Medicare Expansion: President Clinton's Proposals to Allow Coverage Before Age 65

Medicare Expansion: President Clinton's Proposals to Allow Coverage Before Age 65

98-73 EPW
Updated March 31, 1998
CRS Report for Congress
Received through the CRS Web
Medicare Expansion: President Clinton’s
Proposals to Allow Coverage Before Age 65
Bob Lyke, Beth C. Fuchs, and Jennifer O’Sullivan
Specialists in Social Legislation
Madeleine Smith
Consultant
Education and Public Welfare Division
Summary
President Clinton has proposed allowing people ages 62 through 64 to buy into
Medicare if they do not have access to employer-sponsored or federal health insurance.
Displaced workers ages 55 through 61 generally would also be allowed to buy in if they
lost employer-sponsored insurance. In addition, retirees ages 55 and over whose former
employers terminated or substantially reduced retiree health insurance would be
permitted to extend their COBRA coverage (defined on page 6) until age 65. The
proposals have been introduced as H.R. 3470 (Representative Stark) and S. 1789
(Senator Moynihan).
The President’s proposals would help people in these age groups obtain health
insurance. While most of them already are covered by employment-based, government,
or private non-group plans, nearly one in seven is uninsured. Many without coverage
find that private non-group insurance is too expensive or, if they have pre-existing
medical conditions, unavailable. However, the cost of buying into Medicare (estimated
to be $300 to $400 a month) or continuing COBRA coverage may also exceed what
most uninsured can afford. Questions have been raised about whether Medicare buy-ins
would result in costs to the federal government and whether Medicare should be
expanded in light of the anticipated insolvency of the Part A trust fund. Some argue that
legislative action should be deferred until the issue is considered by the National
Bipartisan Commission on the Future of Medicare. Proponents argue that the proposal
is largely self-funded and is needed now to address a growing problem.
Background
Population Characteristics. Most people ages 55 through 64 have health insurance.
Table 1 shows that in 1996 about 68% of people ages 55 through 61, and 60% of people
ages 62 through 64, had employment-based insurance as their primary coverage either
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directly or as a dependent spouse. Employment-based insurance includes plans for active
workers, retiree health plans, and COBRA continuation coverage. About 5% of the
younger group and 9% of the older group had primary coverage under Medicare (due to
disability or kidney disease), while about 4% of both groups had primary coverage under
Medicaid (due to disability or caring for a Medicaid-eligible child). Private, non-group
insurance was primary coverage for about 9% and 11 %, respectively.
About one in seven persons in these age groups had no health insurance in 1996 (13%
of those ages 55 through 61 and 16% of those ages 62 through 64). Our analysis shows
that 25% of the uninsured were poor and that 35% were neither employed nor the
dependent spouse of an employed person — characteristics that would make it unlikely
one could pay much for insurance.
Table 1. Primary Health Insurance Coverage, 1996
Ages 55-61
Ages 62-64
Type of coverage
Number
Percent
Number
Percent
Employment-based: own coverage
7,991
51.0%
2,586
44.6%
Employment-based: dependent coverage
2,579
16.5%
875
15.1%
Medicare
764
4.9%
496
8.5%
Private, non-group
1,378
8.8%
624
10.8%
Medicaid
657
4.2%
216
3.7%
Veteran’s, military health
232
1.5%
103
1.8%
Uninsured
2,072
13.2%
902
15.5%
Total
15,673
100.0%
5,802
100.0%
Source: CRS analysis of the March 1997 Current Population Survey (CPS). Numbers are in
thousands.
However, almost half of these uninsured people had family incomes more than
twice the 1996 poverty threshold (i.e., over $16,326 for a single person and $21,128 for
two). Moreover, many had ties to the workforce. Among uninsured people ages 55
through 61, 33% were employed full time and 12% were the dependent spouse of full time
workers. An additional 27% were part-time workers or the dependent spouse of a part
time worker. Among uninsured people ages 62 through 64, 16% were employed full time,
19% part-time, and 14% were a dependent spouse of a worker. Among the uninsured
with some labor force attachment, over half in both age groups were employed or the
spouse of employees working for firms with fewer than 25 employees. Small firms
generally are less likely to provide health insurance to their workers.
Among people ages 62 through 64, the uninsured rate increased from 12% to 16%
between 1990 and 1996. Those without insurance were more likely to be full time
employees or their dependents in 1996 than in 1990, and more had incomes at least twice
the poverty level. There was no appreciable change in the uninsured rate among people
ages 55 through 61. (Among all people under age 65, the uninsured rate rose from 16%
in 1990 to 18% in 1996.)
Obtaining health insurance can be a serious problem for older people who are not
yet eligible for Medicare. Average health care expenses of insured people in their early 60s

