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Medicare’s future benefit changes: reading the demographic tea leaves

In the last Presidential election, almost one-third of all eligible voters were age 60 and older. This 60+ age group not only had the largest bloc of eligible voters, it had the highest proportion of eligible voters who actually voted – 51%. In comparison, the 18-29 age group represented just 18% of eligible voters in that election and only 32% of them actually voted. That’s according to exit polls published in 2008 by the New York Times.

Even though the 60+ age-group already has the most voters and the highest voter participation, its numbers are rapidly growing. In the 2012 election, for example, there will be about six million more eligible voters in this group than there were in 2008. And it’s an article of faith that this group’s political clout will heavily influence the types of changes that Congress makes to Medicare’s benefit design.

As they seek to put Medicare on a more solid fiscal footing, policymakers have two primary considerations. First is the sheer number of people who will be enrolling in Medicare. More than 75 million individuals will turn 65 between 2011 and 2029, an average of more than 10,000 a day. And as tens of millions retire, the number of workers per Medicare beneficiary will drop from 3.4 today to 2.3 at the end of 2029.

During this period income tax revenue per Medicare beneficiary will decline by one-third, aside from possible changes in the tax code. Also, because healthcare inflation grows about twice as fast as other kinds of cost increases, in 2029 a dollar will buy only one-half as much healthcare as it does now. As a consequence, the government will receive one-third fewer tax dollars per Medicare beneficiary, and each dollar will have one-half the healthcare purchasing power it does now.

Demographics are policymakers’ other major consideration. What is the age distribution of Medicare enrollees, and how will that change in the next 10 and 20 years? How long will people live, on average? How much can they pay for healthcare? How many retirees have serious chronic illnesses, and is the percentage higher or lower than a decade ago? Congress needs to know the answers to these questions before making structural changes to Medicare if it wants the changes to be sustainable. Also, by understanding the demographic trends, retirees are better able to anticipate upcoming changes to their healthcare costs.

Last year the government published Older Americans 2010: Key Indicators of Well-Being, a 174-page report compiled by 15 federal agencies. Revised earlier this year, the OA Report uses charts, graphs, and text to describe the income levels, health status, and other characteristics of the senior population. Also, the Medicare Payment Advisory Commission’s 2011 Data Book includes a section that details the demographics of current enrollees. Both documents are useful in anticipating the most likely types of benefit changes to Medicare. And two demographics in particular — life expectancy and income – provide helpful clues.

Life Expectancy: At age 65, Americans can now expect to live another 18.5 years, on average, which is four years more than in 1960. In addition, at age 85 women have remaining life expectancies of 6.8 years and men have 5.7 years. That’s according to the OA Report and is based on 2007 data. Because the remaining life expectancy for 65-year-olds has increased by almost four years since Medicare was enacted, it seems like a no-brainer to delay the eligibility age from 65 to 67, perhaps in one-year increments starting a few years from now.

One potential downside to this inevitable change is that the most expensive market for individual coverage is the pre-65 segment. Delaying Medicare eligibility until age 67 lengthens the period when people without retiree coverage must buy individual policies. But if the Health Reform law stays intact, beginning in 2014 insurers can’t deny coverage or charge higher premiums to people with pre-existing conditions, which will make this segment of the market more affordable. Also, Health Reform has a cap on age-related premium adjustments for people over 50.

Seen from a different angle, remaining life expectancies for 65-year-olds have increased by one month for each calendar year since 1960. Because of this steady advance, at any given age individuals’ remaining life expectancies are slightly longer than they were for people who were at that same age just three or four years earlier.

That’s one reason a 65-year-old should expect to live longer, since the average is based only on past experience. People should also think of the average remaining life expectancy for a 65-year-old as the mid-point of a bell curve, with approximately one-half of retirees living past that mid-point, some by 15 or 20 years. That means when seniors who are in good health estimate their healthcare spending in retirement, they should assume that they will have long lives.

Income: Seniors are better off financially than they were 35 years ago. According to the OA Report, the median household income in 2007 for people 65 and older was $29,393 compared to $20,838 in 1974, an increase of more than 40% (page 13). Both numbers are in 2007 dollars, so inflation is taken into account.

Despite this improvement, most of today’s seniors struggle financially. According to the MedPac 2011 Data Book, only one in four Medicare enrollees has an income above the 400% poverty level. In other words, three-fourths of the Medicare population cannot reasonably be expected to pay much more for healthcare than they already pay.

When legislators require those with low and moderate incomes to pay more for healthcare, there are two unintended results: a) some people skip doctors’ visits and stop taking their prescription drugs. By rationing their healthcare, these people increase their odds of becoming seriously ill and being hospitalized, where the costs will be paid almost entirely by Medicare; b) some people use their minimal savings to cover the added costs, making it more likely they will eventually qualify for Medicaid and other assistance programs where state and federal governments pick up 90% to 100% of the tab.

Congress apparently did not think this through when it included a provision in the Health Reform law requiring new cost sharing for low-income people who happen to own one of the two most popular Medigap policies. Nearly one-third of the people who own these policies have incomes below $20,000, according to a Kaiser Family Foundation study.

This provision will be likely set aside before it becomes effective in 2015, chiefly because of widespread complaints from Medicare consumer advocates and a recommendation to re-evaluate this requirement by a sub-group of the National Association of Insurance Commissioners’ Senior Issues Task Force. Likewise, suggestions such as the one that Medicare have a Part B surcharge for all enrollees who buy certain Medigap policies, regardless of their incomes, are probably too indiscriminate to become law.

At the same time, it’s clear that affluent retirees will pay more for Medicare coverage in future years. Already those in the highest tier have seen their Part B premiums jump by more than 98% since 2007. And last week to help pay for an extension of the payroll tax cut, House Republicans proposed that retirees with modified adjusted gross incomes above $80,000 ($160,000 for couples) pay even higher Part B premiums than they do now.

While this particular proposal may not become law, the fact that it is being offered by House Republicans is a signal that even moderately well-off retirees should expect significantly higher costs in the coming years. Also, the thresholds for defining affluence will be lowered, as they are in the House Republicans’ proposal.◊


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