equal 20 to 25 percent of their income. Consequently, few of the near-elderly uninsured population would be likely to enroll. Given the high cost of insurance for persons in this age group, subsidies would be required to assist this population in obtaining coverage.
The buy-in would also create opportunities for employers to effectively “dump” their retiree health plan beneficiaries into Medicare at a substantial cost to Medicare. For example, employers with average retiree health care costs that are greater than the Medicare buy-in premium could eliminate their early retiree benefit and increase retiree pension payments by the amount of the buy-in premium so that retirees could buy the coverage themselves. This would save money for the employer without necessarily having a detrimental impact on retirees, but would saddle Medicare with beneficiaries who cost more than what is paid in premiums. Moreover, the existence of the buy-in could provide a rationale for eliminating the retiree benefit altogether, regardless of the impact on the retiree, knowing that the retirees have the option of buying coverage through Medicare at a group rate. These responses would shift some of the industry’s most costly early retirees to Medicare.
For many of the near elderly, the Medicare buy-in program would tend to be viewed as a price-competitive alternative to private insurance for persons with high health care costs. For example, individuals who have not been able to get insurance due to a history of illness and those who face stiff preexisting condition limitations in the individual market would often see the buy-in as an attractive option. Also, individuals facing high premiums due to health status would often find it less costly to buy into Medicare. Thus, Medicare would tend to attract persons with disproportionately high health care costs. Consequently, it is not clear that the provisions of these proposals that are designed to cover the cost of this “adverse selection” are adequate. This could result in a substantial net increase in Medicare costs.
Enacting the buy-in for persons under the age of 65 would have some of the opposite effects of raising the Medicare eligibility age to 67. For example, the buy-in would encourage more individuals to retire early, and might encourage a general shift from private insurance to public insurance for the near aged. The proposal might be successful in reducing the barriers to health insurance for those who find it difficult to obtain insurance in the individual market. Specifically, it would permit some individuals to benefit from Medicare’s group premiums (because risk is spread over a large number of people) and the lack of exclusions for preexisting medical conditions.
Medicare Eligibility Age Increase with the Buy-in Option
Enacting the buy-in could provide something of a safety net for those affected by an increase in the Medicare eligibility age. Newly ineligible persons age 65 and 66 would be able to buy in and receive the same coverage that they would have had at age 65. However, this provision effectively protects only those who can afford the buy-in premium. While very low income aged persons would be able to get full coverage under Medicaid, near-poor individuals would often be unable to afford the buy-in premium and would go uninsured.
Therefore, a program that provides at least partial subsidies to lower income individuals who would be displaced by the increase in the Medicare eligibility age would be needed if we are to avoid an increase in the number of uninsured persons age 65 to 66. Indeed, the growing difficulties faced by the near elderly in obtaining insurance would seem likely to put pressure on Congress to provide some form of subsidy for this population long before the Medicare eligibility age was actually increased to 67 under these proposals.
The Congress created the National Bipartisan Commission on the Future of Medicare to make recommendations on how to ensure the financial integrity of the Medicare program through 2030. The Commission also has broad freedom to reevaluate all aspects of Medicare in light of the changing needs of older Americans. A major issue in its deliberations will be evaluating the possibility of increasing the age of Medicare eligibility from 65 to 67 by 2020. Increases in longevity have increased the number of years that retirees can be expected to receive Medicare benefits, thus placing an ever-increasing strain on the Medicare Hospital Insurance (HI) fund. Rolling back the Medicare eligibility age would reduce costs by effectively reducing the number of persons covered under the program and increasing payroll tax revenues for persons who choose to delay retirement. Moreover, these increases in longevity have extended the working lives of individuals, suggesting that the age of retirement could be increased without great hardship.
At the same time, there is a growing appreciation of the difficulties that the “near elderly” (i.e., persons age 55 to 64) can experience in finding affordable health coverage, which has led to proposals allowing the “near elderly” to buy into the Medicare program. For example, the President has proposed to permit certain individuals between the ages of 55 and 64 to buy into the program by paying an “actuarially fair” premium. Also, the Congress directed the Medicare Commission to consider a Medicare buy-in option for persons beginning at age 62 as part of a broader plan to gradually increase the Medicare retirement age. These proposals would provide a new source of coverage for near elderly individuals who are unable to obtain insurance from an employer or in the individual insurance market due to health status or high premium prices. If implemented together with an increase in the Medicare eligibility age, the buy-in would provide a source of coverage for newly ineligible individuals, as long as they can afford the premium. However, these potential expansions in coverage must be considered in light of the Commission’s mandate to produce a plan that will extend the financial integrity of Medicare through 2030.
It may seem paradoxical that while the Commission is examining a rollback of the Medicare retirement age as a means of reducing costs, it is also considering a Medicare buy-in option that could add to program costs. However, these two proposals are arguably in harmony with the notion of protecting the health of older Americans in an age of fiscal constraint. If the proposals achieve their objectives, the joining of these two plans has the potential to extend the life of the Trust Fund while reducing the number of uninsured near-elderly Americans. There has also been speculation that allowing the near elderly to buy into the Medicare program may encourage greater support for raising the eligibility age to 67, by providing a “safety net” for newly ineligible seniors.1 In fact, providing the buy-in may be necessary to paving the way to an increase in the Medicare eligibility age. For example, a recent Gallup poll indicated that 64 percent of the general public opposes increasing the Medicare eligibility age from 65 to 67, while another poll found that 68 percent of the general public supports the near-elderly buy-in concept.2,3
The Medicare program includes a Hospital Insurance (HI) program (Part A) and a Supplemental Medical Insurance (SMI) program (Part B) which covers physician services. The Medicare HI trust fund was originally established to provide long-term financing for hospital insurance under Part A. Taxes were to be collected from workers and saved to pay for their health care when they retire. However, funding for the program has never been adequate to meet future obligations. Consequently, the program has developed into a “pay-as-you-go” system where nearly all of the revenues collected each year are used to fund current obligations, with little saved to pay for future benefits.
