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Changing the Age of Medicare Eligibility

Implications for Older Adults, Employers, and the Government

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Document date: December 16, 2003
Released online: December 16, 2003

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.

This report is available in its entirety in the Portable Document Format (PDF).


Executive Summary

The age of Medicare eligibility has not changed since the program was created in 1965. For more than 35 years, Medicare has provided subsidized health insurance coverage to virtually all Americans when they turn 65. Younger adults can receive Medicare benefits only if they are disabled.

In recent years, however, numerous experts, policymakers, and advocates for the elderly have recommended changing the age of eligibility. Growing concerns about health insurance coverage for near elderly adults have prompted calls to lower the eligibility age, while increases in the normal retirement age for Social Security and concerns about Medicare’s financial health, particularly as the population ages, have led others to suggest delaying it.

This report reviews the available evidence on how changes to the age of Medicare eligibility might affect government costs and rates of health insurance coverage and employment for near elderly adults (ages 55 to 64) and young elderly adults (ages 65 to 66).

Health Insurance Coverage at Older Ages Under the Current System

Like other adults, the near elderly obtain health insurance from a mix of public and private sources. These include employer-sponsored coverage received by active workers and by retirees (in the form of retiree health insurance (RHI) benefits), private nongroup coverage, Medicare for those with disabilities, and Medicaid for those with limited incomes and assets who are blind or disabled. But the relatively high risk of health problems they face limits their coverage options in the private nongroup market, where insurance is expensive and difficult to obtain at any price for those in less than perfect health. The same limited set of insurance options would exist for the young elderly if the age of Medicare eligibility were raised.

Just under 10 percent of the near elderly were uninsured in 1998. Although a larger share of younger adults are uninsured, the uninsurance rate at older ages is alarming because many of the near elderly have health problems that require medical care. Coverage rates are closely related to income, limiting the effectiveness of policies designed to increase coverage by simply encouraging adults to purchase insurance. In 1998, for example, 28 percent of near elderly adults with family incomes below the federal poverty level (FPL) were uninsured, compared with only 4 percent of those with family incomes exceeding 400 percent of FPL.

Virtually all adults ages 65 and older are covered by Medicare. Many beneficiaries supplement their Medicare coverage with additional types of insurance, including employer-sponsored health benefits (provided to active workers, retirees, or the spouses of active workers and retirees), private Medigap plans, and Medicaid coverage. But 31 percent of young elderly Medicare beneficiaries had only Medicare coverage in 1998. Because many of them have limited economic resources, young elderly adults without additional types of insurance may have special difficulty finding coverage if they lose Medicare eligibility. For example, 33 percent of those without supplemental coverage were poor or near poor, compared with only 19 percent of those with supplemental coverage.

Lowering the Age of Medicare Eligibility

Providing subsidized Medicare benefits to all adults ages 62 to 64 by lowering the age of automatic eligibility for Medicare would virtually eliminate uninsurance at ages 62 to 64. It would also improve security for those who rely on the expensive and risky individual insurance market, all of whom would instead be able to obtain less costly and more secure Medicare coverage. In addition, the expansion of Medicare coverage would reduce employer costs for retiree health benefits and both retiree and employer costs for COBRA continuation coverage. But it would be expensive. Reducing the automatic eligibility age to 62 would cost the Medicare program about $5.4 billion per year (in 2000 dollars). The net cost to the federal government would total about $5.0 billion, because the expanded Medicare program would pick up some costs currently paid by Medicaid.

A less costly approach would be to create a buy-in plan that would allow the near elderly to purchase Medicare coverage. Buy-in plans would in effect lower the age of Medicare eligibility, although participants would pay higher premiums than older beneficiaries who qualify for automatic coverage. The Clinton administration first proposed a buy-in plan in 1998 that would charge premiums approximately equal to the cost of services it provides, and Democratic lawmakers introduced similar legislation in Congress in 2003. These proposals would have limited benefits to adults ages 62 to 64 (and displaced workers ages 55 to 61), but benefits could easily be extended to all adults as young as 55.

