How to design a medicaid buy-in

3/20/2017 10:58:00 AM

Democrats have long supported the idea of adding a "buy-in" option to medicare and medicaid, where people who do not normally qualify for these programs could pay enroll anyway, provided that they pay their own way through premiums. The Clinton administration drafted several versions of a medicare buy-in, and Al Gore made it a plank in his presidential campaign platform in 2000. Democrats continued introducing bills on the topic throughout the Bush administration, and very nearly added it to the Affordable Care Act in 2009.

I think democrats have an unrealistic vision of how medicare buy-in would work in practice. They're confident the buy-in program would fund itself, that the insurance plan would be generous, and the premiums low. None of these things are true.

Urban institute analyzed the idea back in 2002 and had this to say:

Only a Medicare buy-in that provided subsidies to make the plan affordable to low-income people would significantly reduce uninsurance rates among the near elderly.

In fact, even when health insurance premiums are low, they are expensive. Americans spend almost as much on healthcare as on housing—our mental model for health insurance should be a major budget item closer in magnitude to paying rent than, say, car insurance. In practice, a Medicare buy-in program cannot be self-funding.

Further exacerbating this problem, Medicare would charge premiums much higher than most Democrats expect. Medicare spends an average of $10,000 per beneficiary per year on benefits, meaning an actuarially fair, community-rated premium for medicare would exceed $10,000 per year. Kaiser Foundation's calculator tells me that an unsubsidized plan for a 64 year old on the ACA exchanges would cost $10,160 per year, but at least with the ACA, there are subsidies for low-income folks.

Oh, and by the way, the ACA plan is better than that medicare plan. In fact, traditional medicare doesn't meet the ACA's minimum coverage requirements. I've written before about how medicare is actually crappy insurance that not only doesn't cap your out-of-pocket expenses, but actually increases them as your condition worsens.

A medicaid buy-in looks a bit better. Medicaid is great insurance that comes with very low out-of-pocket costs. Still, average medicaid spending per beneficiary is $6,502 per enrollee per year, still higher than what most folks pay for an ACA plan (though more generous). A big reason medicaid spending is higher than private insurance is that the enrollees are sicker. For one thing, seniors on medicare don't enroll in ACA plans, but many of them do enroll in medicaid. And think about it: if you had a catastrophic illness and couldn't afford care, you'd do whatever needs to be done to qualify for medicaid—quit your job, give away your assets, anything. Without hiring actuaries and risk-rating premiums, at least partially, to account for the fact that folks who opt into medicare or medicaid buy-ins would be lower cost than existing enrollees, neither plan looks very affordable.

That said, I think with one tweak to the medicaid rules could solve several problems at once: instead of charging a premium, charge a payroll tax.

The exact tax function should be empirically grounded, which is beyond the scope here, but here's a starting point to get the idea: your medicaid premium is equal to 0 percent of income up to federal poverty level, and 10 percent on income above that.

In principle, this buy-in option would exist for everyone, but in practice it would essentially phase out smoothly right around 400 percent of federal poverty level, as most folks above that level could find cheaper options on the ACA exchanges. That makes this plan comparable in scope to the ACA subsidies, except without the three separate cliffs that impose high effective marginal taxes on some folks under the status quo: medicaid eligibility cutoff at 133 percent of federal poverty level, the cost-sharing reduction cutoff at 250 percent, and the tax credit cutoff at 400 percent of federal poverty level.

My medicaid buy-in plan would reduce the disincentives to labor that we find under the current regime. The budgetary impact is ambiguous—although medicaid is more generous than ACA plans, pushing the effective subsidy size up, medicaid reimburses at significantly lower prices, pushing subsidy size down. However, the overall cost, including both on-budget and off-budget healthcare spending, is likely to be lower than the status quo as medicaid pays less and has lower administrative costs than private insurance. Recall also that ACA premiums—as well as the associated ACA subsidies—would also decline as sicker folks would tend to sort into medicaid rather than private insurance, making insurance more affordable for everyone, regardless of whether they use the buy-in option.