12/13/2012 01:24:00 PM
Recently the idea of raising the Medicare age has been floated around Washington as a potential compromise to deal with the so-called "fiscal cliff." This study shows that raising the eligibility age would save almost no money--a paltry $5.7 billion out of a federal deficit of  $1,100 billion. That is barely a half of one percent of the deficit. Moreover, it is just bad policy: to continue to have health insurance once their medicare is rescinded, 65 to 67 year olds would need to pay nearly twice that to cover private insurance. Even as a way to cut federal spending, this plan stinks. But on top of the fact that it doesn't significantly affect spending, it is rooted in a faulty premise--in fact, life-expectancy hasn't risen among the working class, and even among those where it has risen, the rise does not mean that people are able to work longer.

Some liberals have suggested that the democrats agree to the plan as a compromise in congressional negotiations, while others have suggested that the GOP has ulterior motives in pushing so hard for such a meaningless gesture.

Now, given that every taxpayer needs health insurance, it would cost the taxpayers half as much to get it through Medicare than through private insurers. This suggests that if we are serious about cutting costs to the taxpayer, we should lower, not raise, the Medicare eligibility age.  In fact, we could abolish the Medicare eligibility age all together, and let everyone get Medicare.

Note that universal Medicare needn't distort incentives, since the choice is between Medicare and private insurance. That is, universal Medicare won't increase waiting lines or cause any more inefficient overuse of healthcare services than we already see in the private insurance industry. And if we charge insurance premiums for those under 65, there is no more distortionary effect on labor incentives than we have in the status quo. The only effects of the change would be the effects that come with supplying the same amount of health care at a lower cost--namely, people will be wealthier.

The drawback of such an idea, however, is that Medicare can't discriminate between different types of customers the way private insurance does. In many ways, this is a good thing since it provides people with a better safety net, but there are downsides. For example, Medicare might not be able t charge higher premiums to people who smoke, or who refuse to exercise or engage in other health-cost-reducing behaviors, while private insurers can. This point is largely moot, however, because private insurers don't do this type of long-term health management in the status quo anyway--a result of the fact that private insurance is tied to employers so that on average people only stay on one health plan for two years, which means insurers have no incentive to give a crap about anyone's long-term health.

We could, however, reform the system so that instead of buying insurance plans, employers give employees stipends with which they can buy insurance plans that they can keep their whole lives. This would enable insurers to implement innovative ways of improving people's life-long healthy behaviors, as described above. But then this does not give us the cost savings we would get if everyone bought insurance through Medicare.

One compromise plan might be to make Medicare an option for everyone under 65. The government could set the premium equal to the average cost per Medicare recipient, which ensures that the program stays solvent, and let people choose whether to buy Medicare or a private health plan. Strictly speaking this policy would save people money overall, but it is not perfect. Medicare can't discriminate between high-risk and low-risk buyers the way private insurers can, which means that we would inevitably see private insurers undercut the price Medicare charges to siphon off all the low-risk buyers. This would leave Medicare with a riskier, and therefore costlier, pool of buyers, meaning they would have to further raise the premium they charge.

The point is this: while it is true that it costs the same individual twice as much to buy private insurance as Medicare, if we made Medicare optional we would see the low-cost individuals filter into private insurance and high-cost individuals filter into Medicare, meaning that such a plan, though it would still lower overall healthcare spending, would shift costs to the government. Moreover, the optional-Medicare plan would inevitably be costlier overall to a system in which everyone has Medicare.

This is not a purely hypothetical discussion. Paul Ryan and others have put forward proposals that would make Medicare optional for people over 65 (though not providing any benefits for those under 65). They could either stay on traditional Medicare, or take a voucher to buy private insurance, the result of which would be that low-risk individuals would have an incentive to go to slightly cheaper private plans, leaving Medicare with a costlier, sicker group of people, driving up costs for the government. Of course, Ryan's plan is different in one critical way: it does not tie Medicare revenues to costs. Ryan's plan doesn't let people "opt-in" by paying premiums to cover their costs, but rather lets people opt-out by taking their slice of payroll tax revenues in the form of a voucher. Thus, as low-cost seniors opt out of the program, the remaining revenues won't be enough to cover the high-risk pool, and the program goes bankrupt.

To sum up, raising the Medicare age is remarkably stupid policy. Making Medicare optional is pretty inefficient if it is an opt-in program, and downright unworkable if it is an opt-out voucher program. But lowering the Medicare age, or even abolishing it, has real merit.