01Aug2011

Should the Medicare eligibility age be increased?

Dale Yamamoto discusses the pros and cons of increasing the Medicare eligibilty age.

by Dale Yamamoto, President, Red Quill Consulting

DaleYamamoto Lots in the news lately about raising the eligibility age for Medicare. After all, it’s been age 65 since the adoption of the Medicare program in 1965. A lot has changed since then. According to the Centers for Disease Control and Prevention (CDC) website from their publication “Health, United States, 2010,” the average life expectancy at birth in 1965 was 70.  In 2007, it was 78. Average life expectancy at age 65 was 15 and 19, respectively. In a 2000 white paper, the American Academy of Actuaries suggested that if Congress were to change the Medicare eligibility age, it should do so at least by 2010 to capture the expected bulge in the elderly population. But as the first set of baby boomers have retired in 2011, that didn’t happen.

One of the proposals that have been priced recently by the Congressional Budget Office (CBO) calls for a transitional period of increasing the eligibility age to age 67 by starting in 2022 at 65 years old and two months and increasing two months each year thereafter until it reaches 67 by 2033. Interestingly, a recent USA Today article cited this CBO report as saying that increasing the Medicare eligibility age to 67 would save $125 billion by 2021.

The CBO report analyzed several different changes under a proposal by Congressman Paul Ryan and did not specifically isolate the Medicare eligibility age so this reader couldn’t discern where the newspaper derived the $125 billion savings, but it doesn’t seem right that there could be savings of any amount by 2021 for a program of changes that begin in 2022. Of course, it could be a present value number which, in that case, doesn’t seem like very much.

Misinterpretation by the popular press aside, should the Medicare eligibility age be increased? The most widely cited argument against such an increase is that it is bad policy. That is, Americans have long expected to be eligible for Medicare at age 65 so we should not be pulling the rug out from under them. Many of us in the private sector have learned that if you provide enough early warning for those affected, they deal with the change. As the Academy paper noted, if we would have adopted the change in 2000, a 10-year effective date would have captured all of the baby boomers with sufficient warning of the change. With Congressman Ryan’s proposal, that same 10-year effective date will capture less than half of the baby boomers (figuring that 2021 would be last year that eligibility is age 65, which means that anyone born in 1956 or earlier is grandfathered. The baby boom generation is often referred to as those born from 1946 through 1964. So, 11 out of 19 birth years are not affected).

When Medicare was enacted, it was billed as an increase to the Social Security benefit which has already changed its full benefit age to 67 with consideration to increase it further. So, if it’s good policy for Social Security, it seems like good policy for Medicare. The improvement in mortality that I cited in the first paragraph is another reason that it makes sense.

And, yes, there are consequences for increasing the Medicare eligibility age. It would delay the time for employers who still provide medical benefits to their retirees to gain financial relief from coordinating their plans with Medicare. A result of this more employers may be dropping coverage because of affordability (adding an older group to an already expensive pre-Medicare population will increase their costs) or reducing their subsidies to their plans further (half of employers providing retiree benefits have already limited their subsidies and this may result in more employers placing such limits). Until 2014 when the new health exchanges are established around the country, it may have been difficult for retirees without employer coverage to find insurance but assuming any change will be delayed beyond 2014, that should not be an issue. Without government support, pre-Medicare coverage will be expensive even with health reform, but there are some protections such as no pre-existing condition limitations, limits on insurance company premium rates that they can charge the highest cost individuals (basically, the elderly) and guaranteed issue (everyone will have access to insurance). And low income individuals may be eligible for government subsidies to purchase insurance. Prior to the recent health reform legislation, the biggest stumbling block for increasing the Medicare eligibility age was that those affected may not be able to afford or have access to insurance. With that hurdle eliminated, we are just left with the “bad policy” argument.

The latest Medicare Trustees report projects that the Hospital Insurance trust fund (the fund that we all pay for via payroll taxes) will be exhausted by 2024. That’s only two years after Ryan’s proposal would start to increase the eligibility age. Despite the bad policy in changing a promise to those approaching Medicare eligibility, I for one would rather see the change made because the alternative could be nothing at all. And, there also needs to be other changes made to shore up the program. A recent Academy issue brief  suggests a few.

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