When economists and policymakers worry about the long-term fiscal crisis, what they’re mostly worried about is Medicare. That’s why a persistent idea during this fiscal cliff season is raising the Medicare eligibility age from 65 to 67.
It’s an idea that appears superficially to have many virtues. Bringing the Medicare retirement age into line with the Social Security retirement age seems logical. The change is simple to describe to journalists and the public. And agreeing to reduce spending by keeping the program the same but limiting eligibility for it allows Democrats and Republicans to come together without resolving their fundamental disagreement over what Medicare should look like. As far as big picture entitlement reform goes, in other words, it’s relatively simple, straightforward, and easy to accomplish.
Unfortunately it’s also a terrible idea that cloaks a staggering giveaway to hospitals, doctors, and other health care providers.
There are two separate fiscal issues around the government and health care spending. One is the scope of the government’s responsibility for footing the bill for health care financing. The other is the price the government has to pay for the health care services it’s responsible for financing. Conservatives often imply that government health care spending is expensive because the government is somehow purchasing inefficiently or offering bloated benefits. This fits well with stereotypes about public sector waste and thus plays to popular prejudice. But it ignores the big reality about government health care purchases, which is their enormous scale. Medicare, in particular, is the biggest bulk buyer of health care services in the country, and so the fees it offers health care providers are much lower than what normal insurance companies pay.
Why do providers put up with those stingy payments? For the same reason any vendor offers discounts to any bulk purchaser: volume. In big, rich cities, it’s not all that unusual for some providers to eschew Medicare patients and simply fill their dockets with better-paying private customers. But the vast majority of doctors, hospitals, imaging centers, and other providers need those patients. There are a lot of old people in America, and old people consume a lot of health care services. So when Medicare offers the health care industry a low-margin payment and huge scale, most providers have no choice but to say yes.
That’s why raising the eligibility age is such a poor policy. Moving a patient off the Medicare rolls and onto the private market doesn’t just shift costs from the government to the patient. It also entails a massive increase in costs.
The Kaiser Family Foundation has found that lifting the eligibility age from 65 to 67 would reduce federal spending by about $5.7 billion in its first year of full implementation. But that would be offset by $11.4 billion in spending by other parties. That includes $3.7 billion in higher costs for 65- and 66 year-olds, $4.5 billion from employers through company-sponsored insurance, $0.7 billion from state governments, and $2.5 billion in higher average prices for third parties once younger seniors are shifted out of the Medicare risk-pool and into the general population.
That’s an absurd means of saving the federal government money—akin to raising $12 billion in taxes and then setting half the money on fire. The only people who actually benefit from this shift are health care providers who get to charge higher prices to 65- and 66-year-olds.
Rather than shrinking Medicare, we ought to be taking advantage of the program’s lower costs. One way to do that would be to lower the retirement age—potentially all the way down to zero—and bring more people into the program. That would reduce system-wide costs but require higher taxes or bigger deficits. A more viable idea would be to bring back the “public option” concept that liberals were forced to drop from Obamacare. The idea here was that the new insurance exchanges that will be set up in 2014 should have an option that’s linked to Medicare and its payment rates. The Congressional Budget Office says such a public option could save the government about $68 billion in reduced subsidies over 10 years, while also reducing out-of-pocket costs. Alternatively, you could structure the option as a formal offer to let non-seniors “buy in” to Medicare with the same mix of personal funds and government subsidies that Obamacare envisions being used for private plans.
When the new health care law is fully implemented, we’ll have a funny two-track health care system. People under 65 will have private insurance plans that pay high prices to providers, with subsidies available according to objective economic need. Older people will have a public insurance plan that pays lower prices and is available with little means-testing. Adding a price-lowering public option for the non-elderly while steadily raising the Medicare eligibility age would over time give us a unified system with low prices for everyone but subsidies only for those who need it—offering patients and taxpayers the best of both worlds at the cost of lower incomes for health care providers.
It’s the kind of grand bargain that makes sense. Simply raising the retirement age without building on what’s great about Medicare would generate small savings for the taxpayers and huge windfalls for providers. But by combining a money-saving idea that’s too right-wing to pass with a money-saving idea that’s too left-wing to pass, principled reformers could team up to crush the special interests whose high prices are making health care unaffordable for the government and private payers alike.