Number 13 in Series, "The Retirement Project"
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
As Americans born during the early baby boom years approach retirement, health insurance
coverage for the near elderly is becoming an increasingly important
policy issue. The near-elderly—defined here as those aged 62 to 64—are not old
enough to qualify for Medicare (unless they are disabled), yet they are much
more likely than younger people to experience serious health problems. In
addition, many near-elderly persons have already retired, limiting their
insurance options. Although most working Americans receive health benefits from
their employers, many employers do not provide coverage after retirement. And
many individuals without employer-sponsored insurance face problems obtaining
coverage in the private nongroup market because of age and health concerns.
One widely debated solution is to offer tax credits to help the uninsured buy private
insurance. The Bush administration has proposed refundable tax credits of up to
$2,000 for low- and moderate-income families and up to $1,000 for individuals
who purchase nongroup coverage. Even with these financial incentives, however,
nongroup premiums would remain unaffordable to many near-elderly Americans,
especially those with health problems (Simantov et al. 2001). Other individuals
would continue to face preexisting-condition exclusions or would be denied
coverage altogether because of their health status.
An alternative approach to help older uninsured Americans obtain coverage is to create a
Medicare buy-in plan allowing persons below the age of full eligibility to
purchase Medicare coverage. The Clinton administration offered several versions
of a Medicare buy-in plan, and it was one of Al Gore's campaign promises during
the 2000 presidential election. More recently, in March 2001 Senator
Rockefeller (D-WV) introduced a bill to create a buy-in program for
near-elderly Americans.
This brief describes findings from a recent study that examined potential participation
rates in alternative Medicare buy-in plans and measured the potential impact of
these plans on rates of uninsurance.1 The study found
that many individuals younger than 65 would purchase Medicare coverage if a
buy-in plan were available. But without subsidies, participation would be
limited to those who could afford substantial premiums and who have difficulty
buying insurance in the private market because of health problems. 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.
Coverage for the Near Elderly
The near elderly obtain health insurance from a mix of public and private sources.
Retirement and the relatively high risk of health problems they face, however,
limit their coverage options.
Employer-Sponsored Coverage and Retiree Health Insurance Benefits
By the time individuals reach their early 60s, many have stopped working. In 1998, about
half of men and about two-thirds of women aged 62 to 64 no longer worked. Some
firms continue to contribute toward their workers' health benefits after
retirement. These retiree health insurance (RHI) benefits generally continue
until age 65, when Medicare coverage begins, and sometimes supplement Medicare
benefits after age 65.
Unfortunately, RHI benefits are not available to most Americans. In 1998, only 37 percent of
men and 34 percent of women aged 50 to 54 reported having access to RHI from
their own employers or their spouses' employers after retirement (Johnson
2001). Even those offered RHI may not be able to afford it. RHI benefits are
usually less generous and require more cost sharing than do health benefits
provided to active workers. About one in ten early retirees offered RHI
benefits turns them down because they are too expensive (Loprest 1998). And
recent declines in the availability of RHI may further erode employer-sponsored
coverage for the near elderly (Hewitt Associates 1999).
Most retirees who lack access to RHI can continue to receive their employer-sponsored
coverage for a limited time. Under federal law, employers with 20 or more
employees must provide continuation coverage to former workers for up to 18
months (or 29 months if the worker is disabled). However, the cost to the
beneficiary can be high because former workers assume full responsibility for
up to 102 percent of the premium.2 These costs
contribute to the low take-up rate for continuation coverage (Flynn 1994).
Public Sources
Near-elderly persons who lack job-related health benefits have limited public insurance options. Nonelderly adults can qualify for Medicare or Medicaid benefits only if they
are disabled. In addition, Medicaid benefits are subject to strict income and
asset limits, and Medicare benefits do not begin until at least 29 months after
the onset of disability.
Private Nongroup Coverage
Given these constraints, many near-elderly persons without employer coverage turn to the
private nongroup market. Indeed, people aged 55 to 64 are more than twice as
likely to have private nongroup coverage than people aged 35 to 54 (Brennan
2000). However, relying upon the private nongroup market at older ages has
important drawbacks, including the high price of coverage (especially for those
in poor health), the limited benefits provided by many plans, and the possibility
that coverage may be denied altogether.
