Medicare Buy-In Is the Wrong Prescription
It's a new week, and the Senate is considering a new plan for health care reform. The latest proposal from Majority Leader Harry Reid introduces the concept of "Medicare buy-in," or an option for people aged 55-64 to buy Medicare in lieu of private insurance. Oddly, this is being touted as a "substitute" for a public option, but really it is a public option -- it would expand government-run health insurance to many more Americans than receive it currently.
Moderate Democrats who were initially open to this plan have cooled, and for good reason -- buy-in would make our existing Medicare mess even bigger. Senators should scrap this idea and go back to the drawing board. A better move would be to raise the Medicare eligibility age gradually to 67, on a schedule to match the currently-rising Social Security full-benefit retirement age. This would encourage people to retire later, save billions of dollars that could be used to help finance health reform, and take pressure off an already overstretched Medicare system.
There are two key problems with Medicare buy-in. First, it would lead some Americans to retire earlier. Last year, the CBO looked at a proposal to allow Medicare buy-in at age 62. While the participants would have had to pay the full cost of their Medicare coverage, the plan would have cost the government roughly $1 billion per year in additional Social Security payments. That's on top of lost income and FICA tax revenue because of early retirements.
The current proposal would likely have larger effects. It would start Medicare buy-in at age 55, significantly expanding the pool of potential early retirees. Additionally, the CBO estimate is based on an unsubsidized Medicare buy-in plan that would cost $7,600 per year. CBO assumed that some eligible people would decline this plan due to the expense, and continue to work where they get employer-based coverage. The subsidy provisions already in the Senate bill that make it easier to buy individual insurance would also make it easier for 55-64 year olds to retire and enter Medicare early.
As a result, the proposal could be expected to significantly increase early retirement. This would increase the cost of Social Security and reduce tax revenues at all levels of government, putting further pressure on federal and state budgets.
The even bigger problem is that buy-in would greatly expand Medicare participation, because it would be highly appealing to 6.5 million Americans currently aged 55-64 who are uninsured or purchase insurance in the individual market. Today, Medicare has roughly 46 million participants, so this proposal is likely to result in a greater than 10% expansion in Medicare participation.
This is a problem because health reform will already lead to a supply-demand imbalance in Medicare. Medicare pays lower reimbursement rates than private insurance plans typically do, so physicians and hospitals prefer to treat privately-insured patients instead of Medicare patients. The reform's mandate and subsidy provisions will extend private coverage to millions of Americans who currently lack it, increasing the pool of privately-insured people buying care; meanwhile, it will reduce the growth of Medicare reimbursement rates, making Medicare patients less desirable.
A report out Thursday from the Centers for Medicare & Medicaid Services says these phenomena could jeopardize Medicare participants' access to care. Their report estimates that the proposed reduction in growth of reimbursement rates would make 20% of existing Medicare providers unprofitable within ten years. As a result, some providers would be likely to exit the Medicare program and treat only privately-insured patients.
Congress might intervene to raise reimbursement rates, which would induce doctors and hospitals to continue participating in Medicare. However, this would eliminate many of the Medicare savings that are supposed to finance expanded health insurance.
The CMS report is based on a version of the health care bill that does not include Medicare buy-in, and projects no increase in Medicare participation. Adding 6.5 million new Medicare participants would greatly exacerbate this problem, necessitating even higher reimbursement rates to maintain an adequate supply of Medicare providers. Simply put, health reform will already have Medicare bursting at the seams -- it cannot also take on a vast expansion in participants while cutting reimbursement rates.
When senators talk about expanding Medicare eligibility, they are going in the wrong direction. Previous discussions of Medicare expansion (for example, in the 1990s) have focused on how difficult it is for people nearing retirement age to afford individual insurance. But health reform will make it easier for them to afford insurance -- indeed, that's the point of reform. So shouldn't we be able to contract Medicare instead of expanding it?
Instead of letting people get into Medicare younger, Congress should gradually raise the Medicare eligibility age to 67. Last year, CBO looked at a proposal to raise the eligibility age by two months a year from 2014 through 2025, when it would reach 67 -- matching the scheduled increase already in motion for Social Security. This would encourage people to retire later, increasing tax revenues and saving on Social Security and Medicare spending.
CBO estimated that the Medicare savings alone from an increased retirement age would be $86 billion through 2019, with an additional $7 billion in Social Security savings. In the context of health reform, these savings would be muted somewhat -- some people would get insurance premium subsidies while they are waiting for Medicare eligibility. But even after this offset, this reform would save billions that could be used to finance health reform or reduce the federal deficit. Additionally, it would reduce the number of Medicare participants, helping to alleviate the demand pressures identified by CMS and making Medicare cost reductions more plausible.
Raising the retirement age would also help to bring Medicare into line with its original purpose. Medicare eligibility has been set at age 65 since the program's inception in 1967, when American life expectancy at age 65 was 15 years. Life expectancy at 65 has risen by 4 years since then, greatly increasing the ratio of expected years on Medicare to expected years in the workforce and contributing to the system's insolvency.
While Medicare buy-in would be likely to grow deficits at all levels of government and serve as a first step on the road to single payer, a rise in the Medicare eligibility age would be a real cost-saving measure that could provide a key chunk of financing for health reform.