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

Overview of Methods

Our analysis relies on a model developed by the Actuarial Research Corporation (ARC) to assess the spending effects of options to modify Medicare’s benefit design and restrict supplemental coverage, assuming full implementation in 2018. The model is primarily based on individual-level data from the Medical Expenditure Panel Survey (MEPS), which are calibrated to match aggregate Congressional Budget Office (CBO) Medicare spending and enrollment estimates and projections. To evaluate the effect of providing additional financial assistance to low-income beneficiaries, the model incorporates estimates and projections of the number of beneficiaries enrolled in Medicaid, Medicare Savings Programs, and the Part D Low Income Subsidy (LIS) program from the Medicare Chronic Conditions Data Warehouse and of the income distribution of beneficiaries from the DYNASIM model developed by The Urban Institute.

We first developed a current-law baseline for 2018 by identifying Medicare reimbursements for each individual in traditional Medicare (excluding beneficiaries enrolled in Medicare Advantage plans), inferring the individual’s cost-sharing obligations under current law, and dividing those obligations between the individual and their supplemental insurer as appropriate. We calculated Medicare and supplemental plan premiums and added these amounts to beneficiaries’ out-of-pocket costs. Next, we simulated the effects of benefit design changes by modifying cost-sharing obligations according to the benefit design features and by changing Medigap coverage and costs. We assumed that beneficiaries would use less (or more) care as cost sharing increases (or decreases) for specific services and that some beneficiaries would switch into or out of traditional Medicare, Medigap, or Medicare Advantage in response to the benefit design changes.

Although MEPS includes Medicare beneficiaries who are enrolled in Medicare Advantage, we excluded this group when evaluating the individual-level spending effects of the benefit design options because the options modify traditional Medicare. The model does incorporate indirect effects on aggregate Medicare Advantage spending and enrollment, based on the assumptions that changes in traditional Medicare reimbursement would be reflected in Medicare Advantage payments, and that aggregate Medicare Advantage payments will change to the extent that some beneficiaries switch between traditional Medicare and Medicare Advantage.

Modeling of this type involves some degree of uncertainty and invariably requires a number of assumptions. A discussion of limitations and assumptions following the discussion of findings. Details on data and methods are provided in the Appendix.