The cost of the Medicare program was about $208 billion in 1997 and is expected to increase steadily as the baby-boom population approaches retirement. Medicare spending is projected to grow at an average annual rate of 7.4 percent over the next ten years, while the gross domestic product (GDP) of the US is expected to grow at a rate of only 4.5 percent over this period.4 Thus, Medicare will consume an ever-increasing share of the federal budget and the nation’s GDP.
Throughout the next decade, annual revenues for the HI trust fund will be less than the cost of benefits paid under the program in each year. Consequently, the HI trust fund will be drawing down whatever savings the fund has accumulated just to pay current obligations. Even after accounting for the Medicare provisions of the Balanced Budget Act (BBA), the trustees of the Federal Hospital Insurance Trust Fund estimate that by the year 2008, these savings will be exhausted and the Medicare HI trust fund will be unable to meet its obligations.5 This estimate is based upon the assumption that the Health Care Financing Administration (HCFA) will be able to implement the Medicare+Choice program created under the BBA, which is expected to result in substantial savings to Medicare. However, in the light of the problems that HCFA is having in implementing key aspects of the program, it is not clear whether the Medicare+Choice program can be implemented in time to realize the expected savings.6 This could move up the point at which the trust fund is exhausted by a few years. The trustees’ report indicates that even with the timely implementation of the Medicare+Choice program, the annual shortfall in funding will grow to an amount equal to about 2.68 percent of taxable payroll by 2030 (Figure 1).
Long-Range Hospital Insurance Trust Fund Income and Cost as a Percentage of Taxable Payroll
Source: Annual Report of the Trustees of the Medicare Hospital Insurance (HI) Trust Fund for 1998.
Part B of Medicare, which covers physician care, is funded through monthly premiums paid by enrollees and federal general revenues. The Part-B premiums were initially set at a level sufficient to pay 50 percent of physician service costs under the program with the remainder paid out of general revenues. However, because the program has always limited increases in the Part-B premium to no more than the growth in the Consumer Price Index (CPI), Part-B premiums now cover only 25 percent of Part-B program costs, while 75 percent is paid from general revenues. The BBA requires that Medicare Part-B premiums be permanently set to cover 25 percent of program costs into the future.7 Thus, Part-B costs will create growing pressure on the federal budget as the number of beneficiaries increases.
Rolling back the Medicare eligibility age to 67 has been proposed as a means of reducing the drain on the Part-A trust fund and reducing general revenue obligations under Part B. Demographic changes in recent years, including longer expected lifespans and earlier retirement from the workforce, have reduced the number of active workers who support each Medicare beneficiary’s costs. The ratio of workers to Medicare enrollees will decrease when the large “baby boom” generation retires, from 3.9 workers per enrollee in 1996 to 2.3 workers per enrollee by 2030. This will create ever-increasing pressure to control the growth in program costs.
At the same time that Medicare retiree health care costs are rising, there is growing concern about the adequacy of the coverage available to the near elderly. For example, data from the Current Population Survey (CPS) indicates that while 11.5 percent of workers between the ages of 55 and 64 were uninsured, 15.8 percent of retirees aged 55 to 64 were uninsured, suggesting that early retirement is often associated with reduced insurance coverage.8 Persons in this age group face multiple difficulties in obtaining insurance coverage due to recent reductions in the availability of employer-sponsored retiree health benefits, increasing risk of sickness and major health expenditures, and difficulty purchasing affordable health insurance in the individual market. Of companies with more than 500 employees, only about 40 percent offered retiree health benefits in 1996, down from 46 percent in 1993. Also, a recent article by the Alpha Center indicates that older individuals purchasing private insurance on their own are facing very high premiums. For example, a recent Alpha Center study found that HMO premiums for a healthy 60-year old are typically four times as great as the premium for a healthy 25-year old.9 In addition, retirees who have these benefits are facing growing cost-sharing obligations.10
In response to these concerns, President Clinton has proposed to allow some near elderly to “buy in” to the Medicare program at an “actuarially fair” premium cost. The buy-in would effectively guarantee issue of coverage to these individuals without preexisting condition limits. Also, the premium for the buy-in would not vary with the health status of the individual as it often does in the individual market. In the context of increasing the Medicare eligibility age, the buy-in would provide a means of obtaining coverage for newly ineligible persons age 65 and 66 if they could afford the premium.
Proposals to roll back the Medicare eligibility age, while also allowing the early retiree buy-in, are sure to get a great deal of attention by the Commission. Senator John Breaux, Chairman of the Commission, has urged Congress not to take any action regarding the President’s Medicare buy-in proposal until the Commission has had an opportunity to consider it. However, the President is eager to move forward with the proposed expansion and has endorsed the Medicare Early Access Act, a bill introduced concurrently by Sen. Daniel Patrick Moynihan and Rep. Pete Stark that incorporates all the principles of the Clinton plan. Other lawmakers, such as Rep. McDermott, have also suggested expanding Medicare’s benefits package to include prescription drug coverage. Consequently, the Commission can be expected to consider several ways of expanding Medicare’s scope as part of the process.
