Adding an Out-of-Pocket Spending Maximum to Medicare: Implementation Issues and Challenges

Appendix A:  Provisions Related to Restructuring Medicare’s Benefit Design That Include an Income-Related Out-of-pocket Maximum in recent Deficit-Reduction Proposals

Erskine Bowles and Former Senator Alan Simpson (April 19, 2013).  Would replace current Medicare cost sharing with a unified deductible, and uniform coinsurance up to an initial out-of-pocket maximum, with 5 percent coinsurance required for expenses between the initial limit and the out-of-pocket maximum.  Would make the modifications to the benefit package such that the average out-of-pocket costs (including premiums) are held constant.  Out-of-pocket maximums would be income-adjusted and low-income beneficiaries would have lower deductibles than higher-income beneficiaries. Source: Moment of Truth Project, “A Bipartisan Path Forward to Securing American’s Future,” April 19, 2013

Senator Richard Burr and Senator Tom Coburn (February 16, 2012). Would unify Parts A and B with combined annual deductible of $550; set coinsurance rate equal to 20 percent up to an annual out-of-pocket total of $5,500 and coinsurance rate equal to 5 percent for out-of-pocket expenses between $5,500 and $7,500 per year; and establish an annual out-of-pocket maximum at $7,500.  The out-of-pocket maximum would be greater for beneficiaries with incomes greater than $85,000/individual, $170,000/couple (ranging from $12,500 and $22,500).  Includes a higher unified deductible for beneficiaries with incomes exceeding $1 million. Source: Senator Richard Burr and Senator Tom Coburn, “The Seniors’ Choice Act,” February 16, 2012.

Center for American Progress (November 13, 2012).  Would set annual out-of-pocket limits, ranging from $5,000 per year to $10,000 per year, based on beneficiaries’ incomes.  Would direct the Institute of Medicine to recommend additional improvements to align incentives with high-quality care.  Would implement the changes such that average cost-sharing would not increase and the value of the benefit package would not decrease. Source: Center for American Progress, “The Senior Protection Plan,” November 13, 2012.

Commonwealth Fund (May 2013). Proposes a new option called Medicare Essential, which would combine Medicare’s hospital, physician, and prescription drug coverage into an integrated benefit with an annual limit on out-of-pocket expenses for covered benefits.  The standard limit of $3,400, would be reduced to $2,000 for individuals with incomes below 150 percent of the FPL. Source: Karen Davis, Cathy Schoen, and Stuart Guterman, “Medicare Essential: An Option to Promote Better Care and Curb Spending Growth,” Health Affairs, May 2013 32(5):900–9.

The Hamilton Project at the Brookings Institution (February 26, 2013).  Would unify Parts A and B with a combined annual deductible of $525 and set the coinsurance rate above the deductible equal to 20 percent up to an annual out-of-pocket maximum.  The maximum would vary by income, ranging from $1,983 for beneficiaries with incomes between 100 percent to 200 percent of the FPL to $5,950 for beneficiaries with incomes above 400 percent of the FPL.  Deductibles for beneficiaries with incomes below 200 percent of the FPL would be reduced to $250. (Proposal authored by Jonathan Gruber) Source: The Hamilton Project, “15 Ways to Rethink the Federal Budget,” February 26, 2013.

Robert Berenson, John Holahan, and Stephen Zuckerman of the Urban Institute (March 7, 2013). Would set a maximum on beneficiaries’ out-of-pocket expenses that would vary by income.  Would reduce premiums and deductibles for beneficiaries with incomes below 300 percent of the FPL. Source: Robert Berenson, John Holahan, and Stephen Zuckerman, “Can Medicare Be Preserved While Reducing the Deficit?” March 2013.

Appendix B:  Medicare’s Current Claims Payment Process

Today, the payment of provider claims for people in traditional Medicare is typically handled as follows:

  1. The provider, such as a hospital or physician, submits a claim to Medicare.  A physician or supplier who does not “accept assignment” is not required to submit the claim to Medicare, in which case the beneficiary pays the provider and submits the claim.  (Fewer than 1 percent of Medicare claims are unassigned.1)
  2. Medicare reviews the claim, calculates the amount it owes, and pays the provider accordingly.  Medicare contractors record and process claims and track beneficiary cost sharing (e.g., a beneficiary’s spending towards the Part B deductible) in the electronic “Common Working File.”
  3. Medicare coordinates with supplemental payers.  The Common Working File contains information on beneficiaries’ supplemental coverage (provided by beneficiaries and providers on Medicare claims and supplemented by information from insurers and Medicaid under a Coordination of Benefits Agreement).  If a beneficiary has supplemental coverage, the Common Working File prompts the Medicare contractor to forward adjudicated claims to the Coordination of Benefits Contractor, which in turn transmits the information to supplemental payers.2   Alternatively, if a claim is first submitted to a beneficiary’s retiree plan, the claim will be transmitted by the plan to Medicare.
  4. Supplemental payers wrap around Medicare coverage.  After receiving an adjudicated claim from Medicare, the supplemental payer calculates any benefits it owes and pays the provider accordingly.  (This discussion assumes that Medicare is the beneficiary’s primary health coverage.  That is generally the case, but is not true for beneficiaries who are working and covered by an employer health plan, or covered by an employer health plan as a dependent.  In that case, and some others, Medicare is the secondary payer, and pays claims after the group health plan.)  Supplemental payers have various methods for wrapping around Medicare’s coverage:
    • Medicaid covers Medicare’s cost-sharing requirements for “full duals” and some “partial duals,” although cost sharing is only covered up to the amount Medicaid pays at states’ discretion.3
    • The majority of Medigap policyholders are enrolled in either Plan C or Plan F, both of which cover all beneficiary cost sharing for Medicare-approved charges under Medicare Parts A and B.4
    • The vast majority of employer-sponsored retiree health plans that pay benefits directly coordinate with Medicare through the “carve-out” approach, under which the employer first calculates the benefit it would pay if the enrollee did not have Medicare, and then subtracts or “carves out” the Medicare payment.  The result under this method is that retirees still have out-of-pocket obligations unless they reach the retiree plan’s out-of-pocket maximum.5
  5. Providers bill the beneficiary for any remainder.  The beneficiary owes the provider either the full Medicare cost-sharing amount if they do not have supplemental coverage or the balance if their supplemental coverage does not cover the full cost-sharing amount.  For an unassigned claim, the beneficiary pays the provider and is reimbursed by Medicare and any supplemental insurer.
  6. Medicare notifies the beneficiary of claims payments.  Medicare beneficiaries may review claims status through, and receive a quarterly Medicare Summary Notice (MSN) through the mail or online.

Appendix C:  Medicare’s Current Income-Related Features

How CMS Administers Income-Related Part B and D Premiums

Under Part B and Part D, Medicare beneficiaries are subject to higher premium amounts if their modified adjusted gross income (MAGI) exceeds a certain threshold.  In 2014, the income-related thresholds are $85,000 for an individual and $170,000 for a couple.  The Part B income-related premium ranges from 35 percent to 80 percent of total Part B per capita costs; the Part D income-related premium amounts are based on similar percentages.

The Social Security Administration (SSA) determines which beneficiaries are required to pay the income-related premium each year based on income tax data provided electronically by the Internal Revenue Service (IRS).  When doing so, SSA relies on information from two to three years prior to the year in which the premium is being applied.  For example, when determining the Part B and Part D income-related premiums in 2013, SSA relied on 2012 tax returns (reflecting 2011 income) or 2011 tax returns (reflecting 2010 income) if 2012 returns were unavailable.  If a beneficiary is required to pay an income-related premium, SSA will send a notice informing them of the amount of the premium and how the premium was determined.   SSA does not apply an income-related premium to beneficiaries who do not file income taxes.   Such “non-filers” are mostly individuals who are not required to file tax returns because their incomes fall below certain thresholds.

The use of lagged tax return data means that actual beneficiary income for the year in which the income-related premium is applied may be lower or higher than it was during the year from which the electronic data base is available.  No reconciliation is made on subsequent tax returns.  However, under certain circumstances, an individual may request to base the determination of income on more recent income information.  For example, if the beneficiary believes that the IRS has more recent information, the beneficiary may seek a correction from the IRS.  Additionally, if a beneficiary can provide evidence that a qualifying life-changing event—such as the death of a spouse or retirement—significantly reduced his or her MAGI, the SSA will determine the Part B or Part D income-related monthly adjustment based on data from a more recent tax year.6

How Medicare Determines Eligibility for the Part D Low-Income Subsidy

The Part D Low-Income Subsidy (LIS) program assists enrollees with premiums and cost-sharing requirements under a Part D prescription drug plan.  Beneficiaries can receive LIS benefits through either:

  • Automatic eligibility.  Beneficiaries may be automatically eligible for Part D LIS benefits if they already receive Supplemental Security Income benefits, full Medicaid coverage, or partial Medicaid coverage through the Medicare Savings Programs.
  • Application.  Medicare beneficiaries who are not automatically eligible may still receive LIS benefits if they have incomes below 150 percent of the federal poverty level and resources below a certain threshold.7  In this scenario, beneficiaries need to apply annually through their state Medicaid agency or with the Social Security Administration (SSA).
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