Senate Democrats seem to be looking at a Medicare out to their internal divisions over how to structure a so-called “public option.” One side of the caucus would get a “less robust” public option (whatever that means), and the other side of the caucus a bigger role for government in the form of giving people ages 55 to 64 the option of “buying in” to Medicare.
But how many people will want to buy in to Medicare?
The answer is, it depends. If Medicare charges an “actuarially fair” price, that means the enrollees would pay an amount that reflects the cost of providing the Medicare benefit to people ages 55 to 64. The best single predictor of a person’s health-care costs is the person’s age. The older the person, the higher his health-care costs.
The Senate bill limits how much higher the premium can be for older people than younger people. That means younger people subsidize older people. With an “actuarially fair” Medicare premium, at best 55-year-olds would be subsidizing 64-year-olds.
There are two forces at work. In one direction, dropping the cross-subsidies from 24-year-olds makes for a higher Medicare premium than in the regulated private market. In the other direction, the lower payments that Medicare imposes on providers would make the Medicare premium lower than the premium in a private plan.
It could be the case that the Medicare “buy in” option is one that economically rational people would be unlikely to take. And it could also create a giant sucking sound as Medicare displaced the private health-insurance market for 55- to 64-year-olds. Only time could tell for sure which will happen, but meanwhile the legislative process will rely on what the CBO model says. Those who want to forecast the next chapter in Senate action should wait for the oracle to speak.
– Hanns Kuttner is a visiting fellow at Hudson Institute.