III. increasing the Medicare eligibility age to 67
Raising the Medicare eligibility age from 65 to 67 has been proposed as a way to extend the solvency of the Medicare Part A Trust Fund. Raising the age of eligibility would reduce the number of beneficiaries receiving benefits while also increasing the number of individuals paying into the fund, effectively extending the Trust Fund’s ability to pay medical claims. In addition to improving Trust Fund solvency, this proposal would keep Medicare eligibility consistent with the Social Security normal retirement age, which is scheduled to gradually increase to age 67 by 2020.11 Moreover, increasing Medicare’s eligibility age would be in step with changes in life expectancy and longer potential work life that have occurred since Medicare was enacted in 1965.
The proposal to increase the Medicare eligibility age was considered by the Congress just last year. In fact, the Senate version of the Balanced Budget Act of 1997 (BBA) contained a clause that would alter the Medicare eligibility age from 65 to the age at which an individual is eligible to receive full Social Security benefits (age 67 by 2020).12 (Medicare beneficiaries age 65 and 66 account for 10.9 percent (4.1 million) of program beneficiaries and about 6.2 percent of program costs.13) However, eligibility for Medicare based on disability status would remain unchanged, thus allowing persons age 65 and 66 to obtain coverage as a disabled individual if they qualify.14 The Senate passed this version of the BBA with an overwhelming majority, but the House, which determined that it was not authorized to consider such legislation, did not specifically vote on this bill. Consequently, the rollback of the Medicare eligibility age was not included in the BBA. However, as discussed above, the BBA did instruct the newly created Medicare Commission to consider such a measure. Figure 2 summarizes some of the envisioned pros and cons of increasing the Medicare eligibility age to 67, as was proposed in the Senate version of the BBA.
A. Impact on the Trust Fund and Government Costs
Raising the Medicare eligibility age would ultimately reduce the number of people on Medicare, resulting in reduced Medicare spending and additional payroll tax revenues for those who continue to work past age 65. However, some of the affected 65 and 66 year olds would be able to obtain Medicare coverage during these years as disabled individuals. The Congressional Budget Office (CBO) estimates that about 10 percent of Medicare beneficiaries age 65 to 66 would retain Medicare coverage under the Disability Insurance (DI) program. Thus, according to CBO, raising the eligibility age would likely reduce the number of beneficiaries aged 65 to 66 by 90 percent (3.57 million), with a corresponding reduction in expenditures for that age group. However, the actual reduction in expenditures could be less than CBO has estimated because the disabled, who would continued to be covered, typically have higher than average health care costs. Another study showed that the proposal would reduce the total number of beneficiaries by 11.3 percent and would reduce total program costs by 6.2 percent.15
Medicare Eligibility Age Increase Pros and Cons
|Consistent with Social Security age rollback and early buy-in provisions.Consistent with original intent to provide benefits at end of life. As people live longer, the age that they begin to receive benefits should correspondingly increase.Discourages early retirement. Potential for more workers to continue paying into Medicare Trust Fund, extending its solvency.Individuals aged 65 to 67 have a higher average income than the average Medicare beneficiary does, thus they can more likely to afford private insurance.Individuals aged 65 to 67 are healthier than the average Medicare beneficiary is, thus the cost of other insurance may be affordable.||High cost for companies who provide health benefits to retirees ineligible for Medicare.No significant impact on Medicare finances because the delay postpones, but does not reduce, aggregate program costs.Beneficiaries aged 65-67 cost less than two-thirds of the average Medicare beneficiary cost; eliminating their coverage may produce little savings.Might increase governmental costs if people are older, and potentially sicker, when they do enroll. This would be exacerbated by individuals who enroll in Medicare after a period of time without insurance coverage.Even though the 65-67 age group is wealthier in comparison to their Medicare peers, they still do not have enough income to buy insurance.Medicare savings would be partly offset by increased Medicare enrollments based on disability, not age.|
The long-term cost savings for the government are substantially less clear. Waidmann estimates that the cost savings would add no more than a year to the life of the Medicare Trust Fund, even if the program were implemented immediately.16 While the Congressional Budget Office (CBO) has not published an analysis of the impact of raising the Medicare eligibility age to 67, prior to the passage of the BBA, the CBO did analyze a different proposal that would have raised the Medicare eligibility age from 65 to 70. In testimony before the Senate Special Committee on Aging, the CBO predicted that raising the eligibility age to 70 would reduce Medicare expenditures by nearly 15 percent but that Medicare spending would still be equal to seven percent of the GDP by 2007. The report also said that it “would do little to lower total health care costs and would lengthen the period of time in which people who opted for early retirement under Social Security might have difficulty getting private insurance coverage.”17
As discussed above, part of the reason for these modest projected savings is that those aged 65 to 66 who would lose their eligibility status (i.e., would not qualify for disability insurance) typically represent the best health risks and are much less costly to insure than older Medicare beneficiaries.18 In fact, these estimates may yet overstate the savings to Medicare because newly ineligible individuals who are uninsured from ages 65 to 66 may try to delay getting care for expensive procedures until health coverage becomes available. This “pent-up demand” is likely to increase expenditures for beneficiaries at age 67 when they become eligible for Medicare. However, it is important to note that while these cost savings are relatively modest, especially in the early years of implementation, all of the cost savings for Part A of the program would go toward reducing the Trust Fund’s deficit. Therefore, a small percentage reduction in spending represents a larger percentage impact on the Trust Fund deficit. For example, a 6.2 percent reduction in Medicare spending in 2030 corresponds to roughly a 12.9 percent reduction in the funding deficit in that year.