Premiums are generally higher for private nongroup plans than group policies because risk
pooling is more limited, administrative costs are higher, and employer
subsidies are generally unavailable. For example, among 62- to 64-year-olds, we
found that individuals who were not offered job-related health benefits or
public insurance faced average annual premiums of $5,100 in the private market.
By contrast, workers with employer-sponsored coverage averaged just $650 per
year in out-of-pocket premium contributions for their benefits. Health problems
also increase the risk-rated premiums individuals face in the nongroup market.
Because health problems are more common among the low-income population, the
poor often face especially high nongroup premiums.
To offset the high price of private nongroup coverage, many individuals purchase plans that
offer limited coverage, but carry high deductibles and coinsurance. For those
with low incomes, the lack of comprehensive coverage can limit access to care. Many
insurers also exclude coverage for pre-existing health conditions, further
limiting the comprehensiveness of benefit packages. We estimate that about 12
percent of Americans aged 55 to 64 with private nongroup coverage have
restricted policies because of pre-existing conditions. Consequently, many
near-elderly persons with nongroup coverage may be underinsured, leaving them
vulnerable to high out-of-pocket costs if they become seriously ill.
Even when near-elderly Americans are able to afford the high cost of private nongroup
coverage, they may be denied coverage by insurers. According to a recent study
of the nongroup health insurance market in 10 states, insurers often deny
coverage to those suffering from such health problems as rheumatoid arthritis,
chronic headaches, kidney stones, angina, heart disease, and stroke (Chollet
and Kirk 1998).
The Near-Elderly Insurance Gap
Because private nongroup coverage is expensive, especially for individuals with health problems, a Medicare buy-in could help insure many of the near elderly who lack access to
public insurance or job-related health benefits. In 1998, about 47 percent of
persons aged 62 to 64 received coverage from their own employers, either as
active workers or as retirees (see figure 1). Another 15 percent received
coverage through their spouses' employers. The public sector provided coverage
for about 15 percent of near-elderly Americans, primarily in the form of
disability-related Medicare benefits. About 12 percent purchased private
nongroup coverage in 1998, while 10 percent were uninsured.3 Thus,
about one in five persons aged 62 to 64 (those who lack coverage or rely on the private nongroup market) could potentially benefit from the introduction of a Medicare buy-in plan.
Coverage rates are closely related to income, which limits the effectiveness of policies
designed to increase coverage by encouraging individuals to purchase
unsubsidized insurance. About 28 percent of persons aged 62 to 64 in poverty
were uninsured in 1998, compared with only 3 percent of those with family
incomes exceeding 400 percent of the federal poverty level. Rates of coverage by public
insurance, in the form of Medicare and Medicaid benefits, are much higher among
the poor than among those with substantial incomes, but not high enough to
offset the low rates of employer-sponsored coverage among those with limited
incomes.
Estimating the Impact of a Medicare Buy-In
We begin by testing how private nongroup coverage responds to changes in price, family
income, and health status, controlling for demographic characteristics. These
estimated effects are then used to simulate participation in a Medicare buy-in
plan and the impact of the buy-in on private nongroup coverage among
individuals aged 62 to 64 in 1998. The model assigns limited private nongroup
coverage, carrying high deductibles and cost-sharing requirements, to
individuals who are predicted to purchase insurance but cannot afford standard
coverage. The model also accounts for possible changes in labor supply that
might result from the introduction of a buy-in plan. Estimates are based on
data from the Health and Retirement Study, a large, nationally representative
survey of noninstitutionalized Americans aged 51 and older conducted by the
University of Michigan for the National Institute on Aging. The model also
incorporates premium data from nongroup insurance providers.
We measure the sensitivity of participation in the Medicare buy-in plan to price by employing
three different premiums—moderate, high, and low. The moderate premium is set
at $300 per month in 1998, almost equal to the level the Congressional
Budget Office estimated as necessary to achieve cost-neutrality (i.e. premiums
paid by participants fully cover program costs).4 The low premium
is set at $200 per month, and the high premium at $400 per month. The model
also examines participation under a plan with income-related premiums that
would charge only $43.80 per month (the monthly Medicare Part B premium in
1998) for those with family incomes below 150 percent of the poverty level and
$300 per month for everyone else.5 The analysis
assumes that only persons without access to employer-sponsored insurance or
other types of public insurance could participate in the buy-in plan.
