Modifying Medicare's Benefit Design: What's the Impact on Beneficiaries and Spending?

Introduction

Proposals to modify the benefit design of traditional Medicare have been frequently raised in federal budget and Medicare reform discussions, including in the June 2016 House Republican health plan as part of a broader set of proposed changes to Medicare.¹ Typically, Medicare benefit design proposals would establish a single deductible for Medicare Part A and Part B services (rather than two separate deductibles for these services, as is the case today), modify cost-sharing requirements for various Medicare-covered services, add an annual cost-sharing limit to traditional Medicare, and impose restrictions or surcharges on Medicare supplemental insurance (Medigap) policies.² These proposals typically do not incorporate or make changes to the Medicare Part D prescription drug program.

Modifying the benefit design of traditional Medicare has generated interest among policymakers, perhaps partly because this approach to Medicare reform can achieve different objectives, including reducing federal spending, simplifying Medicare’s cost-sharing requirements, providing people in traditional Medicare with protection against catastrophic medical expenses, providing low-income beneficiaries with additional financial protections, and reducing the need for beneficiaries to obtain Medicare supplemental coverage (Medigap).

The specific objectives that could be achieved through any given Medicare benefit redesign proposal depend on the features of the design. Such features would have a substantial effect on expected outcomes, including the share of beneficiaries facing lower or higher out-of-pocket costs; the amount of Medicare savings or additional spending; and the change in spending by other payers, including Medicaid, Medigap, and employers who offer retiree health benefits. For example, setting an annual cost-sharing limit at a relatively low level would reduce costs for a larger share of beneficiaries than if the limit were set relatively high, but a lower cost-sharing limit would result in higher costs to Medicare. These features are also important in determining the extent to which a modified Medicare benefit design would provide relief from—or add to—the financial burden of health care costs for Medicare beneficiaries, half of whom lived on annual incomes below $24,150 in 2014.³

In 2011, we released an analysis of a proposal to modify Medicare’s benefit design in combination with restrictions on Medigap coverage, based on a set of parameters from the Congressional Budget Office (CBO).⁴ The modified benefit design included a single Part A/B deductible of $550, an annual cost-sharing limit of $5,500, uniform coinsurance of 20 percent for Medicare-covered services, and restrictions on “first-dollar” Medigap coverage, modeled as if fully implemented in 2013. The most recent House Republican proposal includes a similar set of parameters, to be implemented in 2020, although it does not specify the exact dollar amounts for the deductible or the cost-sharing limit. The results from our 2011 modeling of these parameters showed that, overall, more beneficiaries would see their out-of-pocket costs increase rather than decrease under this benefit design, although the spending effects would vary based on beneficiaries’ health status and other characteristics.

Since we conducted our previous analysis, a number of modifications to the basic benefit redesign approach described by CBO have been suggested. One alternative put forward by the Medicare Payment Advisory Commission (MedPAC) and others would charge varying service-specific copayments, rather than a uniform coinsurance rate, for most Medicare-covered services, similar to the cost-sharing structure in Medicare Advantage plans.⁵ For example, rather than adding a new coinsurance requirement for home health services, MedPAC included a $150 copayment per episode, which would limit the financial burden of the new cost-sharing requirement on beneficiaries who need extensive home health care. Other benefit design modifications have also been proposed, including varying the deductible and cost-sharing limit by income,⁶ exempting physician visits from the deductible,⁷ and providing additional financial protections to low-income beneficiaries.⁸ In addition, a number of options have been suggested for restricting supplemental coverage, including a premium surcharge on Medigap policies and employer retiree plans.⁹

This report updates our earlier work with an analysis of the effects on beneficiaries and payers of four options to modify the benefit design of traditional Medicare and restrict Medigap coverage, assuming full implementation in 2018 (Table 1).

The main features of Option 1, the basic benefit redesign option,¹⁰ are:

• A single $650 deductible for services covered under Medicare Parts A and B. The cost of physician visits would not be subject to the deductible, which aims to mitigate the effects of a de facto increase in the deductible for beneficiaries who primarily use Part B services only (that is, people who have no hospitalizations in any given year).¹¹
• A $6,700 annual cost-sharing limit on services covered under Medicare Parts A and B (excluding costs under the Part D drug benefit). This feature aims to provide financial protection to beneficiaries in traditional Medicare who have very high medical costs, with the cost-sharing limit set to match the limit required in all Medicare Advantage plans.
• Various cost-sharing amounts for Medicare-covered services, including a new cost-sharing requirement for home health services.¹²
• Prohibiting Medigap policies from covering 50 percent of the Part A/B deductible, but no other restrictions on Medigap coverage. This approach is similar to the Medigap provision included in the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), which applies exclusively to new Medicare beneficiaries.¹³

We also evaluated three modifications to the basic benefit redesign option described above:

• Option 2, the lower deductible and cost-sharing limit option: Similar to Option 1, but lowers the deductible to $400 and the cost-sharing limit to $4,000 for all traditional Medicare beneficiaries. The aim of Option 2 is to reduce the share of beneficiaries who face spending increases, relative to Option 1, by lowering the deductible, and to increase the share of beneficiaries with a spending reduction by lowering the annual cost-sharing limit.
• Option 3, the low-income subsidies option: Similar to Option 1, but adds full Medicare cost-sharing subsidies (paid by Medicare) for beneficiaries in traditional Medicare who are enrolled in the Specified Low-Income Medicare Beneficiary (SLMB), Qualified Individual (QI), or Part D Low-Income Subsidy (LIS) program and do not receive assistance with Part A and Part B cost-sharing requirements from Medicaid or the Medicare Savings Programs. The vast majority of these beneficiaries have incomes below 150 percent of the federal poverty guidelines¹⁴ and limited assets.¹⁵ The aim of Option 3 is to reduce the spending burden associated with the modified benefit design under Option 1 for some low-income beneficiaries. We estimate that 2.3 million traditional Medicare beneficiaries would receive these additional subsidies in 2018. However, Option 3, as modeled, does not subsidize all low-income Medicare beneficiaries and assumes no woodwork effect. For example, it excludes beneficiaries who are eligible for but not enrolled in SLMB, QI, or LIS, and those with incomes below 150 percent of poverty but assets above program eligibility levels.
• Option 4, the income-related option: Similar to Option 1, but modifies the deductible and cost-sharing limit based on income, with a lower deductible and cost-sharing limit for those with incomes less than 150 percent of poverty ($325/$3,350), ranging up to $950/$9,500 for those with incomes greater than 1,000 percent of poverty. As modeled, the lowest deductible and cost-sharing limit apply to all traditional Medicare beneficiaries with incomes less than 150 percent of poverty, regardless of assets or supplemental coverage status, and therefore covers a larger number of low-income beneficiaries than the subsidies provided under Option 3. The aim of Option 4 is to increase the progressivity of the modified benefit design, compared to the deductible and cost-sharing limit that do not vary by income under Option 1.

The discussion below first examines the overall effects of Option 1, the basic benefit redesign option, compared to current law, assuming full implementation in 2018. This discussion highlights the expected effects on beneficiaries in traditional Medicare in terms of aggregate out-of-pocket spending on cost sharing and premiums, the share with higher or lower out-of-pocket costs, and expected changes in average per capita out-of-pocket spending, as well as the expected effects on payers (the federal government, including Medicare; state Medicaid programs; employers; and other payers). We then describe how these effects would change based on the benefit design modifications in Options 2-4.