Rolling back the Medicare eligibility age would also result in increased Medicaid costs for aged persons. Under current law, persons age 65 and older who meet the income eligibility levels for the Supplemental Security Income (SSI) program are eligible for Medicaid. Also, certain low-income aged persons are eligible for Medicaid as Qualified Medicare Beneficiaries (QMBs) or as Supplemental Low-Income Medicare Beneficiaries (SLMBs).19 Typically, Medicaid provides “wrap-around” coverage for copayments and services not covered under Medicare for these persons. Moving the Medicare eligibility age to 67 would result in Medicaid covering the full cost of care for these individuals, most of which otherwise would have been paid by Medicare. This would result in increased Medicaid spending for states and the federal government.
While the savings to Medicare could be substantial, increasing the Medicare eligibility age would increase costs for employers. Retiree health benefits often offer full coverage prior to Medicare eligibility, and may or may not include “wrap-around” or Medigap coverage once the employee has enrolled in Medicare. Employers would face higher costs in their retiree health benefits program because they would provide an additional two years of full coverage for retirees aged 65 and 66. A recent study by Hewitt Associates estimated that retiree benefit costs would increase by 16 to 18 percent if Medicare’s eligibility age were immediately increased to 67.20 Businesses would also need to record on their balance sheets a significant increase in future obligations for promised retiree benefits for their active employees with possible effects on their ability to raise capital.21 These future obligations would affect businesses immediately upon enactment of the age increase, even though these additional retiree costs would not be incurred for several years.
Employer health benefits costs would increase in several other ways, even in instances where the employer does not have a retiree health plan. For example, many working spouses of persons affected by the increase in the Medicare eligibility age would be likely to cover these individuals as dependents under their employer’s plan, resulting in higher costs to employers.22 Also, many workers would be likely to exercise their option to continue their coverage under COBRA.23 COBRA currently requires employers with health plans to permit former employees to continue their employer coverage for 18 months by paying a premium not to exceed 102 percent of the premium for active enrollees. This would increase costs for employers because the actual cost of coverage for persons age 65 and 66 would be well above 102 percent of average costs for active workers.
In response to these cost increases, some employers may drop their retiree health benefits program or may offer significantly reduced benefits. There is already a trend among employers to drop or restrict retiree health coverage. As reported in Medicine and Health, a Hewitt Associates study found that very large companies offering Medigap coverage to employees 65 and older dropped from 80 percent to 71 percent between 1991 and 1996. In addition, there was a 16 percent increase in the number of employers that required retirees to pay premiums for these benefits during this period.24
While rising costs for retiree coverage would encourage employers to discontinue retiree coverage, employers are likely to reevaluate their policies on retirement in light of a broad range of issues. These will include issues such as: relative employee productivity in later years; the impact of retirement on the “organizational knowledge” within the firm; the cost of hiring and training new workers; and the payroll implications of retaining older workers. Employees may also place greater value on retiree health benefits as a result of the increased age of Medicare eligibility and could be willing to give up other compensation to maintain these benefits. Thus, companies would face conflicting incentives relative to this policy change, and would have to weigh all of these factors when determining whether to offer, retain, or reduce retiree benefits. Companies would likely determine the most cost-effective means of providing benefits while remaining financially viable. Moreover, the increase in the retirement age would phase in gradually by 2020 suggesting that any changes in employer policy resulting from this proposal may not materialize until well into the next century. Thus, the overall impact of this policy on employer-sponsored retiree health benefits is unclear.
Regardless of employers’ employment policies, increasing the Medicare eligibility age would likely encourage employees to retire later so they can retain employer-sponsored health insurance until they reach the increased Medicare eligibility age. This would be true even for companies that offer retiree health benefits, since many businesses require a greater degree of cost sharing for retirees than for active employees. Also, due to the difficulties in obtaining coverage in the individual market, employees with a history of illness may be especially likely to delay retirement until they reach the Medicare eligibility age. Consequently, some companies may experience cost increases as a disproportionate number of higher-cost employees delay retirement to ensure consistent health insurance coverage for themselves and their spouses.
If the Medicare eligibility age were increased, many workers may delay retirement until they reach the new eligibility age. Access to health benefits has a significant impact on the retirement decision. Studies of retirement behavior have found that access to retiree health benefits (i.e., continuation of health insurance benefits) encourages employees to retire earlier, while lack of benefits encourages individuals to delay retirement until they become eligible for Medicare, especially if the worker has a health problem.25 One study also noted that 61 percent of employees indicated that they would not retire early without knowing that they would have health insurance coverage.26 Delayed Medicare eligibility, compounded with a potential decline in employer-based retiree health benefits, would encourage more employees to remain in the workforce to retain health insurance. This would be especially true for employees with a history of illness who would face high premiums and preexisting condition limitations in the individual market. In fact, private premiums for persons age 65 and 66 are likely to be $4,000 per year or more in many parts of the country.
Some individuals would be able to maintain coverage by becoming covered under a spouse’s employer plan as a dependent or through retiree coverage for workers in firms that continue to offer this coverage. For those individuals without employer-based retiree health benefits or coverage as a dependent under a spouse’s employer plan, the cost impacts of this proposal could be significant. However, individuals without access to this coverage would have the opportunity to pay for health insurance out of their own pockets, either by purchasing COBRA insurance through their former employer (for up to 18 months) or by purchasing insurance through the individual market. COBRA insurance coverage would likely be less expensive for the individual (i.e., $2,000 – $4,000 per year) than non-group insurance (i.e., $4,000 or more per year) because retiree payments are currently capped at 102 percent of active employee premiums.
