Who Pays? More on the Impact of Raising the Medicare Eligibility Age

In a post last week, I wrote about the Congressional Budget Office’s new projection that raising the age of eligibility for Medicare from 65 to 67 could save the federal government $113 billion over the next decade. But I missed a big part of the story: that this savings might be far outweighed by increased costs to senior citizens, employers, and state governments.

If 65 and 66 year-olds become ineligible for Medicare, they will seek health insurance elsewhere, obtaining it through their current or former employers, applying to Medicaid, or purchasing it on their own or through the exchanges that will be created under the recent healthcare reform bill. The CBO study mentions these alternatives but doesn’t quantify their costs and seems to gloss over the possibility that they might significantly outweigh potential government savings. A Kaiser Family Foundation study from last summer found that the increased costs to businesses for employer-sponsored health insurance, to states for healthcare programs, and to individuals for increased out-of-pocket costs and premiums would add up to more than double the savings the federal government would accrue from such a change.

Kaiser and the CBO use different models in their calculations (see note at bottom), so it’s unclear what the expected costs to citizens, businesses, and state governments would be under the CBO model. Kaiser estimates that two-thirds of affected 65 and 66 years olds would end up paying more out-of-pocket for insurance than they would have paid under Medicare; CBO simply says that, “many, but not all,” would pay more. Besides the additional costs, some critics have raised concerns that increasing the eligibility age would lead to worse health outcomes and might disproportionately benefit the wealthy.

Of all the secondary consequences and cost-shifting likely to result from raising the Medicare eligibility age, the most interesting to me is that premiums for both Medicare and health insurance purchased on the exchanges will increase, by an estimated 3% according to Kaiser. The youngest, healthiest seniors will leave Medicare, increasing the overall risk of the Medicare pool, and will join the pool of insured adults under age 65, adding a cohort of older, sicker people to that group. So it’s a lose-lose scenario, which is why some politicians have actually proposed lowering the Medicare eligibility age

The impact on premiums raises a critical question about Medicare – why is the government providing health insurance for the oldest and sickest members of society but not everyone? The best way to keep insurance costs down is to reduce average healthcare spending per person by including young, healthy people in your risk pool. Of course the government saves  money by letting an entrenched system of employer-sponsored health insurance pull funds from the private sector. But from the point of view of overall system efficiency, it seems problematic for the government to shoulder responsibility for the pool of individuals with the highest healthcare costs while leaving out all the younger, healthier individuals who could bring the overall risk level, and therefore average cost per person, down. In general, part of the purpose of both insurance and government programs is that they spread risk across large groups. The fragmentation of our healthcare system into so many pieces, while it has its benefits, seems to be undermining this risk-spreading benefit.

Thanks to Matthew at Polentical for his tip on this issue in the comments section of my previous post.

Raising the Ages of Eligibility for Medicare and Social Security 
Noah Meyerson and Joyce Manchester // Congressional Budget Office // January 11th, 2012

Raising the Age of Medicare Eligibility: A Fresh Look Following Implementation of Health Reform 
Tricia Neuman, Juliette Cubanski, Daniel Waldo, Franklin Eppig, and James Mays // Kaiser Family Foundation // July 2011

Note: Here are some key ways the CBO and Kaiser models differ: (1) Kaiser assumes an immediate increase of the eligibility age (from 65 to 67) in 2014 while the CBO models the same increase occurring gradually over 15 years. (2) The CBO estimates that ¼ of Medicare savings will be offset by increased federal government spending on Medicaid and health insurance subsidies. Kaiser estimates that the ¾ of Medicare savings will be offset by increased federal spending in these two areas. (3) Compared to Kaiser’s estimates, the CBO project a greater share of 65 and 66 year olds who lose Medicare eligibility will access employer-sponsored insurance and a smaller share will purchase insurance on the exchanges.

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