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are twice those of people in their 40s; they are three times those of people in their early
20s. While employment-based insurance spreads these costs over all workers in the same
plan, private non-group insurance premiums generally reflect the higher risk attributable
to the policyholder’s age and health status. (In the few states that require community
rating, these costs would be spread among all individual policyholders.) Thus, it is not
unusual for people in their late fifties and early sixties without group coverage to face
annual premiums of $4,000 to $6,000. If they have not had recent insurance coverage, in
most states they could be charged more or even denied coverage.
Prior Legislation. Congress has enacted legislation that provides some assistance.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA, P.L. 104-191)
requires that all individual policies be guaranteed renewable, regardless of the health status
or claims experience of the enrollees, unless the policyholder fails to pay the premium or
defrauds the insurer. It also requires that individuals who recently had group coverage be
offered health insurance without restrictions for pre-existing conditions. However, the Act
allows states to comply in a variety of ways. It does not limit what insurers may charge
for these policies, leaving that regulatory authority to the states. Some states have
established high-risk pools for people who are hard to insure, but even their premiums can
be adjusted for age, and they may be as high as two times the average premium charged
for individual policies outside the risk pool.
To help retirees maintain employment-based coverage, Congress has allowed
COBRA eligibility upon retirement and special COBRA extensions if employers file for
chapter 11 bankruptcy (see page 5). Congress has also provided tax benefits for
advanced-funded retiree health plans (including 401(h) and voluntary employees’
beneficiary association (VEBA) plans); however, statutory restrictions and record-keeping
requirements have limited their attractiveness. Employers that do not advance fund retiree
health plans can still deduct expenses as benefits are paid, just as they can deduct expenses
for active workers. Nonetheless, many employers question whether they can continue the
current level of benefits in the face of steadily rising health care costs and the Financial
Accounting Standards Board requirement (FAS 106) that future post-retirement benefit
obligations be recognized currently in financial statements.
Expanding Medicare Eligibility
Current Law. Medicare provides health insurance coverage for virtually all
persons age 65 and older. In addition, it provides protection, regardless of age, for
persons who receive social security disability benefits (after a 24-month waiting period)
and for most who need a kidney transplant or renal dialysis. Medicare consists of two
parts: the Hospital Insurance (Part A) program is paid for by payroll taxes imposed on
current workers and their employers, while the Supplementary Medical Insurance Program
(Part B) is financed by monthly premiums (equal to 25% of program costs for the aged)
and by Federal general revenues. The 1998 monthly premium paid by Part B enrollees is
$43.80. The average per capita Part A and B cost for an aged enrollee was $5,600 in
1997.
The President’s Proposals. Under H.R. 3470/S. 1789, two groups would be
allowed to buy into Medicare beginning July, 1999. First, persons ages 62 through 64
could obtain Medicare coverage if they were not eligible for employer-sponsored or
federal health insurance. They would pay two monthly premiums: a base premium before