Individual coverage can be extremely expensive, especially for people at or near retirement age, and can be unavailable for persons with a history of illness. A recent study by the Alpha Center for the Kaiser Family Foundation shows that because most insurers set rates based on an applicant’s age and health status, the near elderly in the individual market may pay up to three times as much as younger, healthier enrollees in the same plan.27 High prices, in turn, could force the near elderly to purchase minimal coverage with high deductibles and copayments, increasing out-of-pocket expenses. Moreover, while the Health Insurance Portability and Accountability Act (HIPAA) required guaranteed issue of insurance for workers, most states have not acted to ensure the availability of insurance in the individual market. Thus, many individuals with a history of illness will either not be able to obtain coverage or will face substantial pre-existing condition limitations.
Ultimately, raising the Medicare eligibility age would increase the number of elderly without insurance. Under current law, virtually all Americans age 65 and older are eligible for Medicare. The only ones who are not covered are persons who do not have enough covered quarters of employment for themselves or from a spouse to qualify. While much of the affected population would be able to retain coverage under an employer plan or purchase individual coverage, many individuals may not have coverage at their place of employment and may not be able to afford insurance in the individual market. While very low-income persons would continue to be eligible for Medicaid coverage, many poor and near poor individuals would go without insurance. Consequently, some form of subsidy would be needed to ensure that all of those individuals who are displaced by the increase in the Medicare eligibility age would be able to obtain coverage.
In addition, some affected individuals may face substantial reductions in coverage, leaving many persons “underinsured.” This would typically occur in instances where persons age 65 to 66 purchase individual coverage that covers fewer services or has higher patient cost sharing than Medicare. Also, many persons with a history of illness would be unable to obtain coverage that does not include substantial preexisting condition limitations, thus effectively leaving individuals uninsured for the very condition(s) that they suffer. Waidmann estimates that about 34 percent of affected individuals would be uninsured or underinsured under a rollback in the Medicare retirement age (Figure 3).28 About 41 percent of these individuals would have employer-based coverage, while about 7 percent would have individual coverage.
IV. Allowing early buy-in to the Medicare program
President Clinton launched the debate on a potential Medicare buy-in program to address the needs of the “near elderly,” who face the combined difficulties of rising health insurance costs and declining health status. Sponsors of the Medicare Early Access Act (S. 1789), which includes all of the provisions of the President’s proposal, point to increasing incidence of heart disease, stroke, and cancer as individuals approach retirement age. This Act would provide the opportunity for certain individuals to purchase Medicare benefits prior to age 65, thus providing insurance coverage to people for these and other health risks. Funding would come primarily from actuarially based premiums and surcharges, with additional funds from projected savings from Medicare fraud and abuse enforcement. There are three different means of participation under this proposal:
Re-Distribution of Former Medicare Eligibles by Insurance Status
Source: Waidmann, T. A., “Potential Effects of Raising Medicare’s Eligibility Age.” Exhibit 4, using data from the 1992 Medicare Current Beneficiary Survey. Health Affairs: 17(2). March/April 1998.
- General Buy-In Available to all individuals age 62 or older. Participants would pay a monthly premium set at the actuarial value of the Medicare coverage (estimated to be $300 per month) until they reach the age of Medicare eligibility (currently age 65). This premium would likely be less than the actual cost of caring for these individuals because the program would be expected to attract persons with disproportionately high health costs. When the beneficiaries reach the Medicare eligibility age, they would have to pay an additional premium of approximately $10/month for every year of participation to pay the remainder of the premium cost over time.
- Displaced Worker Buy-In Available to individuals age 55 to 61 involuntarily displaced from their job. To be eligible for this buy in, individuals would have “lost or left (their) job because of a plant closing/company moves, slack work, or the position has been abolished or shifted.” The estimated cost of this program would be $400/month, paid for by the beneficiary. There would be no additional premium surcharge once enrollees reach the Medicare eligibility age.
- Eliminated Benefit Buy-In Available to retirees age 55 to 64 whose retirement benefits were reduced or eliminated by their former employer after they have retired. These workers would be eligible to purchase insurance through COBRA for up to 10 years at an estimated cost of 125 percent of the active employees’ premium cost with the employers paying any additional cost of coverage.29
The Congress has also instructed the Commission on the Future of Medicare to consider a buy-in for individuals age 62 or older, without the Displaced Worker (age 55 to 61) and the Eliminated Benefit Buy-In provisions that are included in the President’s plan. Under these buy-in proposals, employers would be prohibited from buying their own workers into Medicare to ensure that employers do not shift their older workers to the program.
The purpose of the Act is to provide increased access to insurance. According to an analysis of the 1997 Current Population Survey, about 13.9 percent of the persons aged 55 to 64 are uninsured and another 10.4 percent purchase private non-group insurance.30 According to a recent study by the Alpha Center, coverage for the near elderly through the individual health insurance market may even be priced out of reach for many individuals.31 Offering the opportunity to buy into the Medicare program presents a new, possibly lower priced group insurance option for individuals aged 55 to 64. Some of the envisioned advantages and disadvantages of the buy-in option are summarized in Figure 4.
