Biden’s Medicare plan spells trouble for the whole system

The Supreme Court has once again upheld the Affordable Care Act. Now, President Biden and congressional democrats are looking to put their own mark on the nation’s health care system. The administration recently proposed lowering Medicare’s eligibility age, and Senate Democrats are apparently eager to include the reform in their forthcoming $6 trillion reconciliation bill. 

The policy seems straightforward: take a popular program and expand it so that people as young as 60 can enroll. But, as with many of Biden’s proposals, the devil is in the details.

To begin, President Biden’s proposal could be charitably described as undeveloped. There are only a handful of sentences devoted to the idea in the president’s budget and precious few details from the administration about how the plan would work.

Indeed, there are a myriad of questions that the administration and congressional Democrats who support the idea have not yet answered. How would lowering Medicare’s eligibility age to 60 affect those who currently receive coverage through Medicaid or the Affordable Care Act’s (ACA) exchanges? Would late-enrollment penalties apply to those who defer coverage until the current eligibility age of 65? Would reimbursement rates to providers differ for the new population? And would the newly eligible face the same premium requirements, including income-related premiums, that the current Medicare population pays?

These questions may seem technical, but their answers will impact the health care arrangements of 18 million Americans.

We analyzed the impacts of a proposal like Biden’s and found that lowering the Medicare eligibility age to 60 would move millions of Americans from their private plans to government coverage, increase the federal deficit, and accelerate the insolvency date of Medicare’s Health Insurance Trust Fund. To compensate, policymakers would either be required to increase taxes or plug the hole with general revenues, severing the tie between Medicare’s hospital benefit and the exclusive payroll taxes that finance it.

The vast majority of those who would become eligible for Medicare already have insurance. In fact, only about 10 percent of the early-eligible population currently lacks coverage. About half have existing employer-sponsored coverage. And almost a quarter of the newly Medicare-eligible under Biden’s proposal already have government coverage through, for example, state Medicaid programs or the Affordable Care Act’s marketplace plans.

We estimate the expansion would increase the ten-year deficit by $394 billion with about 14 million Americans enrolling in at least Medicare Part A (which provides coverage for hospitalizations). The impact on Medicare spending would be even larger — it would rise by almost $1 trillion over the next ten years.

The increase in Part A spending would hasten the insolvency date of Medicare’s Hospital Insurance (HI) Trust Fund without corresponding offsets. Under the current baseline, the Congressional Budget Office projects the HI trust fund will be insolvent in 2026. We estimate that, absent alternative financing options, lowering the Medicare eligibility age to 60 in 2022 would accelerate the insolvency date to 2024.

To avoid weakening the trust fund, the Biden administration has stated that the expansion will have “financing separate from the Medicare Trust Fund.” This implies that it plans to use general fund revenue to offset the spending increase. This approach, however, would represent a fundamental shift in how Medicare is funded. Since its enactment, the program’s benefits have been viewed as an “earned right” because they are paid for by dedicated HI payroll taxes. Severing, or at least weakening, the tie between the HI payroll taxes and the benefits provided is not just an accounting change but one with far-reaching policy and political implications.

The alternative to insolvency or general fund transfers is to increase the HI payroll tax. We consider two alternatives that would plug the hole. The first increases the Affordable Care Act’s Net Investment Insurance Tax, which applies to tax filers with at least $200,000 in earnings. While politically appealing, this option would require an almost 300 percent hike in the rate next year. That would be in addition to the other investment tax increases the administration has in mind. The other option would be to raise the base HI payroll tax, which would impact working and middle-income Americans. We estimate that a 12 percent increase in the tax — to 3.25 percent in 2022 — would be needed if policymakers chose this option.

The HI Trust Fund’s looming insolvency should be a wake-up call because Medicare is under fiscal distress. Outlays are projected to grow faster than any other major entitlement and will soon account for nearly one in every five dollars the federal government spends. Policy makers should be focused on reforms that will strengthen Medicare for current and future retirees while putting it on a fiscally sustainable path. Lowering the Medicare eligibility age to 60 does the opposite.

President Biden and congressional Democrats have already expanded the Affordable Care Act and Medicaid subsidies in an effort to expand health coverage to more Americans. But their proposal to lower the Medicare eligibility age threatens our healthcare system more broadly. Not only will it have significant fiscal impacts, but it will also weaken a program that over 60 million Americans rely on for life-saving care.

Lanhee J. Chen is David and Diane Steffy Fellow in American Public Policy Studies, and Tom Church and Daniel L. Heil are Policy Fellows, at the Hoover Institution. The research underlying this piece was supported by the Partnership for America’s Health Care Future. Follow Lanhee Chen on Twitter @LanheeChen and Tom Church @TomVChurch.