Journal of Health Economics 20 2001 239–260
Avoiding health insurance crowd-out: evidence from the medicare as secondary payer legislation
Sherry Glied
a,∗
, Mark Stabile
b
a
Division of Health Policy and Management, Mailman School of Public Health, Columbia University, 6th Floor, 168th Street, 600 West, New York, NY 10032, USA
b
Department of Economics, University of Toronto, Toronto, Canada Received 1 December 1998; received in revised form 1 August 1999; accepted 1 November 2000
Abstract
The cost of expanding health insurance coverage increases when people who would otherwise pur- chase insurance obtain public coverage. This paper investigates the effects of one of the first efforts to
target insurance benefits to the most needy, the 1982 medicare as secondary payer MSP provisions. We find strong evidence of low compliance with the MSP both in terms of medical bill payments
payment compliance and employer-sponsored insurance coverage coverage compliance. We estimate payer compliance at approximately 33. Coverage compliance is lower, at under 25.
We find weak evidence that the MSP caused older workers to shift toward MSP-exempt jobs. © 2001 Elsevier Science B.V. All rights reserved.
JEL classification: H2; I1 Keywords: Crowd-out; Payer compliance; Coverage compliance
1. Introduction
Many people who are eligible for public insurance coverage would have obtained private insurance coverage if these public programs had not been adopted Cutler and Gruber,
1995. The governmental cost of expanding insurance coverage is increased when those who would have otherwise purchased private coverage participate in a public program.
Such subsidized purchases of insurance substitute for — or “crowd-out” — previously unsubsidized purchases.
Universal insurance programs necessarily generate 100 crowd-out of previously exist- ing private coverage. As the costs of universal programs have risen, however, legislators
∗
Corresponding author. Tel.: +1-212-305-0296; fax: +1-212-305-3405. E-mail address: sag1columbia.edu S. Glied.
0167-629601 – see front matter © 2001 Elsevier Science B.V. All rights reserved. PII: S 0 1 6 7 - 6 2 9 6 0 0 0 0 0 8 2 - 5
240 S. Glied, M. Stabile Journal of Health Economics 20 2001 239–260
have become increasingly interested in targeting public benefits only to those who need them. Before the current crowd-out debate began, Congress made changes in medicare to
try to reverse some of the insurance substitution due to the program’s universal coverage of the elderly. The 1982 medicare as secondary payer MSP legislation requires employers
who offer health insurance to any of their workers to provide it, on similar terms, to their workers age 65 and over, and requires that any such insurance be “primary” to medicare.
This paper examines the effects of that law.
Anti-crowd-out provisions raise two concerns. First, given the fragmented nature of the US health insurance market, the provisions may be very difficult to enforce. Second, the
provisions may alter labor market behavior. Using data from the National Medical Care Expenditure Survey NMCES 1977, the National Medical Expenditure Survey NMES
1987, and the Current Population Survey for 1980–1988, a period surrounding passage and implementation of the MSP, we estimate the extent and nature of compliance with the
legislation. We then estimate the extent of labor market responses to the tax by examining the hours worked by and types of firms where these workers were employed and the extent
to which the legislation affected wages and employment.
1
Our findings suggest that the MSP legislation was largely unsuccessful in forcing employ- ers to provide primary insurance coverage for their elderly workers. Our estimates suggest
that the MSP achieved only between 25 and 33 of its intended savings, mostly because of non-compliance with the legislation. We find some evidence that employers and employees
changed their behavior to avoid complying with the mandate, and that these effects were concentrated in the largest firms.
2. The medicare as secondary payer legislation
Under MSP, beginning on 1 January 1983, medicare became the secondary payer if a person age 65 or over held employer-sponsored insurance and was employed by a firm
of 20 employees. Employer-sponsored insurance paid first and medicare paid only those medicare-covered expenses that were not covered by the employer plan. If an employer
chose to provide health insurance to employees under age 65, heshe had to offer coverage to those age 65 and over on identical terms and this coverage substituted for medicare.
If a medicare-eligible senior chose to decline employer-sponsored coverage, he could not select employer-sponsored Medigap. Rather, such an employee would lose the coverage of
medicare deductibles and co-payments as well as pharmaceutical coverage or other benefits
1
Over this time period there were also changes in social security benefits, tax laws, mandatory retirement laws, and medicare laws. Most of the changes made in OASDI in this period were long term changes. Beginning
in 1984, beneficiaries with incomes above certain thresholds were required to include a portion of their social security benefits in their taxable income. There were no major changes in mandatory retirement laws over this
period. Overall, the financial status of retired households ages 65–69 and 55–64 changed little over the period following the legislation 1984–1991 according to analysis of the SIPP Poterba et al., 1994. Over this period,
medicare also implemented its DRG payment system for hospitals. This system reduced the length-of-stay of patients at hospitals and stabilized medicare hospital expenditures. This would also have implied a stabilization
in the expected patient copay for hospital stays, possibly reducing the demand for supplemental coverage relative to what it would otherwise have been.