Pros and Cons of Allowing a Medicare Buy-In for Near-Elderly
|Otherwise expensive for older adults to obtain coverage.Costs of coverage could be reduced by allowing buy-in to a large group plan rather than private insurance.Near elderly have increased health needs, thus the potential for higher costs of insurance in the individual market.This proposal would help address the needs of the large baby boom population as they near retirement.||Potential for adverse selection to occur. Due to the relatively high cost of this proposal, the individuals most likely to participate are those with poor health who currently face higher health care costs.Incentive to retire early. Fewer active employees would provide less financial support for current Medicare expenditures.If buying into Medicare is an option, employers may be less likely to offer insurance.No impact on individuals who cannot afford early buy-in.|
Both the Administration and the CBO estimate that the cost of the program to the government would be minimal. The Secretaries of HHS and Labor believe that the costs of the Act would be fully funded through a combination of: the monthly premiums; the Part-B premium surcharge for buy-in beneficiaries once they turn age 65; and various savings from fraud and abuse efforts also included in the bill.32 The CBO estimates that the plan would cost $300 million over five years and $700 million over ten years, or approximately 0.11 percent of aggregate Medicare expenditures over this period. By 2008, CBO believes this proposal would account for 0.16 percent of total program costs.33 The CBO estimates that there would be about 400,000 persons who would enroll in the buy-in, which represents roughly a one-percent increase in Medicare enrollment.
The estimated cost of the program would be small because it is designed to be self-funded. As discussed above, individuals who participate in the program would be required to pay a premium based upon the fair actuarial cost for persons age 62 to 64 under the General Buy-In. The fair actuarial cost would be equal to the average expected cost of the Medicare benefits package for all persons age 62 to 64 regardless of health status. This premium is tentatively estimated to be $300 per month under the general buy-in (i.e., persons age 62 and older). Thus, the General Buy-In program would be fully funded as long as costs for those who enroll were no greater than the average for all persons age 62 to 64.
However, the buy-in would attract relatively unhealthy individuals with high health care costs. This would include individuals who could not obtain insurance due to a history of illness or who would face substantial preexisting condition limitations under a private individual policy. Also, persons facing high insurance premiums due to their health status would often find that the Medicare buy-in option would be less costly than private insurance. Moreover, healthier people would generally be able to purchase private insurance at lower rates, thus excluding these healthier individuals from the buy-in population. This would mean that average costs for the buy-in population would be substantially higher than premium revenues, resulting in a net increase in Medicare costs. This accumulation of higher-cost individuals in the buy-in is called “adverse selection.”
Under the Act, Medicare would not be able to adjust the premium for the General Buy-In to reflect this adverse selection because the premium would be set on the basis of the average costs of all near elderly persons, not the costs for those who actually enroll in the buy-in. However, Medicare would recover much of the cost of adverse selection for the general buy-in (i.e., persons age 62 through the Medicare eligibility age) by imposing a $10 per month surcharge on the Part-B premium for each year they were in the buy-in once these individuals reach the Medicare eligibility age. This means that adverse selection costs would not be recovered for several years. Also, it is possible that adverse selection costs could exceed expected revenues from the surcharge, particularly if the buy-in attracted less healthy individuals who did not live long after reaching the Medicare eligibility age. One recent study of the buy-in proposal indicates that costs could be 30 percent, or more, greater than the amounts paid in premiums, depending upon the degree of adverse selection.34
The Medicare premium for the Displaced Worker Buy-In (i.e., persons age 55 to 61), differs from the General Buy-In premium in that the premium would be set on the basis of the actual cost of covering individual enrollees in the program. Thus, the premium charged under the Displaced Worker Buy-In would reflect the cost impacts of any adverse selection that occurs. This is why there would be no Part-B premium surcharge for these individuals once they reach retirement age as there would be under the General Buy-In. However, because the Displaced Worker Buy-In reflects this adverse selection, the premium would be expected to be high (estimated to be $400 per month). Consequently, the program would attract high-cost users of health care who face even higher premiums in the individual market, preexisting condition limitations, or cannot obtain insurance in the individual market at all.
This could create a premium spiral where premiums for the Displaced Worker Buy-In climb each year to reflect this adverse selection. These increases then cause the healthier individuals to leave the buy-in to obtain coverage at a lower cost in the individual market, thus further increasing the premium for those who remain in the buy-in. This spiral could continue year after year, resulting in a program with an extremely high premium that effectively includes only uninsurable persons. As the premium spirals upward, the Congress could come under substantial pressure to limit premium growth; with Medicare effectively paying the costs in excess of that amount. Many states have had similar experiences with their own high-risk pool programs.
The Eliminated Benefit Buy-In described above would have little direct impact on government spending. The entire program would be funded by employers and individuals. The eliminated benefits provision would permit workers in firms that have reduced or eliminated retiree benefits to purchase COBRA coverage from that employer for up to 10 years. While this would affect costs for some workers and employers, it would have no direct impact on Medicare spending. However, the increased health insurance costs to employers and individuals would increase deductions for health insurance expenditures, resulting in some small reductions in tax revenues. Also, there might be pressure to provide subsidies for lower-income retirees who would not be able to afford the entire actuarially fair premium, which could result in a substantial increase in government expenditures.35 Also, if individuals responded by retiring early, it could result in a loss of payroll tax revenues to the Medicare and Social Security trust funds. Estimates of program participation are low, however, suggesting that this loss of revenue would be small.
The most immediate cost consideration for employers under the Act would be the Eliminated Benefit Buy-In. Under the Act, retirees of firms where employers have reduced or eliminated their retiree health benefits would be able to purchase COBRA coverage through their employer. Individuals could purchase COBRA coverage for up to 10 years for those retiring at age 55 by paying a premium that would be no greater than 125 percent of the costs for active workers. This would increase employer costs in two ways. First, it is likely that the allowable premium amount would not be enough to cover retiree costs. For example, a Lewin Group estimate of age-related premiums indicates that average workers with single coverage, aged 55 to 64 cost 42 percentmore than all other employees.36 Second, the individuals that are most likely to take the COBRA option are those with higher health care costs who can not afford to go without insurance. Employers would be responsible for the amount by which actual costs for covering these individuals exceed the allowable premium amounts.