Participation in Medicare Buy-In Plans
The results of our model indicate that substantial numbers of near-elderly Americans would
purchase Medicare coverage if it were available. As reported in figure 2, 37
percent of eligible persons, or 490,000, would participate in a moderately
priced Medicare buy-in plan. Participation rates would fall to 23 percent, or
293,000 persons, if the plan charged higher premiums, and would rise to 68
percent, or 897,000 persons, if it charged lower premiums.
A moderately priced buy-in would not reduce uninsurance rates by much, however. Most
participants would drop expensive private nongroup coverage in favor of the
less costly Medicare coverage, reducing the number of near- elderly Americans
who purchase private nongroup coverage by more than half. As a result, coverage
rates among those without access to other types of public insurance or to
employer-sponsored coverage would increase only modestly, from 56 percent to 61
percent. If the buy-in's premiums were low, the model predicts that no
near-elderly Americans would purchase private nongroup plans, because
premiums for all private plans would be higher than those for the low-cost
buy-in plan.
Although an unsubsidized buy-in would have small effects on coverage rates, it would reduce
costs and improve the quality of coverage for many near-elderly people. Under
current law, in the absence of Medicare buy-in options, only 34 percent of
near-elderly Americans without access to public or employer-sponsored insurance
purchased standard nongroup coverage. However, if moderately priced Medicare
coverage were available, 52 percent would have standard coverage, either
through the public or private sector.
Unless premiums were related to income, few low-income Americans would participate in a
Medicare buy-in program. If participants at all income levels faced moderate
premium prices, only 6 percent of poor persons and 14 percent of near-poor
persons eligible for the buy-in would participate. However, if premiums were
related to income, with low-income persons charged $43.80 per month and
everyone else charged $300 per month, 63 percent of poor eligible persons and
46 percent of near-poor eligible persons would participate.
Because health insurance is most valuable to those in poor health, many purchasers of Medicare benefits would have health problems. For example, 64 percent of participants in
a moderately priced buy-in plan would have at least one serious
health problem, compared with only 38 percent of those eligible for the buy-in.
This adverse selection problem, which drives up insurance costs because those
who purchase coverage are most likely to utilize health services, highlights
the difficulty of designing a cost-neutral buy-in program. Raising the price to
cover costs discourages even more healthy people from participating in the
program and may make the plan unaffordable to those who need it most. We
estimate that 93 percent of participants in the high-priced buy-in plan would
have serious health problems.
Effects of Medicare Buy-Ins on the Uninsured
The introduction of a buy-in plan would reduce uninsurance rates among the near
elderly, but the effects would be small unless the plan was heavily subsidized.
As reported in figure 3, uninsurance rates would fall from 10 percent under
current law to 9 percent after the introduction of a moderately priced buy-in
plan, reducing the number of uninsured near-elderly Americans by about 60,000.
Overall, 8 percent of the near elderly would participate in a moderately priced
buy-in plan, and 5 percent would purchase private nongroup coverage.
Participants in the buy-in program would far outnumber the newly insured,
because most buy-in participants would purchase private plans if they were
unable to buy into Medicare. However, the buy-in plan would raise the overall
quality of coverage, with many participants replacing limited private nongroup
coverage with more comprehensive Medicare benefits. As a result, a moderately
priced buy-in option would reduce the portion of the near-elderly population
without standard coverage from 14 percent to 11 percent.
Because many uninsured individuals have limited resources, the effect of the buy-in on
coverage rates would be larger if monthly premiums were related to income. A
buy-in plan with income-related premiums would reduce overall uninsurance rates
for the near elderly to 6 percent, with about 180,000 people acquiring coverage
(relative to coverage in 1998 under current law). The effect would be even more
pronounced among the near-elderly poor, whose uninsurance rates would fall from
28 percent to 12 percent.
If premiums were not related to income, coverage rates for those with limited incomes would
not improve significantly (see figure 4). For example, a buy-in plan that
charged all participants moderate premiums would not reduce uninsurance rates
at all for the poor or near poor, although the quality of their coverage would
improve slightly, as some low-income individuals would drop limited private
nongroup coverage for more comprehensive Medicare benefits. Thus, a buy-in plan
that ties premiums to income better targets benefits to the near elderly than a
plan charging the same premium to all participants.