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age 65, estimated to be about $300 in 1999 (though subject to geographic variation); and
a deferred premium for ages 65 through 84, estimated to be about $10 a month in 1999
for each year of early participation (not subject to geographic variation).1 Thus, a person
who bought-in for three years would pay a deferred premium of about $30 a month in
addition to what they pay for their Part B premium. The base premium is not intended to
cover the full cost of people who buy in; in effect, Medicare would be loaning early
enrollees the difference and then obtaining repayment with interest from the deferred
premium during the 20 years after they turn 65. The base premium could be adjusted
yearly to reflect cost changes, but the deferred premium, made known at the time of
enrollment, would be changed only for subsequent enrollees. No Medicaid assistance
would be available for premiums or cost-sharing. People may enroll within two months
of either turning 62 or losing federal or employer-sponsored health insurance; they would
not have to elect or exhaust COBRA coverage. If they disenroll, they could not re-enroll
unless they obtained and subsequently lost federal or employer-sponsored insurance
including eligibility for COBRA coverage.
The second group allowed to buy in includes persons ages 55 through 61 who lose
their job because their firm closed, downsized, or moved or because their position was
eliminated. They must meet requirements for receiving unemployment compensation and
must also lose health insurance (after having at least 12 months of creditable coverage)
because of this displacement and not have access to federal or employer-sponsored
insurance including any COBRA coverage. The spouse of an eligible person could also
buy in. Participants would be charged geographically-adjusted premiums (one for people
ages 55 through 59 and another for those ages 60 and 61) that would be approximately
$400 a month in 1999. They would not pay a deferred premium after turning 65 since the
$400 monthly base premium is intended to cover their full cost. People who disenroll or
obtain federal or employer-sponsored insurance could re-enroll only if they were displaced
once again. If displaced workers had no federal or employer-sponsored health insurance
after turning 62, they could obtain Medicare coverage under the terms described above.

Policy Issues. Coverage. The President’s proposals are a response to the concern
that many people ages 55 through 64 do not have access to affordable health insurance.
They are targeted to several groups including individuals with pre-existing conditions who
are unable to get coverage through other sources, persons who are sick, individuals with
Medicare-eligible spouses who are not eligible themselves because they are not yet 65, and
persons who are displaced from their jobs and lose accompanying health insurance.
Some critics of the President’s plan suggest that it addresses these problems in a
piecemeal fashion and only covers a portion of the target population. (A preliminary
estimate by CBO is that about 410,000 persons out of the 3 million uninsured ages 55
through 64 would elect coverage under H.R. 3470/S. 1789 (including the expanded
COBRA option discussed below)). There is also concern that the availability of Medicare
at age 62 might encourage some people to retire earlier or to enroll in public rather than
private insurance. Some suggest that employers might be further encouraged to drop all
or a portion of their retiree health coverage. Others urge that the private sector should be
encouraged (perhaps with use of tax incentives) to address the health insurance needs of
1 Premium estimates in this report were made by the Congressional Budget Office (CBO).

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the target population; they view this as preferable to expanding a public program which
is facing long-term financial problems.
Costs. One reason that only about 13% of uninsured people ages 55 through 64
would gain coverage under H.R. 3470/S. 1789 is that many of the others could not afford
the premiums. In particular, those with incomes less than twice the poverty thresholds
(about half of the total) may find it difficult to pay $300 to $400 a month. Those with
fixed incomes (including many who are not employed) may face added problems if
premiums are increased to keep pace with inflation or to cover costs attributable to
adverse selection.
The Administration argues that in the long run the buy-ins would be fully funded
by participants’ premiums and so would not incur federal costs. There would be start-up
costs (which the Administration initially estimated to be about $3.1 billion over 10 years)
which would be funded by savings from proposed legislation, the Medicare Fraud and
Overpayment Act of 1998 (H.R. 3471/S. 1788). The latter initiatives would be in addition
to the fraud and abuse measures included in HIPAA and the Balanced Budget Act of 1997
(BBA 97, P.L. 105-33). However, some critics are concerned about the possibility that
these initiatives might not actually offset the start-up costs. It is also possible that at some
point in the future there would be proposals for the government to subsidize buy-in
premiums for lower income individuals.
The premium estimates assume that the proposals would result in some adverse
selection, that is, that the people who buy in early would have higher than average health
care costs. (Otherwise, they would find private insurance less expensive.) But actuarial
estimates sometimes are not borne out by subsequent events. While premiums would be
adjusted for future participants, based upon the experience of the earlier enrollees, there
still could be temporary unanticipated gains or losses. If the buy-in is attractive mostly to
higher-cost people, premiums would rise as they obtain coverage and use health care they
previously could not afford. Over time, healthier individuals would find other insurance
to be less expensive or would forgo coverage entirely, further increasing the buy-in
premiums. Unless the premiums were subsidized, costs would increase to the point that
either few people would be served or the early buy-in could not pay for itself. This
phenomenon is sometimes referred to as the adverse selection spiral.
Effect on Future of Medicare. Some observers argue that Medicare should not
be expanded until the problems facing the existing program are addressed. BBA 97
established a National Bipartisan Commission on the Future of Medicare to review the
long-term financial condition of the program and to analyze potential solutions. The
Commission’s report, due March, 1999, is required to include recommendations on a
number of items including “the feasibility of allowing individuals between the age of 62 and
the Medicare eligibility age to buy into the Medicare program.” The Commission is also
required to consider gradually increasing the eligibility age to 67 to match the increase
slated to occur under the social security program. A provision increasing the Medicare
eligibility age was included in the Senate-passed version of the BBA 97; however, it was
dropped in conference. At that time, some persons suggested that if the eligibility age
were increased, persons age 65 and 66 should be allowed to buy into the program. The
Administration argues that its buy-in proposal can be treated as a separate issue since it
would not add to Medicare costs.

