Medicare, Exchanges, and Work Incentives

One of the arguments for increasing the age of eligibility for Medicare from 65 to, say, 67 is to increase the incentive to work. Putting aside the fact that many at that age may not be able to work, the logic here is that lifespans have lengthened (for some) and we could use more tax revenue and economic activity, so let’s put more people to work. (One has to ignore the fact that jobs vacated by older individuals are filled by younger ones. So, retirement doesn’t necessarily reduce the work force.)

The work incentive mechanism is obvious in today’s world since, absent Medicare, the only reliable source of health insurance coverage for 65 and 66 year olds is employer-sponsored plans. By that age, the vast majority of people will have some kind of pre-existing condition that will make obtaining affordable, non-group coverage challenging. So, if Medicare goes away, many people will try harder to keep working.

But the work incentive argument loses its punch in the era of subsidized, exchange-based coverage. One can retire and get health insurance that’s guaranteed to be affordable. Is there still a work incentive effect of increasing the Medicare age in this case? Maybe, but it is harder to demonstrate. One needs to examine the out-of-pocket cost of exchange coverage versus Medicare. Both have income-varying premiums, net subsidies. There are other complicating factors, but I won’t belabor the point, which is that you just can’t assert raising the age of Medicare eligibility increases work incentives. It’s just not obvious in this case.

Who, if anyone, has done a careful calculation to show there is or is not a work incentive from increasing the Medicare age in the context of the ACA? To what extent does the work incentive, if any, vary by income?

By the way, a policy option I’ve seen nobody discuss is allowing 65-66 year olds access to exchanges and Medicare but at a consistent subsidy schedule across both regimes. Do you know what that is? It’s Medicare premium support with a public option, but only for a narrow age band, the one, in fact, for which it makes the most sense (on the argument that older beneficiaries are more likely to have difficulty making plan choices).

I can see why both the left and right might simultaneously like and hate aspects of this idea. That might make it the perfect compromise test of premium support and the public option. But, you have to be on board with both the ACA and Medicare premium support to go along. I can almost feel people squirming.

[Cross-posted at The Incidental Economist]

Austin Frakt

Austin Frakt is a health economist and an assistant professor at Boston University's School of Medicine and School of Public Health. He blogs at The Incidental Economist.