Even without special targeting, the introduction of a Medicare buy-in plan would
substantially reduce uninsurance rates for those with health problems. With a
moderately priced buy-in plan, uninsurance rates would fall from 9 percent to only 6 percent
for those with two or more serious health problems and from 8 percent to 5
percent for those who described their overall health status as poor.
Uninsurance rates would fall even further if premiums were related to income,
to 3 percent among those with two or more serious health problems. Strong
demand for insurance among those with health problems, and the high premiums they face in
the private nongroup market, drive these improvements in coverage.
Effectiveness Linked to Subsidies
Allowing individuals younger than 65 to buy into the Medicare program could help reduce
the number of persons without insurance in the United States. Without
subsidies, this approach would largely benefit persons who could afford to pay
substantial premiums but have trouble buying insurance in the private market
because of health problems. With subsidies, the benefits of a buy-in could
extend to limited-income individuals, who have much higher rates of
uninsurance. Thus, the success of a Medicare buy-in program would depend upon
the level of subsidies provided to make coverage more affordable. But higher
subsidies raise the costs of the program, and they could prove difficult to
implement.
Our estimates indicate that a Medicare buy-in for persons aged 62 to 64 would only modestly
reduce uninsurance rates for the near elderly if taxpayers did not bear some of
the costs. Although many near-elderly Americans would choose to participate in
a cost-neutral plan, most participants would replace private nongroup coverage
with the less expensive (and often more comprehensive) Medicare coverage. Very
few of them would have been uninsured in the absence of a buy-in plan, and
two-thirds would have high incomes.
The impact of a buy-in on coverage rates would be greater if the plan were better targeted to individuals with limited incomes. Many of the near elderly who lack insurance under current
law receive little income and would be unable to afford Medicare coverage that
carried substantial premiums. If premiums were related to income, so that those
with family incomes below 150 percent of the poverty level were charged $43.80
per month, uninsurance rates for the poor would fall from 28 percent
under current law to 12 percent. However, these subsidies would cost the
government more than $3,000 per low-income participant, much more than the tax
credits proposed by the Bush administration. Even with these subsidies, premium
costs for the poor would remain substantial. Under our income-related plan,
premiums for an unmarried person with income equal to 75 percent of the poverty
level in 1998 would amount to $526 per year and equal more than 8 percent of
his or her income. The effects of a Medicare buy-in plan on coverage rates for
the poor would exceed our estimates if premiums were more heavily subsidized
for low-income Americans.
The results also suggest that adverse selection into the buy-in program would complicate
efforts to keep costs down while ensuring access to those with limited incomes.
Participation rates would be higher among persons in poor health, who use more
health services and incur more costs, than among those in good health. The
adverse selection bias would become less severe if the plan incorporated an
across-the-board subsidy and if those in better health with lower expected
costs chose to participate. The cost to taxpayers, however, could increase if
the program charged lower prices.
Another drawback to a buy-in plan is that it might reduce RHI coverage. The value of
employer-sponsored retiree benefits to workers will fall if the government
provides subsidized health benefits at age 62. Firms might react by dropping
benefits, accelerating the decline in RHI coverage evident over the past 15
years. But if current trends continue, few retirees will receive RHI benefits
in the future, even without a buy-in measure.
Additional factors, such as private insurance reform, the role of Medicaid, the
appropriate cutoff age, and other design features, could alter the
effectiveness of any buy-in plan. If policymakers ever take a serious look at a
buy-in as a way to improve coverage, they will need to examine these other
factors closely.
Endnotes
1. The full report, A Medicare Buy-In for the Near Elderly: Design Issues and Potential Effects on Coverage, is available at the Henry J. Kaiser Family Foundation
Web site (http://www.kff.org).
2. After workers separate, they pay the employer's group rate if they choose to continue their coverage, plus up to 2 percent to cover administrative costs. The firm
typically pays at least part of the premium for active employees. For example, 31 percent of workers in medium-sized and large firms did not make any premium contributions for their health benefits in 1997, while monthly costs for those who did contribute averaged just $39 (U.S. Bureau of Labor Statistics 1999). Of course, workers may implicitly pay more for employer-sponsored coverage if firms offset part of the cost of health benefits by paying lower wages than they would if they offered no benefits.