Employers might also respond to the buy-in by reducing insurance coverage for older workers due to the availability of the Medicare General Buy-In coverage.For example, some employers might eliminate their early retiree benefits knowing that these retirees could obtain coverage under the Medicare buy-in if they were unable to obtain coverage elsewhere (e.g., as dependents on a spouse’s plan, non-group coverage, etc.). This rationale could be used by employers to eliminate their early retiree benefits programs, just as the availability of the buy-in might provide a rationale for Congress to increase the Medicare eligibility age. This would be particularly true among employers that are already considering reducing or eliminating their retiree health plans due to cost pressures.
The General Buy-In program might also create some opportunities for employers to lower their cost of retiree coverage without necessarily increasing the burden on retirees. For example, employers could eliminate their early retiree health benefits program and provide an increased pension payment to these retirees that would be sufficient for them to buy into Medicare on their own. This would be advantageous to employers only in instances where costs under their own retiree benefits program would be greater than the Medicare buy-in premium. This would occur among firms with relatively unhealthy retirees and in industries with relatively high health care costs. It would provide early retirees with coverage at no net additional cost to the retiree except for the fact that the additional cash payments to retirees would be taxable to the recipient. This practice of “dumping” early retiree coverage into Medicare could result in substantial adverse selection into Medicare by shifting private industry’s highest-cost early retirees to Medicare.
However, the incentive to do this would be reduced if the Eliminated Benefit COBRA provision were enacted along with the General Buy-In. This is because many of these retirees would simply re-enroll themselves in the employer’s plan under COBRA. Employees would choose COBRA coverage because the Eliminated Benefit premium, which would be equal to 125 percent of the cost for active workers, generally would be substantially less than the Medicare buy-in premium amount. Consequently, the existence of the Eliminated Benefit COBRA provision would substantially offset the savings resulting from the termination of retiree health benefits.37 However, the Eliminated Benefit COBRA buy-in would apply only to persons who were actually retired at the time that the retiree benefits were eliminated. Thus, the employer might still find it economically advantageous to adopt such an approach for future retirees as a means of reducing future obligations without actually appearing to be eliminating the retirement package that active workers were earning.
Interestingly, not all employers would find it economically beneficial to dump retiree coverage in this way. For example, a study by McArdle and Yamamoto found that it was often not in large companies’ best financial interest to switch current retiree benefit packages over to the Medicare buy-in option, as current arrangements often provided better coverage at lower cost.38 Also, the Medicare coverage would often be viewed as a poor substitute for retiree coverage because the Medicare benefits package is often less comprehensive than the employer plan. Consequently, the likelihood that employers would “dump” early retiree coverage on Medicare in this way is unclear.
The buy-in might also result in some hidden costs for employers as well. For example, due to recent increases in the demand for labor, many employers might wish to discourage early retirement to retain experienced workers. In these instances, the availability of the Medicare buy-in might make it harder to retain these individuals, resulting in higher costs and reduced productivity. Moreover, to the extent that the Act encourages early retirement, it would further reduce the ratio of workers to Medicare recipients, which over time could lead to higher HI payroll taxes for both employers and workers.
Offering a buy-in for Medicare would likely result in more individuals retiring early. The available research indicates that workers nearing retirement age often make retirement decisions based on the availability of continued income and health care insurance. One set of focus groups conducted by DYG, Inc., found that 50 to 64 year-olds and retirees view health care coverage as the “linchpin of their financial security in retirement.”39 The research also indicates that the age of retirement for individuals tends to be concentrated around 62, when early retirement benefits under Social Security become available, and age 65 when Medicare becomes available.40 One of the deciding factors between these two retirement ages is the availability of insurance coverage at early retirement. Thus, the availability of the Medicare buy-in option could cause an increase in early retirement.
Allowing early retirees to buy into the Medicare program at age 62 would reduce their barriers to finding affordable health insurance prior to becoming eligible for Medicare at age 65. Also, retirees would be eligible for both Social Security early retirement benefits and health insurance continuation under the buy-in at age 62, thus making it easier to leave the workforce early. While the proposed premium of $300 per month would be a significant burden for many retirees, it would often compare favorably to the premiums that these individuals would be charged in the individual insurance market, particularly among those with a history of illness. Still, the fact that the buy-in would not be subsidized as are typical retiree health benefits plans (i.e., the employer pays a portion of the premium) would dampen the impact of the buy-in on retirement.
As discussed above, the Medicare buy-in would tend to attract relatively high cost individuals who find it difficult to get insurance in the private market. This would be true of both the General Buy-In for persons age 62 and older and the Displaced Worker Buy-In for persons who have lost their job for economic reasons. For example, the buy-in likely would attract individuals with preexisting conditions who can not purchase insurance in the individual market or individuals who face very high premiums. Healthier retirees might be able to purchase more affordable individual insurance on the open market, and would therefore be less willing to buy into Medicare.
The Eliminated Benefit COBRA Buy-In proposal would provide some protection for early retirees who lose their employer-sponsored retiree benefits before reaching the Medicare eligibility age. This part of the buy-in would permit retirees age 55 or older whose retiree health benefits had been substantially reduced (a 50 percent reduction or more in the actuarial value of the coverage) or eliminated to purchase COBRA coverage from that employer until they reach the Medicare eligibility age at 125 percent of the average cost of insurance for active workers. This provision would not protect active workers nearing retirement whose employer reduces or eliminates the retiree health benefit, even though these individuals may have planned on having this coverage upon early retirement. These individuals would have strong incentives to delay retirement until they reached the Medicare age of eligibility.
