The idea of letting early retirees buy into Medicare has been around for a long time. The last time it was seriously considered was in the late 1990s when it was proposed by President Bill Clinton. It didn’t pass then, in part, because it was impossible to structure such a program in a way that wasn’t prohibitively expensive to the federal government. Hence it was surprising to see Senate Finance Committee Chairman Max Baucus suggest in his recently released white paper on health care reform that a “budget neutral” buy-in, financed entirely from enrollee premiums, was possible.

There is no data offered in Sen. Baucus’ white paper which supports the contention that such an outcome is achievable, whereas common sense and plenty of independent research indicate that it is not. The problem with the buy-in option is that, because it is voluntary, it is vulnerable to serious adverse selection. If the premiums are set to cover full costs, the only people who will want to sign up are those with chronic and expensive health problems who can’t get affordable coverage anywhere else. Covering costs for a high-risk population would require very high premiums. The relatively healthy would find it less expensive to get coverage elsewhere and so would not jump in.

If, on the other hand, the buy-in were subsidized to make it less expensive for those who have expensive health needs, there would be a stampede of people leaving private coverage to take advantage of a new public insurance subsidy. The Census Bureau reports that there were 33 million people age 55 to 64 in 2007. Providing subsidized coverage for this pre-Medicare population would be very expensive indeed. The difficulty of designing a workable, inexpensive buy-in has been well documented by others, including Urban Institute researchers in this analysis from 2002.

Of course, it may be that Sen. Baucus wants to start with the proposition that such an option will be budget-neutral and then get dragged by interest group pressure toward the more expensive alternative. Certainly, there are many businesses which would like nothing more than to dump their early retiree health care obligations onto the federal government. A Medicare buy-in, if subsidized and therefore attractive to the healthy as well as the sick, would provide them with the opportunity to do so.

Taxpayers beware.


December 11, 2008