3. Uninsurance rates are lower for the near elderly than for those aged 35 to 54, 13.4 percent of whom lacked coverage in 1997 (Brennan 2000). Concern about coverage for the near elderly stems from the serious consequences of uninsurance at older ages,
not from the relative size of the uninsured population aged 62 to 64.
4. The Congressional Budget Office estimated that a cost-neutral buy-in plan in 1999 would charge participants $316 per month at ages 62 to 64, plus monthly
surcharges of about $23 from ages 65 to 84 (U.S. Congressional Budget Office
1992).
5. We model this plan to illustrate the potential impact of buy-ins that vary premiums with income. A better plan design would be to phase out subsidies gradually as
income rises, instead of creating a single income level at which generous subsidies are abruptly eliminated. The plan we model imposes a large tax on those with incomes just above 150 percent of the poverty level, leaving them potentially worse off than others with less income and creating powerful work disincentives for those with incomes near that level.
References
Brennan, Niall. 2000. "Health Insurance Coverage of the Near Elderly." Washington, D.C.: The Urban Institute. Assessing the New Federalism Policy Brief B-21.
Chollet, Deborah J., and Adele M. Kirk. 1998. "Understanding Individual Health Insurance
Markets: Structure, Practices, and Products in Ten States." Report No. 1376.
Menlo Park, Calif.: Henry J. Kaiser Family Foundation.
Flynn, Patrice. 1994. "COBRA Qualifying Events and Elections, 1987-1991." Inquiry 31: 215–220.
Hewitt Associates. 1999. "Retiree Health Coverage: Recent Trends and Employer
Perspectives on Future Benefits." Menlo Park, Calif.: Henry J. Kaiser Family
Foundation.
Johnson, Richard W. 2001. "Gaps in Health Insurance Coverage Among the Near Elderly." Testimony to the Senate Committee on Finance, March 13, 2001.
Johnson, Richard W., Marilyn Moon, and Amy J. Davidoff. 2002. A Medicare Buy-In for the Near Elderly: Design Issues and Potential Effects on Coverage. Menlo Park,
Calif.: Henry J. Kaiser Family Foundation.
Loprest, Pamela. 1998. "Retiree Health Benefits: Availability from Employers and Participation by Employees." The Gerontologist 38(6): 684–694.
Simantov, Elisabeth, Cathy Shoen, and Stephanie Bruegman. 2001. "Market Failure?
Individual Insurance Markets for Older Americans." Health Affairs 20(4):
139–149.
U.S. Bureau of Labor Statistics. 1999. Employee Benefits in Medium and Large Private
Establishments, 1997. Washington, D.C.: U.S. Department of Labor.
U.S. Congressional Budget Office. 1992. An Analysis of the President's Budgetary Proposal for Fiscal Year 1999. Washington, D.C.: U.S. Congressional Budget Office.
Acknowledgments
The authors are grateful to Landon Jones for outstanding research assistance and to Len Burman, Larry Thompson, Cori Uccello, and Sheila Zedlewski for helpful comments on
earlier drafts of this report. The research described here was funded by a grant from the Henry J. Kaiser Family Foundation.
About the Authors
Richard W. Johnson is a senior research associate in the Urban Institute's Income and
Benefits Policy Center. His current research focuses on retirement, long-term care, and health insurance at older ages.
Amy J. Davidoff is a research associate in the Urban Institute's Health Policy Center, where
she studies health insurance coverage and health care access and use for low-income populations.
Marilyn Moon is a senior fellow at the Urban Institute, where she conducts research and policy analysis in health policy. She recently completed her term as a public trustee
for the Social Security and Medicare trust funds.
About the Series
The Retirement Project is a research effort that addresses how current and proposed retirement policies, demographic trends, and private-sector practices affect the
well-being of older individuals, the economy, and government budgets.
The views expressed are those of the authors and do not necessarily reflect those of the
Urban Institute, its board, its sponsors, or other authors in the series.
Latest Research
Browse by Topic:
PDF
Printer-friendly summary
