'Mini Medicare' Reform Could Cut Retirement Health Benefit Costs

Could Medicare reform play a role in health care cost reduction in a way that actually benefits governments?
September 10, 2009 AT 3:00 AM
Girard Miller
By Girard Miller  |  Finance Columnist
The finance columnist for Governing.

Could Medicare reform play a role in health care cost reduction in a way that actually benefits state and local governments? Until a few weeks ago, I would have said, "No way." But an idea advanced in the final week of the Congressional summer recess could change that. Last-minute proposals in a legislative battle as complex as the health care debate usually are non-starters, but this is one idea that could survive to see another day, even if it misses the ObamaCare train when it leaves the station later this month.

The reason I'm so optimistic about this idea is that health care reform without Medicare reform is just half of President Obama's potential long-term legacy, and he knows it. The White House also knows that they can't just kick the can of Medicare reform down the street, because that system will go broke before the end of his second term in office if he's re-elected. Winning on health care while flunking on Medicare is not going to earn him a place on the social safety-net hall of fame.

I'd like to credit former Vermont governor Howard Dean, whose book on health care reform and recent comments on the relationship with Medicare forced me think this over. Dean, a physician, advanced a powerful idea as the debate over the "public option" of a national single-payer plan intensified and the White House waffled on the issue. At one point he suggested that some, not all, Americans could be given the option to join the Medicare system. To illustrate, he floated the idea that Americans over age 55 might be given a passkey to buy in. He didn't say enough about costs, however, and that's where I want to take his idea to the next higher level.

Today's Medicare benefits are unaffordable and unsustainable. To achieve actuarial balance, we need to both raise the payroll tax and raise the eligibility age for those we subsidize. Both reforms are achievable and must be joined at the hip to receive bipartisan support -- while at the same time providing a competitive alternative in the health insurance marketplace that "bends the cost curve" and thus reduces state and local government retiree health care costs.

A four-step solution is required:

1. Allow any American over age 55 to purchase Medicare coverage at full cost with no subsidies for the group as a whole. The Medicare program could provide a non-subsidized national group rate to all those aging baby boomers who lack medical insurance today, who can't find a better deal as individuals in the private sector, or whose employers decide to purchase Medicare for them instead of conventional group insurance. I call this "Mini Medicare." Each year, the premiums would be re-set to achieve a breakeven budget and to recapture any prior underwriting losses if they occur.

2. Raise the eligibility age for today's subsidized Medicare benefits -- what I call "Medicare Gold" -- from 65 to 70 over a seven-year transition period and adjust it thereafter for increasing longevity. All current recipients should continue to receive Medicare Gold. Because working taxpayers subsidize this group, Medicare Gold is the best medical insurance bargain in the nation. But as Americans live longer, we've thrown the system completely out of actuarial balance because the benefits now require subsidies for periods of time that expand each year with each new class of retirees who outlive their predecessors. To sustain the Medicare system, we need to freeze the initial subsidy for the retiring baby boomers who then reach the Social Security retirement age (66 or 67 depending on their year of birth).

3. This brings us to the "Medicare Silver" group -- those who achieve eligibility at age 66 (or later, 67) but haven't reached age 70. For these new retirees, their Medicare system subsidy should be the same dollar amount provided now, but without future medical cost inflation. Each year, the Silver group's premiums will therefore rise to match increasing health care costs, but they will still receive a fixed partial subsidy--far better than their peers in the Mini Medicare group who pay full cost. The Silver group's subsidy would decline in value relative to the Gold group's over time. When it erodes through inflation to less than half the value of the Gold group's subsidy, it could then be increased by the CPI and still be actuarially affordable. Notice that private and public employers who replace conventional insurance for their older employees with Medicare Silver would enjoy a subsidy for employing older workers. Their benefits costs would be less than those in Mini Medicare or private insurance plans. This is a powerful employer incentive to keep aging baby boomers engaged in the workforce and contributing productively, which will also reduce Social Security and pension costs.