Studies of the impact of the Clinton buy-in proposal predict that about 37 percent of eligible adults ages 62 to 64 would participate in a plan priced at $300 per month with no supplemental payments after age 65. But participation rates would be much higher among those who would otherwise purchase private coverage than among those who would be uninsured, so the plan would not help the uninsured much. Simulations indicate that it would reduce the size of the uninsured population ages 62 to 64 by only about 6 to 12 percent.

A buy-in plan could be much more effective if it included subsidies for low-income adults. For example, uninsurance rates could fall by more than one-third if premiums were capped at 5 percent of income. And if those with family incomes below 150 percent of the federal poverty level had to pay only about $45 per month for coverage, a buy-in plan could reduce uninsurance rates for the poor by more than half. Relating premiums to income would target public benefits to those who need them most. Tying the subsidies to lifetime earnings, instead of current income, would reduce the incentive to retire early to qualify for low-cost insurance coverage.

Subsidies inevitably increase program costs, though. Costs could reach $525 million per year (in 2000) for a buy-in plan for those ages 62 to 64 that subsidized premiums for all participants by 25 percent and $2.7 billion for a plan that capped premiums at 5 percent of income. Costs would run even higher if the buy-in program were extended to those as young as 55.

Even if policymakers did not intend to subsidize benefits, they would find it almost impossible to design a cost-neutral buy-in program available to all adults ages 55 to 64 who lacked access to employer-sponsored or public insurance, because the plan would disproportionately attract participants who expect to use many services.

Extending Medicare benefits to nondisabled adults younger than 65, either by lowering the eligibility age outright or by allowing near elderly adults to buy into the Medicare program, could encourage some workers to retire early. By reducing or even eliminating the period during which early retirees without RHI benefits would need to purchase expensive private nongroup coverage to avoid becoming uninsured, extending Medicare coverage would lower the costs of retiring. Policies such as Medicare expansions that encourage retirement heighten concerns about the ability of the economy to support the growing retired population. But they would give some older workers who receive employer-sponsored health benefits on the current job the freedom to leave their job and pursue a second career in another line of work, or become self-employed, without worrying about the availability of health insurance coverage.

Recent estimates suggest that lowering the automatic age of Medicare eligibility to 62 would increase overall retirement rates by about 7 percent. Annual retirement rates among men, for example, would rise from 6.4 percent to 6.8 percent. The introduction of a buy-in program priced at $300 per month would raise overall retirement rates for men by only about 2 percent.

Raising the Age of Medicare Eligibility to 67

Despite concerns about the number of uninsured older adults too young to qualify for Medicare, proposals to increase the age of Medicare eligibility to 67 continue to attract attention. Proponents argue that raising the eligibility age would reduce Medicare costs and improve the solvency of the Medicare trust fund. In addition, it would bring the age of Medicare eligibility in line with the normal retirement age for Social Security, and might encourage some individuals to remain at work and delay retirement, an increasingly important policy goal as the aging of the population reduces the share of adults below the traditional retirement age who can support the growing elderly population. Opponents of an increase in the eligibility age argue that it would leave many young elderly adults uninsured or with inadequate insurance.

Raising the age of Medicare eligibility to 67 would not substantially reduce coverage for most young elderly adults. More than half would receive employer-sponsored coverage from their own workplace or their spouse’s workplace, and another 17 percent would receive Medicaid benefits or maintain Medicare coverage because of disabilities.

However, more than one in five young elderly adults would be forced to rely on expensive private nongroup coverage, and one-half of those could only afford policies that provided limited coverage. In addition, an increase in the age of eligibility would leave 9 percent of the young elderly uninsured.

Raising the age of eligibility would hit those with limited incomes especially hard. For example, almost one in four poor and near poor young elderly adults would lack coverage. Creating a Medicare buy-in plan for the young elderly would mitigate the adverse effects of an increase in the automatic age of eligibility, but low-income adults—who comprise a disproportionate share of the uninsured—would benefit only if the premiums they face were heavily subsidized.

