A Bipartisan Middle-Ground? The Medicare Buy-in Option

While Republicans and Democrats can't agree on much these days, there is one unimpeachable fact on which the two sides can agree: Medicare (and indeed government health care spending) is on an unsustainable trajectory. Last year, Medicare spent a total of $551 billion - around 3.4% of GDP. This grows to 4.1% of GDP - over $1 trillion - by 2023 in CBO's latest projections. Continuing to implement the "doc fix" every year adds over $100 billion more to this number.

So, yes - Medicare is a huge problem. But what to do about it?

On one side (the right) premium support has been proposed as an option - future retirees would be given a set dollar amount (that grows every year) to purchase private insurance, while retaining the option to remain in fee-for-service (traditional) Medicare. On the other (the left), solutions have mainly revolved around cutting provider payments (which Medicare actuaries have noted will likely have to be undone) and attempting to use Accountable Care Organizations to improve quality and reduce costs. While premium support is off the table for the time being, ACOs are being rapidly implemented through Obamacare. However, because evidence on ACOs is mixed, it is unlikely that accountable care will be a panacea for Medicare.

One other option floated every few administrations (it came up during the Clinton years and under Bush Jr.) would raise the Medicare retirement age to 67 (up from 65 now) to match the full Social Security retirement age. A CBO analysis found that, on net, this would reduce federal spending by $113 billion over 10 years (this accounts for potential increases in Medicaid spending etc.), and would reduce Medicare spending by about 5 percent through 2035. It appears that in recent talks between Republican and Democrat lawmakers, this idea has cropped up once more, albeit with a new flavor - offsetting costs on those without Medicare through a buy-in.

Essentially, anyone 65 or 66 (though some proposals bring the lower end down to 62) would be allowed to "buy-in" to the Medicare program by paying actuarially adjusted premiums. The idea would be to help offset the cost shift to those who are unable to receive Medicare benefits at 65/66, and their employers who may have to pay more in retiree benefits because of this. In 2005, the Urban Institute released a thorough analysis simulating the impacts of raising the Medicare eligibility age coupled with a buy-in program. The findings were somewhat nuanced:

Increasing the Medicare eligibility age to 67 will not solve the program's growing cost crisis. Eliminating 65- and 66-year-olds without disabilities from the Medicare rolls will not save very much money because they do not tend to be particularly heavy users of Medicare services. Moreover, it will be almost impossible to design a cost-neutral buy-in option. The buy-in plan will disproportionately attract people with health problems who are expensive to insure. And to be effective, the option must include some subsidies.

Certainly, as CBO's analysis found, the actual savings to Medicare will be modest, and because a subsidized buy-in is necessary to ensure that the elderly aren't left out in the cold, the cost savings would further be moderated by the increased spending. Also, some of the impact on the low-income population would be moderated by current Medicaid expansions as well as the availability of subsidies on exchanges. But ultimately, the specific parameters of raising the eligibility age along with a buy-in program could vary significantly - for instance, if employers are allowed to subsidize a worker's buy-in into Medicare, the cost to the government would be reduced, and the impact on workers could be moderated.

In its final point, the study notes a powerful dynamic of the Medicare eligibility age - the labor force participation rate - which is arguably more important than Medicare spending in and of itself. With Medicare benefits unavailable at 65, workers may be incentivized to keep working longer - two extra years of working at a median salary of $50,000 helps grow the economy quite a bit more than two years receiving Medicare benefits. The impact of more people delaying retirement and working longer (and paying more in taxes), could theoretically offset any increase in costs for the sicker, low-income population.

So while raising Medicare's eligibility age is far from a panacea for Medicare's spending problems, it can be an important symbolic change spurring more people to delay retirement and contribute more to the economic growth that America needs now more than ever. 

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