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Extending COBRA Coverage
Current Law. Under the Consolidated Omnibus Budget Reconciliation Act of
1985 (COBRA, P.L. 99-272), most employers with 20 or more employees that provide
group health insurance must offer employees and their families the option of continuing
the insurance at group rates when faced with loss of coverage because of certain events.
One qualifying event is retirement or other termination of employment (except for gross
misconduct), for which 18 months of continued coverage is allowed. If employers have
filed for chapter 11 bankruptcy, retirees may continue coverage for life and their families
for 36 months. Other qualifying events (such as death, divorce, or entitlement to
Medicare) allow 36 months of coverage for the worker’s beneficiary. Generally,
employers may not charge employees or family members more than 102% of the otherwise
applicable premium. (See CRS Issue Brief 87182, Health Insurance Coverage under
COBRA, by Beth C. Fuchs.)
The President’s Proposal. Under H.R. 3470/S. 1789, retirees 55 years and older
whose employers terminate or substantially reduce retiree health insurance would be
allowed to extend COBRA coverage until the Medicare eligibility age of 65. (A
substantial reduction is at least 50% of the total average actuarial value of the benefits,
including premiums in excess of 150% of the initial premium.) The retiree’s spouse could
also extend coverage to age 65, while other dependents could do so for 36 months.
Employers could charge no more than 125% of the applicable premium. Advance notice
of terminations and reductions would be required.
Policy Issues. This proposal may help retired individuals whose former employer
terminates or sharply reduces health insurance that they had expected to continue at least
until age 65. Retiree health plan terminations can occur with little notice and leave early
retirees with difficult financial choices. Requirements for greater cost-sharing—higher
premiums, larger deductibles and coinsurance, and caps on total employer liability—may
happen more gradually but can also cause financial difficulty. Enrollment in managed care
plans sometimes reduces effective choice of doctors and other health care providers.
However, whether most early retirees could afford extended COBRA coverage is
questionable. For 1997, we estimate that the average cost of a COBRA policy was about
$2,000 for an individual and $5,600 for a family; if employers could charge 125% of the
applicable premium, as proposed, the average cost for early retirees might then be $2,500
and $7,000, respectively. These sums may be prohibitively expensive for all but higher
income retirees. Thus, the option might be attractive mainly to people with pre-existing
conditions who could not obtain comparable coverage in the private individual market.
COBRA enrollees on average use more health care than active workers. Among
people who are eligible, those who need care are more likely to elect coverage, while those
in good health tend to purchase individual policies or forgo insurance. Some estimate the
average enrollee cost to be 150% of that for other plan participants. Employers might
argue that the higher costs of a further extension would not be covered by the 125%
premium rate and thus would unfairly add to the insurance costs of active workers.
Whether the increase would be significant, however, would depend on the ratio of
enrollees to the number of active workers.