Adding 55-65 year olds to Medicare: Compelling reasons (but won't lower cost)

In my third year of practice, I took on the care of a retired Ivy League professor and his wife. He retired at 65, and at his “exit interview” was told that he could purchase the “Medicare family plan” for his wife – who had multiple preexisting conditions.

Of course, there is no Medicare family plan – and the university ended up leaving his wife on its medical plan until she qualified for Medicare at age 65.  But I think of this story often.  It’s hard for people between 55 and 65 to get insurance on their own –and when they lose their jobs (or if their spouse provided insurance and s/he retires), they can find themselves uninsured just when they start having serious medical problems and worrisome medical bills. 

So, from a public policy point of view, I like the idea of a Medicare “buy in” for people 55 and over who don’t have access to employer-based (or other) health insurance.

I’ve been thinking about whether this is likely to lower the overall cost of health care – since that’s the point of this blog. 

Here are ways that allowing those over 55 to “buy in” to Medicare could change the overall cost of health care:

1)      55-65 year olds newly-eligible for Medicare would have insurance, and those with insurance have better health and fewer years of potential life lost.  They see physicians and obtain medical care more than the uninsured. This means that Medicare would see less “pent up demand” when people turn 65.  BUT –it’s always more expensive to have people insured than have them out in the cold.   Alas, there is not likely to be savings from the cost-effective (not cost-saving) health care these 55-65 year olds received because they were insured. So  - score one for social benefit – but not one for cost containment.

2)      Medicare pays hospitals and physicians lower fees than most employer-sponsored health plans (but more than most state Medicaid programs). So, the care delivered to these 55-65 year olds would have lower unit costs.  This could help lower overall costs.  However, if providers simply ‘shift costs’ and raise private insurance rates to cover this new shortfall, aggregate health spending would not go down.

3)      Medicare generally has lower administrative cost than the private sector.  Adding 55-65 year olds on a voluntary basis but with some qualification requirements would increase Medicare administrative costs a bit . Further, those over 65 have their Medicare premiums deducted directly from their Social Security payments – and this new addition would mean Medicare would have to contract for billing services.   If these 55-65 year olds were coming to Medicare from private insurance, there would be some administrative savings. If they were coming from the rolls of the uninsured, the administrative costs would actually be higher (since the cost of administering insurance to the uninsured is zero).

I do see a big risk selection issue likely in voluntary enrollment in Medicare for uninsured 55-65 year olds.  For one thing, those who are eligible for employer based insurance are likely a bit healthier – so those eligible to buy in to Medicare are likely to have higher burden of illness.  Further, a voluntary system tends to attract adverse selection. Therefore, it might be hard for this program to pay for itself if the beneficiaries were paying the full cost (since with adverse selection each successive year the premiums go up and more healthy people drop out, a phenomenon fondly referred to as a “death spiral.” )

Employers have been getting out of retiree health insurance   for some time,   and Medicare eligibility would likely accelerate that.   Paradoxically, if more of the older, sicker early retirees went to Medicare, this could lower health insurance premiums for employers and their employees. But this would not be lowering health care cost overall – it would be shifting some of the higher risks on to the federal program.

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The increased administrative costs of adding this new population to Medicare and the potential of adverse selection are serious concerns.   Some sort of individual mandate would go a long way to preventing a ‘death spiral’ of this type of a program

There is a big social benefit to being sure that 55-65 year olds can be insured.  The ability to buy in to Medicare could make this group feel more comfortable changing jobs or taking a risk, and it would mean fewer medical bankruptcies going forward.   

It doesn’t seem to me that this initiative is likely to lower overall health care costs.  There are compelling reasons to offer Medicare to 55-65 year olds who cannot otherwise obtain insurance.  Lowering overall health care costs is not one of the compelling reasons.