Politically Courageous, but the 65-67 Gap Is Bad Policy

Last week, in a surprising and somewhat sudden decision, the U.S. Senate voted to move the age for Medicare eligibility from 65 to 67 in stages, and to require higher-income beneficiaries to pay a larger share of their Medicare premiums.

Inside the Beltway, at least, the action produced considerable praise. It doesn’t take an actuary to see the problems in Medicare’s future. Especially as baby boomers become eligible for Medicare, keeping the program solvent will require more than short term or incremental adjustments.

Moreover, given the high level of demagoguery that has marked the Medicare debate over the past few years, many viewed the Senate’s act as embodying a considerable dose of political courage. After all, Medicare reform, which generally means that seniors will pay more or get less, often is known as the “third rail of politics.” Those who touch it generally get burned, as Republicans did last year.

One might assume that such courage would produce sound public policy. But unfortunately, that may not be the case. There is good reason to have serious second thoughts about at least one portion of the proposed reforms: the change in eligibility from 65 to 67 years of age.

The obvious problem is that 65- and 66-year-olds, many of them no longer employed, will still need health insurance. If not in Medicare, where will they get it, and how will they, or others, pay for it? Employees, for one thing, may work longer, in part to stay in employer-sponsored health insurance plans. But employers will not be anxious to expand insurance programs. The current trend in employer-sponsored coverage is down, and there already is a growing uninsured problem among those in their early 60s.

Still, projecting from current circumstances, we can reasonably predict that about 50% of those aged 65 and 66 would be able to maintain insurance coverage through their (or their spouses’) employer’s (or ex-employer’s) plan. However, many of the retirees in this group would be likely to face hefty premiums, much larger than those they paid as employees. Of the remaining 50%, about 10% to 20% would likely be uninsured, largely because they were unable to afford coverage. Another 10% already would be in a government program (Medicaid or Medicare), primarily due to a disability of some kind. About 10% would be insured under their former employer’s plan, although they would be required to pay the full premium themselves. Finally, about 10% to 20% would purchase insurance in the private marketplace. There they would encounter premiums likely to be two to four times higher than those charged in employer-sponsored plans. Premiums would be even higher for those with serious medical problems.

All told, it is likely that at least 50% of those aged 65 and 66 would be worse off or at best no better off than they would be under the Medicare program. Not surprisingly, these are likely to be middle- and low-income seniors. They would either be paying considerably more for their insurance or they would have less insurance or no insurance at all. This would likely be true even if they were asked to pay more for their Medicare coverage.

Those still employed and covered under their company’s policies might be better off, but not dramatically so. The employer paying for their full coverage under private insurance probably would be paying for their supplemental coverage (for what Medicare doesn’t cover) if the employee was in the Medicare program. Thus the employee would have comprehensive coverage under Medicare.

Moreover, the fact is that insurance and health care bills for 65- and 66-year-olds would be very large, for whoever was paying them--employers, individuals or public hospitals and public assistance programs (i.e., taxpayers) that will inevitably pay for the increasing number of uninsured elderly Americans. Indeed, it is very possible that the total health care bill for those in this age bracket would be more than it is under Medicare--unless, that is, large numbers of them are uninsured and not getting the care they need. And many would be paying much more and facing much greater insecurity and hardship.

Admittedly, phasing in the change, as proposed, would provide an opportunity for many to plan ahead and for policymakers to consider adjustments that might render the transition less threatening for some. But the fact remains that the best thing for 65- and 66-year-old Americans, many of whom are not employed, would be an insurance program in which they and other seniors are put into a giant pool that could protect them from insurance company discrimination, reduce administrative costs, offer them more security and use its size and market power to get lower prices from doctors and hospitals. Sound familiar? It’s Medicare.

In other words, there are some circumstances in which collection from all and spending for all via a government program is the least expensive, most equitable, most secure and/or most efficient means of accomplishing a goal. Providing health insurance for the elderly may be such a goal.

The political problem, of course, is that Medicare spending would be higher with 65- and 66-year-olds in the program. For those determined to reduce government spending, regardless of the logic behind that spending, this is an unacceptable proposition. But why let the ideological tail wag the policy dog?

How we pay for Medicare--before we are 65 or after that time--is a separate question and there is every reason for policymakers to explore alternatives. They should also, of course, consider means of delivering Medicare’s benefits for less. But dismantling Medicare for 65- and 66-year-olds probably is not the place to start.