Reforming Beneficiary Cost Sharing to Improve Medicare Performance
Zuckerman, Stephen, Shang, Baoping, Waidmann, Timothy, Inquiry
This paper explores options for reforming Medicare cost sharing in an effort to provide better financial protection for those beneficiaries with the greatest health care needs. Using data from the Health and Retirement Study (HRS) and the Medicare Current Beneficiary Survey (MCBS), we consider how unified annual deductibles, alternative coinsurance rates, and a limit on out-of-pocket spending would alter program spending, beneficiary cost sharing, and premiums for supplemental coverage. We show that adding an out-of-pocket limit and raising deductibles and coinsurance slightly would provide better safeguards" to beneficiaries with high costs than the current Medicare benefit structure. Our estimates also suggest that policies protecting these beneficiaries could be structured in a way that would add little to overall program costs.
Despite recognition that shrinking the federal deficit will require controlling Medicare spending, it would be wrong to relegate potential Medicare reforms to only those that can generate program savings. For example, the current structure of traditional Medicare that includes Parts A (hospital insurance), B (supplementary medical insurance), and D (prescription drug coverage)--each with different deductibles and coinsurance rates and none with limits on beneficiary cost sharing requires enrollment in three distinct programs and is quite different from private health insurance plans. Many private health insurance plans have separate deductibles and coinsurance arrangements for prescription drugs, but generally have more unified approaches to cost sharing for hospital and ambulatory services than exist in Medicare.
The most glaring difference between coverage under Medicare and private health insurance plans is that Medicare does not include annual limits on out-of-pocket spending--a key feature of many private health insurance plans--which means that Medicare beneficiaries with the greatest needs and spending could be exposed to a far larger financial burden than a similar person with private health insurance. This potentially inadequate financial protection for Medicare beneficiaries is a strong motivation for having supplemental coverage, either privately or through employers.
The Congressional Budget Office (CBO) considered the costs of replacing the "current complicated mix of cost sharing provisions" in Medicare Parts A and B with a single annual deductible, uniform coinsurance, and an out-of-pocket limit (CBO 2008). Maxwell, Storeygard, and Moon (2002) also considered a range of approaches to "modernizing Medicare cost sharing" that would have added an
out-of-pocket limit and shifted the burden of deductibles away from inpatient care toward ambulatory services that are more discretionary. In an effort to both transform Medicare cost sharing and internalize the provision of Medigap benefits through a comprehensive Medicare benefits option, Davis et al. (2005) proposed "Medicare Extra (Part E)" that would be less costly than private "Medigap" largely as a result of the program's lower administrative costs.
In this paper, we build on these earlier studies by exploring the costs of alternative, comprehensive Medicare benefit reforms and how these options would change the distribution of spending. Using data from the Health and Retirement Study (HRS) and the Medicare Current Beneficiary Survey (MCBS), we consider how unified annual deductibles, alternative coinsurance rates, and an out-of-pocket limit would alter program spending, beneficiary cost sharing, and premiums for supplemental coverage. Our analysis also explores how beneficiaries with different health statuses and levels of out-of-pocket spending would be affected by our various benefit reforms.
Before describing the specific policy options we consider in this study, we provide some context about the financial burden that beneficiaries face under the current premium and cost-sharing structure in Medicare. …