Modernizing the Medicare Benefit: A Closer Look at Reforming Medicare Cost-Sharing Rules
Growing Medicare spending represents the single biggest long-term fiscal challenge facing this country. Even with the recent slowdown in health care cost growth, Medicare spending (net of offsetting receipts) will grow from roughly $500 billion this year to over $900 billion by 2023 under current policies. Beyond this decade, Medicare spending is projected to continue to increase substantially and consume a growing portion of the federal budget as the influx of baby boomers entering Medicare rolls get older and health care cost growth continues to outpace growth of the economy.
As lawmakers consider options to address the fiscal shortfalls and growing debt over the long term, it is essential that they address growing Medicare costs, and do so with a special focus on “bending” the health care cost curve. In other words, while it will indeed be necessary to ask providers to receive less and individuals to contribute more in order to reduce the level of health care spending, policymakers must first do everything they can to reduce the growth in health spending by changing incentives to promote more efficient and cost effective delivery and use of health care services. There are many policies which have the potential to slow cost growth by changing incentives for providers and beneficiaries. One of the most straight forward ways to do so on the beneficiary side is to modernize Medicare cost-sharing rules to encourage better and more cost-effective utilization of health care services.
The current Medicare benefit has a complex and disjointed set of cost-sharing rules – separate deductibles for out-patient and in-patient services, a hodge-podge of varying copays and coinsurance, and no out-of-pocket spending cap. Today’s insurance norms have changed from the bifurcated private insurance model of the 1960s, with a single deductible being more common. The current Medicare cost-sharing rules mask costs, lead to over- and mis-utilization of care, and drive up spending. At the same time, the lack of an out-of-pocket limit leaves beneficiaries vulnerable to financial hardship from catastrophic health care costs unless they purchase private supplemental coverage, such as Medigap, for protection.
Modernizing the Medicare benefit and reforming cost sharing rules would not only strengthen the financial state of Medicare, but would also improve Medicare’s value for beneficiaries and make it easier to navigate and understand. Designed properly, cost-sharing reforms can achieve significant savings for the Medicare program and reduce Medicare premiums by limiting overutilization of care while providing greater protection from risk of catastrophic health care costs and reducing total out-of-pocket spending over their lifetime for most seniors.
The final report of the National Commission on Fiscal Responsibility and Reform, The Moment of Truth, recommended four basic reforms to help address projected cost growth in Medicare and modernize the Medicare benefit: replacing the separate deductibles for inpatient and outpatient services with a single combined deductible, establishing uniform coinsurance requirements for all services, providing an out–of-pocket limit for catastrophic health costs, and restricting supplemental Medigap coverage.
The Fiscal Commission’s proposals represent a comprehensive approach to redesigning Medicare’s cost-sharing rules. An alternative approach would be for policymakers to make piecemeal reforms to the existing benefit design. For example, President Obama has proposed increasing cost-sharing for home health services and the Medicare Payment Advisory Commission (MedPAC) has made several other provider-specific recommendations.
Since the release of the Commission’s report in late 2010, bipartisan support for cost-sharing reforms has increased, and there is a growing consensus that these reforms can streamline the Medicare benefit, offer catastrophic protection, and more efficiently target Medicare dollars. Numerous proposals to reform Medicare’s cost-sharing rules have been put forth by experts across the spectrum, including: MedPAC, the Urban Institute, Center for American Progress, National Coalition on Health Care, American Enterprise Institute, Heritage Foundation, Brookings Institution, and the Commonwealth Fund.
In their latest report, A Bipartisan Path Forward to Securing America’s Future, Fiscal Commission co-chairs former Senator Alan Simpson and Erskine Bowles proposed a modified version of the cost sharing reforms in the Commission report by incorporating elements from these proposals and other feedback on their original proposal. In particular, the new cost-sharing reforms proposed in A Bipartisan Path Forward provide greater protections for low-income beneficiaries while still encouraging more efficient spending and bending the health care cost curve.
The cost sharing reforms in A Bipartisan Path Forward include:
- Replacing current Medicare cost-sharing rules with a unified deductible, uniform coinsurance, and an out-of-pocket maximum, while varying the deductible and out-of-pocket limit with income and allowing value-based adjustments in coinsurance amounts for certain low or high value services.
- Restricting supplemental “Medigap” plans from covering near first-dollar coverage of cost-sharing liabilities.
- Limiting near first-dollar coverage of supplemental TRICARE for Life plans
- Requiring a reformed Federal Employees Health Benefits Program (FEHBP) to subsidize retirees’ premiums rather than their cost-sharing
- Imposing a surcharge on Medicare premiums for those with employer-sponsored retiree plans while offering an option for seniors to “cash out” and instead use the value to subsidize their Medicare premium.
A Bipartisan Path Forward noted the exact parameters would need to be developed based on Congressional Budget Office estimates, but set a goal of achieving total savings of $90 billion over ten years from cost-sharing reforms, while holding average out-of-pocket costs (including premiums) for beneficiaries constant so that seniors are no worse off in a given year and giving them more protection from risk over their lifetime, particularly at lower-income levels. These reforms would modernize the Medicare benefit to improve the value for seniors and reducing premiums by promoting more efficient utilization of Medicare services, while achieving savings for the Medicare program.
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