S. Glied, M. Stabile Journal of Health Economics 20 2001 239–260 241
that might be offered through the employer plan. The narrower scope of medicare coverage relative to employer-sponsored insurance meant that seniors had a strong incentive to accept
employer coverage if offered. The legislation further required employers to provide primary coverage to the medicare-eligible spouses age 65 and over of any employees under age 65,
if such spousal insurance coverage was normally provided. Finally, the law prohibited firms from compensating workers who dropped their coverage.
Thus, the MSP legislation had two intentions: first to require existing employer-provided coverage to become primary payer, which we call payer compliance, and second, to require
employers to provide health insurance coverage for their employees age 65 and over at rates similar to those under age 65, which we call coverage compliance.
Enforcement of these MSP rules depended on the action of private insurers who act as intermediaries for the medicare program.
2
These intermediaries, and medicare providers were supposed to identify patients who should have been covered through MSP provisions
using existing private insurance coordination of benefit rules. Most private insurance plans include coordination of benefits provisions. These apply whenever a plan beneficiary has
more than one health insurance plan in effect at the time services are rendered. Industry-wide provisions determine which plan is the primary payer and which is the secondary payer.
Typically, medicare is primary payer when someone holds both medicare and private in- surance because most of the time, that private insurance is Medigap. When the beneficiary
is employed and holds employer-sponsored coverage, however, the primary payer under MSP should be the private insurance. Without further information, there is no obvious way
for an insurer to know whether private insurance coverage for a medicare-eligible benefi- ciary should be secondary or primary. Various General Accounting Office GAO studies
suggest that this method of identifying people who should have been subject to the MSP rules was quite ineffective GAO, 1993, 1995a,b. Indeed, Congress, under OBRA 1989,
permitted the Health Care Financing Administration HCFA which administers medicare to match data contained in IRS and social security administration files. This match would
have allowed HCFA to know which medicare recipients were currently employed, a critical step in identifying people who might have held private employer-sponsored insurance. The
federal court, however, invalidated that matching system in 1995 — it had never been fully implemented.
Without this match, two features of MSP make enforcing compliance difficult. First, HCFA has no statutory authority to collect current data on the private health insurance
status of its beneficiaries from either employers or insurers. Therefore, in administering MSP, HCFA has had to depend on limited data obtained through the claims process and
from beneficiaries HCFA, 1993.
Nor is there direct provision in the legislation for enforcing the requirement that employers offer coverage to older employees on the same basis as to their younger employees. Older
employees would have to bring suit to enforce this provision. A review of court cases that cite the MSP statute revealed no cases that involved coverage compliance.
Employees have no incentive to bring such suits. Workers would be as well or better off allowing medicare to be primary payer and using their employer coverage to cover only
secondary expenses. Both workers and employers might prefer this arrangement — it would
2
Personal communication, Jim Mays, Actuarial Research Corporation.
242 S. Glied, M. Stabile Journal of Health Economics 20 2001 239–260
reduce costs for employers relative to MSP and would provide more complete coverage for beneficiaries relative to no employer supplemental coverage at all.
Second, the penalties for violating the MSP requirement are very limited. The only penalty except in clear cases of fraud is that private insurers repay any payments for which they
should have been primary payers. This provision is similar to the penalty provision in minimum wage legislation — those who fail to comply must for a first offense make good
their obligations Ashenfelter and Smith, 1979. In 1989, the federal courts further held that the MSP provision did not permit HCFA to recover mistaken payments from third party
administrators, implying instead that HCFA should deal directly with the employers who had originally purchased coverage, and concluded that the MSP provision grants HCFA no
greater rights with respect to insurers’ claim filing deadlines than insurers’ beneficiaries or other private claimants GAO, 1995b.
In contrast with these weak enforcement and penalty provisions, compliance with the mandate carried a high cost Table 1. To estimate the cost of the mandate, we calculate
the average per capita medicare eligible health spending for workers ages 65–69 using the 1987 NMES details on the NMES and other data sources are presented below. In 1987,
total medicare eligible hospital care and physician expenses for this group amounted to US 1562. In column 2, we adjust these figures for the growth rate of overall per capita medicare
expenditures and compute estimates for 1980–1986. In column 3, we report average annual earnings for workers ages 65–69 who report receiving employer-provided health insurance
details below. Column 4 reports the percentage of all workers ages 65–69 who fall into this category. In columns 5, we compute the ratio of per capita medicare expenditures to annual
wage and salary earnings for people with health insurance. In column 6, we repeat this calculation for all workers ages 65–69. In 1980, 35 of those ages 65–69 and employed
had employer-provided health insurance. We find that health care expenditures average 6.8 of wage and salary earnings for workers with employer-provided health insurance
column 5; and 4.7 of wage and salary earnings for all workers ages 65–69 column 6. Our estimates of health care costs for those age 65 and over may understate the true costs of
employer-sponsored medicare equivalent health insurance for this group because the MSP provisions also require that employers cover the medicare-eligible spouses of workers and
because employer-sponsored health insurance costs per capita are higher than medicare costs. In column 7, we report, for comparison purposes, the average percentage of total
wages and salaries all workers paid for health services and supplies based on the US Department of Commerce national income and product accounts Levit et al., 1989. This
last figure is higher than our comparable estimate for older workers, suggesting that our estimate is unlikely to substantially overstate the cost of the mandate.
3. Implications of the medicare as secondary payer legislation
