Would a Medicare reform remix cut costs?

by Adrianna McIntyre -

So apparently I missed a New York Times editorial last week where Yuval Levin proposed, for lack of a better phrase, a Medicare reform “remix.” The two changes that wonks toss around when we talk about cost-containment are raising the Medicare’s eligibility age or making the program “means-tested,” which involves having the wealthy pay more out-of-pocket to cover health care costs once enrolled. Levin basically wants to do both at the same time by means-testing the enrollment age. As far as I know, that’s a new one. From the op-ed:

While many liberals oppose raising the Medicare age of eligibility, doing so on a means-tested basis would address most of their concerns while saving lots of money. For older people with the greatest lifetime earnings, the eligibility age could gradually rise to 70 from 65.

Jonathan Cohn has a thoughtful take on the proposal over at The New Republic, which is what caught my attention in the first place. He thinks the proposal is more likely to garner support from conservatives than liberals, because it’s functionally a reduction in the size and scope of government. He also has an early inkling of how the math might work out (emphasis added):

Levin would address this problem by adjusting the eligibility age based on wealth, so that wealthier seniors had to wait longer to enroll in the government program but less wealthy seniors did not. Levin is still working out the specifics, but he tells me, via e-mail, that this scheme would probably save the federal government a lot of money—maybe not $125 billion over ten years, as the previous proposals would have yielded, but a big chunk of that. At the same time, he says, it would protect lower-income seniors.

It’s clear that Levin is still working out the nitty-gritty behind the numbers, so I don’t want to come off as prematurely critical. Still, the proposal prompts questions about how cost-effective it is to raise anyone’s Medicare age—and these questions aren’t new; Aaron Carroll has written about this policy quirk time and time again (and there’s plenty more where that came from).

But in case you haven’t delighted in the debate yet, here’s the economic snag: moving wealthy 65-70 year olds from Medicare into private insurance populations will make those populations, in the aggregate, more expensive. Some of these people are bound to end up in the exchanges, and the ACA has a provision designed to limit age discrimination there; on the exchanges, insurance companies can only charge the old folk three times what they charge us young’ns (which I discussed a few weeks ago). This constraint was never meant to account for members of the 65+ crowd being pushed into the private insurance risk pool. When the insurance companies recalculate to account for the additional medical expenses these seniors would bring, it’d likely raise premiums across the board.

Remember, the federal government’s offering subsidies to buy insurance on the exchanges. The rate individuals are expected to pay is based on their income, not a proportion of the premium—which is to say, they’re already paying the maximum contribution expected. Ergo facto, if we see premiums increase because older and more expensive people have shifted into private insurance pools, the government (taxpayers) or the rest of those pools—us in both cases—will be on the hook for those increases. It starts to look more like cost-shifting than cost-saving, at least to my amateur eye.

It’s entirely possible that the math adds up—maybe savings accrued from keeping wealthy seniors out of Medicare for five years would outweigh the increase in subsidies by tens of billions of dollars. But I’d like to see the nitty-gritty behind the numbers.

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Adrianna is a graduate student in public policy and public health at the University of Michigan.
Follow her on Twitter @onceuponA or subscribe to the blog.

3 thoughts on “Would a Medicare reform remix cut costs?

  1. John says:

    Medicare doesn’t come for free, so yes, cost shifting it is. OTOH, do you want wealthy seniors paying premiums for their insurance, or do you want them paying nothing by virtue of their eligibility for Medicare? Presumably their health care costs are going to be the same one way or the other (unless Medicare has a rationing component to it!), so why not have the wealthy people in the wealthiest age cohort pick up part of the tab for their own care? Another alternative is to introduce means-testing to Medicare itself, and charge wealthy seniors full freight for the coverage, gradually reducing Medicare premiums as total assets decline, until we arrive at fully subsidized Medicare as we know it for not-wealthy seniors.

    It is totally unclear to me why having poorer 20 and 30-somethings pick up the health insurance tab for wealthy 70-somethings is a social good.

  2. alsanblog says:

    The idea that it’s not cost-effective to raise anyone’s Medicare age is not quite accurate. The costs in the system are what they are and changing the source of payment would not change those total costs.

    If the eligibility age were increased, government spending would decrease, the average premiums paid by those under private plans would decrease, and the total costs paid by private insurers would increase. But the increase in the private sector would be funded by a reduction in taxes in an amount equal to the Medicare savings.

    I won’t attempt to go into details in this comment. But I’ve just posted an analysis on my blog that questions the increasingly popular view that raising the eligibility age would cause costs to increase (see http://alsanblog.com/2013/03/06/raising-the-medicare-eligibility-age-would-not-increase-costs/). Any feedback would be appreciated.

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