Modifying Medicare's Benefit Design: What's the Impact on Beneficiaries and Spending?
This report examines the effects on beneficiaries and spending of a proposal to modify the benefit design of traditional Medicare and place restrictions on “first-dollar” supplemental Medigap coverage that is frequently raised in the context of federal budget and Medicare reform discussions. The analysis also examines the effects of alternative approaches, including lowering or income-relating the deductible and cost-sharing limit, and providing cost-sharing subsidies to a subset of low-income beneficiaries.
Our analysis of the four options that we modeled shows that each would reduce out-of-pocket spending by some beneficiaries in traditional Medicare but increase spending by others, with variation in expected spending depending on the deductible and cost-sharing limits specified under each option and whether additional financial protections are provided to low-income beneficiaries. In our analysis, beneficiaries with lower incomes fared relatively poorly compared to higher-income beneficiaries under the basic modified benefit design, as measured by the effect on their out-of-pocket costs. Subsidizing Medicare cost sharing for a subset of low-income beneficiaries would reduce the spending burden for these beneficiaries associated with changes to Medicare’s benefit design, but the tradeoff is that federal savings would not be as large as under the modified benefit design alone.
The effects on beneficiaries’ spending would also depend on their use of services. In general, adding a cost-sharing limit would provide valuable financial protection to a relatively small share of the Medicare population that incurs catastrophic expenses in any given year, although a larger share of beneficiaries would be helped by this provision over multiple years.1 The single deductible for Parts A and B would reduce the deductible amount paid by the relatively small share of sicker beneficiaries who are hospitalized in any given year, but would increase the deductible amount for the majority of healthier beneficiaries who use physician and outpatient services, but who are not hospitalized in any given year. The expected reduction in out-of-pocket spending for relatively sicker beneficiaries would be substantial compared to current law, while the increase in spending for relatively healthier beneficiaries would be more modest.
Overall, our analysis shows that savings to the federal government can be achieved by modifying Medicare’s benefit design in part by shifting spending onto beneficiaries in the form of higher cost sharing, such as by charging a higher deductible for Part B-covered services relative to current law. Higher beneficiary cost sharing also would likely lead beneficiaries to use fewer services, which would produce federal savings. Conversely, federal savings would not be as large under more generous alternatives to the modified benefit design that offer greater financial protections to some low-income beneficiaries, and there would likely be an increase in federal spending if these protections were extended to a larger group of low-income beneficiaries than we modeled in our analysis. And federal spending can be expected to increase substantially compared to current law when the deductible is set at a relatively low level and when greater protection is extended to beneficiaries with high costs in the form of a lower cost-sharing limit.
Our analysis shows the expected effects of a set of four specific Medicare benefit design options, and these options could be modified by policymakers in any number of ways, with the expected effects likely to vary depending on the specific benefit design decisions that are made. Indeed, our analysis shows that the aggregate effects on spending—overall, and for beneficiaries, Medicare, and other payers, including Medicaid and employers—depend on the specific features of the four benefit design options we modeled, such as the amount of the deductible and cost-sharing limit, whether additional financial protections are provided to low-income beneficiaries (and how many low-income beneficiaries receive subsidies), and whether the deductible and cost-sharing limit vary by income. Aggregate and individual-level savings would also vary depending on policy decisions made with regard to the treatment of supplemental coverage, and whether the restrictions imposed on the generosity of supplemental coverage are relatively tight or loose.2
Drawing on the results of our analysis, policymakers could choose to mitigate some of the less desirable effects of implementing a modified Medicare benefit design in several ways. For example, to avoid a large increase in the deductible that would otherwise be incurred by the majority of relatively healthy beneficiaries for Part B-covered services, policymakers could exempt current beneficiaries from the cost-sharing changes under the modified benefit design and phase it in over time for people who gain Medicare eligibility in the future. A phased-in approach to implementation would ease the financial impact on beneficiaries associated with shifting to the new benefit design, but would reduce shorter-term savings to Medicare and introduce a layer of complexity in administering a program with different sets of cost-sharing rules applied to different cohorts of beneficiaries in traditional Medicare.
In our analysis, beneficiaries with lower incomes fared relatively poorly compared to higher-income beneficiaries under the basic modified benefit design, as measured by the effect on their out-of-pocket costs. To mitigate the cost impact for beneficiaries with lower incomes, policymakers could consider providing additional financial assistance in the form of Medicare cost-sharing subsidies, similar to the approach used in the Part D LIS program, or charging income-related deductibles and cost-sharing limits. This latter approach provides greater financial protection to beneficiaries with lower incomes and less financial protection to those with higher incomes, but implementing income-related Medicare benefits could pose operational challenges, making Medicare potentially more complex for beneficiaries to understand and for the government to administer.3
Providing subsidies for Medicare cost sharing to low-income beneficiaries would offer valuable financial assistance to a vulnerable population. However, Option 3, as modeled, does not subsidize all low-income Medicare beneficiaries. We did not include those who might be eligible for but are not enrolled in SLMB, QI, or LIS, and beneficiaries with incomes below 150 percent of poverty but assets above program eligibility thresholds. With older research showing only a small share of eligible beneficiaries enrolled in Medicare’s existing subsidy programs,4 providing financial protections for low-income beneficiaries under a modified Medicare benefit design may be more effective if done in conjunction with an outreach campaign to identify as many eligible beneficiaries as possible. Including more low-income beneficiaries than we modeled, however, would increase federal spending on this option relative to the current effects estimated by the model. But it would offer important financial protections for many beneficiaries who might otherwise face spending increases they could not afford in the absence of cost-sharing subsidies.
Adding an annual cost-sharing limit would be a significant improvement to the traditional Medicare program, and would level the playing field between traditional Medicare and Medicare Advantage. Even so, under current proposals, the limit applies only to costs for services covered under Parts A and B, not to costs under the Part D drug benefit. Part D has a separate catastrophic coverage threshold ($4,850 in out-of-pocket costs in 2016), above which beneficiaries are required to pay 5 percent of their total drug costs. If Medicare were to maintain two separate cost-sharing limits, one for Parts A and B and another for Part D, the modified benefit design would be out of step with the catastrophic coverage protections required for Marketplace plans today, which limit annual cost sharing under individual policies to $6,850 in 2016.
Our analysis shows that proposals to modify Medicare’s benefit design have the potential to produce federal and Medicare savings, reduce aggregate beneficiary spending, and reduce spending by other payers, including spending by employers for retiree health plans and by states on behalf of beneficiaries who are dually eligible for Medicare and Medicaid. Such proposals could also simplify the program, provide beneficiaries with valuable protection against catastrophic expenses, add additional financial protections for low-income beneficiaries, and reduce the need for beneficiaries to purchase supplemental insurance. As this analysis demonstrates, however, it will be difficult for policymakers to achieve all of these ends simultaneously.
Juliette Cubanski, Tricia Neuman, and Gretchen Jacobson are with the Kaiser Family Foundation. Zachary Levinson is an independent consultant. Monica Brenner and James Mays are with Actuarial Research Corporation.