Individuals who are eligible to participate in Medicare face a particular problem: their new insurance has the same structure since its creation in the 1960s despite living in a 21st-century health care market. A major aspect of this problem lies in Medicare’s cost-sharing design, or what beneficiaries pay for health benefits. Despite handing over payroll taxes during their working years, seniors share the cost of the program with monthly premiums and other expenses.
|Premium||Monthly payment to continue enrollment in a health plan|
|Out-of-pocket limit||Limited amount you can spend in a given year before insurance covers the rest|
|Deductible||Amount you pay for certain expenses before insurance covers the costs|
|Coinsurance Rate||Agreement between you and your insurer on the percentage you will pay for medical services|
|Copayment||Fixed dollar amount for certain services like doctor visits|
Unlike private insurance today, Medicare has an outdated cost-sharing model with four serious problems that increase unnecessary spending on the program:
- No upper out-of-pocket limit
When seniors incur catastrophic health care costs they are vulnerable to tremendous out of pocket expenses reaching thousands of dollars. This fear prompts many beneficiaries to purchase supplemental coverage (Medigap) which distorts health coverage, pricing, and behavior.
- Separate deductibles for Parts A, B, and D
Private health plans use a single deductible to pay for all services, but because Medicare is split into four parts, there are different deductibles varying from high to low.
- Varying copayments and coinsurance by type of service
Part A has a variety of copayments for certain health services after the deductible has been paid, while Part B has a different coinsurance rates to cover certain costs. They are not uniform and in some cases non-existent, making it difficult to know what a particular service costs.
- Overutilization of Medicare services
Seniors avoid the problematic cost-sharing requirements by purchasing supplemental coverage, allowing beneficiaries to receive more care without incurring additional costs. Because health care is being paid for by a third party (Medigap or Medicare) the overuse of tests and other services dramatically increases Medicare spending.
Fixing these issues in Medicare’s design would save taxpayer money, reduce unnecessary utilization of health services, and modernize the program for seniors to reduce their health costs.
What can we do?
The main idea is to increase beneficiaries’ responsibility for their share of health care costs, and several proposals exist to change Medicare’s cost-sharing structure to better align with private insurance. They all share a few common features:
- Establish an out-of-pocket maximum or catastrophic coverage ceiling
Most proposals call for a maximum limit somewhere between $5,000 and $7,500, which would give seniors the knowledge that that is the most they would ever have to pay in a given year. While most beneficiaries would never hit this limit in a given year, it affords security when the unexpected occurs.
- Create a single deductible for Medicare Part A and Part B
Seniors currently have a high deductible for Part A ($1,184) and a low deductible for Part B ($147). Currently, beneficiaries pay separate deductibles for both parts when it would make more sense to pay a single deductible as most private plans do.1 A single deductible of say $550 reduces costs for the truly sick while increasing them somewhat for most beneficiaries.2 Cost savings come from transferring more out of pocket expenses to seniors, but combined with an upper limit they would see more security over time.
- Institute a uniform coinsurance rate for all health services
Part B usually has a coinsurance rate of 20%, but not in all cases such as home health, clinical, laboratory, and certain preventive services. This rate should be uniform and standardized for all Part B health care because services previously not covered are being more frequently used.
- Introduce copayments where none exist
Alongside or instead of coinsurance, we could set fixed prices for home health episodes and other services as standard copayments. The use of coinsurance based on charges that the patient does not know in advance creates uncertainty for beneficiaries about how much they owe. Dollar amounts are usually better at relating costs to seniors than a 20% coinsurance on an unknown bill, and it may be more effective to reduce utilization.
- Value-Based Cost Sharing
Several proposals seek to introduce Value-Based Insurance Design, where higher valued services would have a lower cost sharing requirement and lower valued services would be higher. The idea is to discourage seniors from overusing certain services so they can use their insurance for critical health needs.3 Implementation problems and better-defined criteria of value should be addressed before this provision is enacted.
Medicare’s current cost-sharing model is outdated compared to private insurance today and makes the program more expensive than it otherwise would be. Depending on when these reforms are instituted and the level of cost-sharing implemented, potential savings could range from $32-$110 billion over ten years.
Kaiser ran a model on the single deductible and found 71% of beneficiaries would face higher OOPM with only 5% having lower. This would reduce Medicare spending by 4.2 billion in 2013, but increase beneficiary spending by 2.3 billion.
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 the risk of catastrophic health care costs and reducing total out-of-pocket spending over their lifetime for most seniors.
Cost-sharing reforms would spread the cost by beneficiaries’ use of services, thereby making them more cost-conscious.