However, the Medicare buy-in program likely would have little impact on the number of persons who are uninsured. For example, data from the Community Tracking Study indicates that the average income for uninsured persons age 55 through 64 is $9,600. This means that the buy-in premiums for these persons would be equal to 20 to 25 percent of their income.41 Consequently, few of the near-elderly uninsured population would be likely to enroll. The CBO estimates that only about 400,000 persons would be enrolled in Medicare under the buy-in. Even if all of these are individuals who otherwise would have been uninsured, the percentage of persons age 55 to 64 who are insured would decline from its current level of 13.9 percent to 12.0 percent. In fact, many of those who would be covered under the buy-in would be persons who are shifting from some other more expensive form of coverage such as individual, non-group coverage.
Moreover, to the extent that employers cut back on coverage for early retirees in response to the buy-in, the proposal could cause an increase in the number of near elderly who are uninsured. This is because many of those who would lose coverage due to a discontinuation of retiree benefits might be unable or unwilling to purchase either the eliminated benefit COBRA premium or the Medicare buy-in premium. Thus, it would be important to monitor the program’s impact on employer-sponsored coverage to identify any loss of coverage that might occur.
Increasing the Medicare eligibility age would reduce Medicare costs by effectively reducing the number of beneficiaries and inducing later retirement resulting in increases in payroll tax revenues. Studies have shown that cost savings for the government would be moderate, especially in the short term. State and federal Medicaid costs would increase because Medicaid would have to cover costs for aged enrollees that otherwise would have been covered under Medicare for persons age 65 and 66. However, federal tax revenues could increase as workers delay retirement to the new Medicare eligibility age.
The available evidence suggests that increasing the Medicare eligibility age would have a significant effect on health care insurance availability for those aged 65 to 66. It is likely that many individuals would decide to remain in the workforce longer as a result of the legislation to maintain their insurance coverage. However, many individuals age 65 and 66 would become uninsured because they could not afford private insurance. In addition, many employers who provide retiree health benefits would see an increase in costs because they would have to cover an additional two years of benefit costs for retirees. This could cause many employers to drop their retiree benefits, resulting in an increase in the number of uninsured. Thus, some form of subsidy would be needed to ensure that persons who could displaced by the increase in the Medicare eligibility age would be able to obtain coverage.
Enacting the buy-in for persons under the age of 65 would have many of the opposite effects of raising the Medicare eligibility age to 67. For example, the buy-in would encourage more individuals to retire early, and might encourage a general shift from private insurance to public insurance for the near aged. The proposal might be successful in reducing the barriers to health insurance for those who find it difficult to obtain affordable insurance from the individual market. Specifically, it would permit some individuals to benefit from Medicare’s lower group premiums (because risk is spread over a large number of people) and the lack of exclusions for preexisting medical conditions.
The Medicare buy-in program would tend to accumulate persons with disproportionately high health care costs. Individuals who have not been able to get insurance due to a history of illness and those who face stiff preexisting condition limitation in the individual market would often see the buy-in as an attractive alternative to their current coverage. Also, individuals facing high premiums due to health status would often find it less costly to buy into Medicare. Consequently, it is not clear that the provisions of these proposals that are designed to cover the cost of this adverse selection are adequate. This could result in a substantial net increase in Medicare costs. Moreover, once the program were established, Congress would be under ever-increasing pressure to limit the growth in the buy-in premiums, which could result in substantial new costs to the program. While the buy-in could become an important source of coverage for the near elderly, it likely would have only a relatively small impact on the number of uninsured in this age group since many uninsured individuals would be unable or unwilling to pay the premium.
The buy-in would create opportunities for employers to effectively “dump” their retiree health plan beneficiaries into Medicare at a substantial cost to the program. For example, employers with retiree health care costs that were greater than the Medicare buy-in premium could eliminate their early retiree benefit and increase retiree pension payments by the amount of the buy-in premium so that retirees could buy the coverage themselves. This would save money for the employer without necessarily having a detrimental impact on retirees, but would saddle Medicare with beneficiaries who cost more than they pay in premiums. Moreover, the existence of the buy-in could provide a rationale for eliminating the retiree benefit altogether, regardless of the impact on the retiree, knowing that the retirees have the option of buying coverage through Medicare at a group rate. These responses would shift some of the industry’s most costly retirees to Medicare. Also, to the extent that employers responded by eliminating retiree coverage, the buy-in could actually result in an increase in the number of uninsured, because not all of the retirees who would lose coverage would be able to afford the buy-in premium.
Enacting the buy-in could provide something of a safety net for those affected by an increase in the Medicare eligibility age. Newly ineligible persons age 65 and 66 would be able to buy-in and receive the same coverage that they would have had at age 65. However, this provision effectively protects only those who can afford the buy-in premium. While very low income aged persons would be able to get full coverage under Medicaid, near-poor individuals would often be unable to afford the buy-in premium. Therefore, a program that provides at least partial subsidies to lower income individuals who are displaced by the increase in the Medicare eligibility age would be needed if we are to avoid an increase in the number of uninsured persons age 65 to 66. Indeed, the growing difficulties faced by the near elderly in obtaining insurance seems likely to put pressure on Congress to provide some form of subsidy for this population long before the Medicare eligibility age actually would be increased to 67 under these proposals.
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