The Pros and Cons of Expanding Medicare

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Is the brand more important than the actual product? When it comes to the contentious issue of health reform, Senate majority leader Harry Reid is certainly hoping so. How else to explain the fact that he is reportedly now seriously considering killing off the politically explosive "public option" government health plan in exchange for an expansion of Medicare, one of the most popular (and largest) government programs in history.

At Reid's direction, the Congressional Budget Office (CBO) — which evaluates legislation's impact on the federal budget — is reviewing a proposal to give some 55-to-64-year-olds the option to buy into Medicare. The proposal is part of a potential deal recently struck between 10 Democratic Senators — five centrists and five liberals — Reid charged with devising a compromise that could attract the 60 votes necessary for the Senate bill to overcome the threat of a Republican filibuster and pass before the new year.

Reid and the group haven't publicly unveiled the potential compromise, but the deal struck among the 10 Senators reportedly contains other elements, like a plan to offer nonprofit national private-health-insurance plans, as well as tighter private-insurance regulations. But don't expect a Medicare expansion to skate by. Even though they have spent much of the week arguing on the Senate floor that Democratic plans to dramatically cut Medicare funding would imperil a vital program, Republicans are already objecting to growing a government program that, while effective, is not perfect. On the Senate floor, several Republican Senators, including Pat Roberts, have criticized the expansion idea. But even more consequential for Democrats is the concern expressed by Senators Joe Lieberman, Olympia Snowe and Kent Conrad, all of whom Reid is courting.

Still, no one can deny that the 4.5 million uninsured 55-to-64-year-olds in the U.S. need some help. They are often denied coverage altogether because of pre-existing conditions or charged exorbitant premiums because of their likelihood of illness. Expanding Medicare is not a new idea; previous proponents include Bill Clinton, Howard Dean and even Senate Finance Chairman Max Baucus, who once proposed doing it as a temporary measure while health reform is phased in. "The idea of a Medicare buy in floated around for years, even before the Clinton health reform proposals," says Patricia Neuman, a Medicare policy expert at the Kaiser Family Foundation. "The idea has appeal because it's relatively easy to implement and targets those who have had the greatest difficulty finding affordable coverage."

Sounds simple enough, but the potential impact of such a change is anything but. In fact, expanding Medicare could have far-reaching consequences for the U.S. health care system. Here are just some of them:

The Medicare program could end up in the same, better or worse shape
How an expansion would or would not affect the Medicare trust fund depends on so-far-undisclosed details. Most observers believe that only Americans 55 to 64 without job-based large-group coverage would be allowed to buy into Medicare and that those people would be charged premiums much higher than the roughly $100 a month Medicare enrollees currently pay. If the program was part of Medicare but premiums and benefit payouts were segregated within the program, the trust fund might be unaffected. But would premiums be affordable? In 2008 the CBO evaluated the prospect of a Medicare buy in for Americans 62 to 64 without job-based health insurance. It estimated that by 2014, some 300,000 would buy into the program — 200,000 of whom would have otherwise had private individual insurance, 80,000 would have been uninsured and 20,000 would have stayed working and had job-based coverage. The CBO estimated that these Americans buying in would have had to pay about $7,600 per year in premiums. (Subsidies built into the Senate bill could mitigate the cost for some, however.)

One upside of expanding Medicare eligibility is that if it caused more Americans ages 55 to 64 to get coverage, they would probably be healthier by the time they aged into standard Medicare at 65. According to a recent report from the Kaiser Family Foundation, 20% of underinsured Americans in that age range have two or more chronic health conditions, and 33% have not seen a doctor in the past year. A recently published study by researchers from Harvard Medical School says Americans who were previously uninsured cost the Medicare program an extra $1,000 per year — mostly as a result of previously unmanaged conditions like diabetes and cardiovascular disease. Still, these currently uninsured "near elderly" would have access to more affordable private coverage under Democratic health reform, even without a Medicare expansion.

Doctors and hospitals could see incomes and revenues drop
Medicare-reimbursement rates are lower than those of private insurance, so bulking up the number of Americans covered by Medicare could adversely affect the bottom lines of doctors and hospitals. The American Hospital Association and American Medical Association have already said they oppose expanding Medicare eligibility, and at least one Democrat, North Dakota Senator Conrad, has expressed concern on the same grounds.

Premiums for other Americans could drop
Age is a decent proxy for health. So depending on how many and which 55-to-64-year-olds opted for Medicare coverage over private insurance, the pool of individuals and small groups left buying private insurance in the exchange or exchanges — new marketplaces for insurance — would be less risky to insure and could therefore pay lower premiums.

More Americans could retire earlier
When the CBO estimated the effects of a Medicare expansion in 2008, it predicted that some Americans who would have previously stayed in the workforce to ensure they had health coverage would retire earlier, knowing they could buy into the public insurance program. The CBO estimated that allowing 62-to-64-year-olds to buy into Medicare would lead to an increase in Social Security spending of $1.6 billion over 10 years because of early retirements. However, under Democratic health reform, older Americans without jobs would be able to get more affordable private health insurance as well, so it's unclear if having a Medicare option would affect retirement rates.

The perception of Medicare could change
Medicare is hugely popular for a reason — it provides decent health insurance and allows elderly Americans who would be uninsurable in the private market to get inexpensive coverage. But Medicare is not perfect. In fact, in some ways, Medicare would be inferior coverage when compared with the highly regulated private plans that would be for sale in the exchange (or exchanges) under Democratic health reform. Health-policy experts point to several Medicare shortfalls — including high hospital co-pays and no limits on out-of-pocket expenses — that could cause 55-to-64-year-olds to prefer private coverage.