4. Beginning in 2013 (deliberately after the next Presidential elections) step up the payroll taxes for Medicare incrementally over a five-year period until the program achieves its 75-year actuarial funding levels. That would require an increase in payroll taxes of about 1 percent of salary for both employees and employers alike, which would avert a financial crisis in 2017 when the system is now scheduled to go upside-down financially.

So by now, readers may be wondering where are the savings for state and local governments -- especially if they must begin paying a higher Medicare tax as employers? First, the higher taxes are inevitable -- and these age-based reforms will actuarially reduce the inevitable tax increases for all employers and employees by at least a third. Second, and more importantly, the availability of a non-subsidized national health care option for workers and early retirees at age 55 would provide a cost-effective alternative to today's private insurance premiums. All of the benefits of group purchasing I explained in this week's companion column on health care collectives would apply here as well.

Further, the implicit rate subsidy (younger workers' premiums subsidizing older workers and retirees) for those recipients under conventional insurance goes away because premiums for Mini Medicare would be explicitly calculated in the huge national cost pool and billed accordingly. Premiums for younger active employees should therefore decrease across the board. In fact, some states and municipalities would then be positioned to self-insure their younger, active employees and reduce costs even further.

This arrangement would enable some public employers to decouple their retiree medical benefits (known as OPEB for "other post-employment benefits") from their current plans for active employees. Public employers might then cover only the retiree and not necessarily their spouse and dependents as a way to better manage costs to taxpayers. Their OPEB plans could provide a fixed-dollar contribution toward the Mini Medicare program, with the employee picking up the balance. The subsidy would become explicit and finite, unlike today's "blank check" OPEB plans which are actuarial nightmares and cannot be sustained into the coming decades.

A final cost control: If millions of individual Americans are paying the full premium cost of Mini Medicare out of their own pockets, they will become vigilant watchdogs of the benefits we provide to everybody else in the Medicare system. That adds a powerful check-and-balance now absent in the current system. Imagine a world in which AARP and the "Greying Panthers" actually fight to keep benefits under control.

To satisfy the concerns of moderate congressional Republicans who fear that a public option of any kind would produce inefficient and anti-competitive results that are irreversible, I suggest a "sunset review." The Mini Medicare window could be closed to new entrants after four years unless a bipartisan Congressional panel concludes that the new unsubsidized option for 55-66 year olds has resulted in lower costs and has not unduly disrupted competitive markets to the detriment of the general public. If either of these feared outcomes arise, then we can simply let those who were admitted to Mini Medicare remain in the system at their own cost until they reach the normal Medicare eligibility ages -- and this controlled experiment with an age-based "public option" can quietly fade away.

No state or local government employer should be required to change its retiree medical plans. But with the availability of non-subsidized Mini Medicare at cost as an alternative, some will find it a better option. It could be a game-changer in public-sector benefits cost management.

Mini Medicare (for those between ages 55 and 66) would be a perfect fit for public safety and teacher retirees who traditionally complete their careers earlier than most Americans. If we can drive down the costs of coverage for that cohort group, taxpayers across the country will clearly benefit. And if it's entirely optional, public employers would keep their current arrangements if they see no advantage to changing.

Readers who hate expansive government will be loathe to accept the idea of broadening the Medicare system, but they typically offer no solutions to cost-reduction as I noted in my prior column. They will simply view this as another big step toward a nationalized single-payer system. Those who support socialized health care will think this approach is too stingy, but they have no clue about how to pay for it except by taxing the rich who already pay Medicare taxes on their entire earned income, unlike Social Security.

This Medicare reform compromise would put the system back into actuarial balance, and provide a sustainable and cost-effective solution for many individuals and employers, while preserving competitive markets. With this approach, our elected officials could rightly claim that they "saved Medicare" from its impending death spiral.

Girard Miller
Girard Miller | Finance Columnist | millergirard@yahoo.com