An increase in the age of eligibility could generate substantial savings for Medicare. By 2022, annual savings could reach $28 billion (in 2000 dollars), compared with what the program would pay out under current rules. The reduction in the total cost of public insurance would be somewhat lower, because some of the young elderly would move from Medicare to Medicaid.

In addition, the reduction in Medicare enrollees would exceed the reduction in costs, because many of the most expensive beneficiaries—including the oldest old and those with disabilities—would remain in the program. According to one study, raising the age of eligibility would reduce Medicare enrollment by 11 percent and Medicare expenditures by 4.3 percent.

Raising the age of Medicare eligibility is likely to affect labor supply decisions by increasing the costs associated with retirement, especially for workers whose employers provide health insurance while they are employed but not after they retire. With an increase in the age of Medicare eligibility to 67, they would have to purchase expensive alternatives to employer-sponsored coverage for an additional two years if they chose to retire before age 65. Some workers might choose to avoid these additional costs by delaying retirement. One study concludes that raising the age of eligibility would reduce overall retirement rates by about 5 percent (from 21 percent over a two-year period to 20 percent), higher than some estimates of the impact of increasing the normal retirement age for Social Security.

An increase in the age of Medicare eligibility could raise insurance costs for employers who provide RHI benefits. Under the current system, employers who offer RHI benefits generally pay a substantial share of health costs for retired workers up to age 65, when Medicare coverage begins. At that time, RHI coverage becomes the secondary payer of health care costs, picking up some Medicare cost-sharing expenses and generally paying for some services that Medicare does not cover. Raising the age of Medicare eligibility would increase the number of months of primary RHI coverage. Employers could respond to the increase in insurance costs by eliminating RHI benefits, but there is no empirical evidence to suggest the likelihood of an employer response or its size.

Making Medicare the Primary Payer for Older Workers

The large health care expenses that many older adults incur raise the costs of employing them and may reduce their employment options. Employers who provide health benefits face higher insurance costs from older workers, and age discrimination rules limit their ability to offset these costs by paying lower wages. As a result, employers may prefer younger workers, reducing the demand for older employees.

One way to lower employment costs for older workers and perhaps improve their employment opportunities would be to raise the share of health care expenses paid by Medicare. Under current rules, Medicare is the secondary payer of health care costs for most workers ages 65 and older with employer-sponsored insurance. Employer-sponsored insurance reimburses health care costs first, while Medicare pays only for Medicare-covered services that it does not cover. But the available evidence suggests that making Medicare the primary payer for older workers would not substantially improve employment options for older adults, because the savings for employers would amount to only a small share of total employment costs.

Conclusions

Setting the age for Medicare eligibility is necessarily arbitrary. Although a clear consensus exists in this country for providing universal health benefits to older adults, it is not clear when an individual becomes old. Finding the appropriate age involves difficult trade-offs. Lowering the age of Medicare eligibility would improve health and income security for some adults younger than 65, but it would raise costs and encourage some workers to retire early, exacerbating concerns about the ability of the economy to support the growing retired population. Raising the age of Medicare eligibility would reduce program costs and encourage workers to remain in the labor force, but at the expense of the health and income security of older Americans, particularly those with health problems.

Nonetheless, recent improvements in health status and increases in employment at late midlife may have reduced the need for subsidized health benefits at age 65. As the normal retirement age for Social Security benefits slowly rises to age 67 in 2022, it may make sense to increase the age of Medicare eligibility to 67, because the eligibility age always coincided with the normal retirement age (before the retirement age began increasing in 2000).

But many adults could benefit from an option to buy into the Medicare program at younger ages. Similar to the early retirement option for Social Security, the buy-in program would permit individuals to receive limited subsidized benefits before the full entitlement age. The buy-in option would be particularly important to vulnerable populations, especially if plan premiums varied with the ability to pay.


This report is available in its entirety in the Portable Document Format (PDF).



Topics/Tags: | Retirement and Older Americans


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