With the federal budget reduction looming, politicians are looking for ways to cut spending and many of them have their eyes on Medicare. To help understand how Medicare beneficiaries might be affected, we describe several proposed changes. We also explain commonly used terms and phrases and the effect these changes may have on beneficiaries. It’s important to remember that most Medicare beneficiaries have modest incomes and spend three times more on their health care than younger people. While everyone understands the need to pare down the high cost of medical care, that shouldn’t happen by forcing Medicare beneficiaries to absorb an unfair amount of the cost.
Changing What You Pay For Medicare Benefits
Combine Medicare Part A and B into a single annual deductible ($500 to $750)
Under current rules, Medicare Part A and Part B have separate deductibles. The Part A deductible applies to an inpatient hospital stay ($1,184 per benefit period in 2013). The Part B deductible applies to most outpatient services ($147 per year in 2013).
Several proposals would combine these two deductibles into a single annual deductible ranging from $500-$750. Yet, even the lowest proposed amount is higher than the current Part B deductible. This means that more people would have a higher deductible and therefore have higher health care costs, as more people use Part B outpatient services than Part A inpatient hospital services. The fewer people that do use inpatient services may save some money, as their deductible would be less than today’s inpatient deductible.
For example, if you don’t need inpatient hospital services this year but you only need to see your doctor and use other outpatient services, you pay the $147 Part B deductible and then the 20% cost-sharing under current rules. But under these proposals, you would have to meet a higher deductible of at least $500 before Medicare would begin paying for your care, even if you weren’t admitted to a hospital. By some estimates, 71% of beneficiaries would pay more than their current costs, 5% would pay less, and 24% would pay about what they do now.
Add copayments or coinsurance for each day of hospital, skilled nursing, home and respite care, and lab services
Under current rules, Medicare has a few benefits with no copayment or coinsurance. Some proposals would add a copayment or coinsurance to these services and thus add another financial burden to the sicker beneficiaries who use these services.
A copayment is a fixed dollar amount for each medical service, while coinsurance is a percentage of the cost of a service. It’s easier for Medicare beneficiaries to budget for copayments of a known amount than for the unpredictable amount of coinsurance.
Annual out-of-pocket limit
Some proposals would limit the amount an individual pays in out-of-pocket costs each year, ranging from $5,000 to $7,500 annually. The annual amount in each proposal is greater than what many people pay now for insurance or retiree benefits to cover those out-of-pocket costs. Under these proposals, a couple with high medical costs could spend as much as $15,000 a year before each of them met their individual annual limit on expenses.
Several proposals either prohibit Medigap insurance benefits that pay after Medicare, or tax people who have them by adding 15% of the Medigap premium to the Part B premium. Some allow supplemental benefits to cover only half of the proposed annual limit but none of the proposed combined deductible amount. In all of the proposals, the annual limit on out-of-pocket costs, even at the lowest range, is greater than the annual amount of Medigap premiums that Medicare beneficiaries currently pay for these supplemental benefits.
Terms and Phrases That Describe What You Will Pay
Premium support/competitive bidding/private options
These are terms for a voucher that would give Medicare beneficiaries a set amount of money each month equal to an average cost of Medicare. Beneficiaries would use the voucher to buy benefits from private health insurers. The amount the federal government would pay for the voucher would unlikely keep up with the rising cost of care, according to the Congressional Budget Office calculations, thus leaving beneficiaries to pay the difference between the voucher and the actual cost of benefits. Authors of these proposals assume that Medicare would save money in the long run – hence the federal government would pay less – while beneficiaries would pay an ever-increasing amount for their Medicare benefits.
Benefit redesigns/cost-sharing redistribution
These terms refer to changing deductibles and other costs beneficiaries would pay. In general these proposals reconfigure how costs are applied for each covered service. Most beneficiaries would pay more in a year than they do today in total out-of-pocket costs. The healthiest beneficiaries would likely pay less while the sickest beneficiaries would likely pay the most. How much each person would pay would depend on the amount of care used and cost-sharing paid before reaching the annual limit on expenses ($5,000 to $7,500 in most proposals). An annual out-of-pocket limit is usually a consumer protection, but if the limit is much higher than the cost of supplement insurance, beneficiaries end up paying more in out-of-pocket costs than they do today.
Bundled payments for medical care
Bundling payments is a concept that provides a base payment for the overall cost of a medical event rather than paying separately for each service. It aims to encourage more coordination of care and lower overall costs.
This is a multifaceted concept in health care delivery. Services that are low-cost and significantly improve the patient’s health outcome are high-value while services that are high-cost but result in small or no change in the patient’s outcome are low-value. High-value services would have lower copayments to encourage use of high-value services, and low-value services would have higher copayments to discourage use of these services. The current standard 20% coinsurance for most Part B services may vary depending on the medical necessity “value” of the service.
Targeted, shared responsibility/means testing
Today, federal law requires individuals with annual incomes above $85,000 (couples $170,000) to pay greater amounts for their Part B and D premiums. Medicare premiums will continue to be pegged to an individual’s or couple’s annual income, but those income amounts are no longer tied to inflation. Without an inflation adjustment, increasing numbers of people will be required pay higher premiums each year, including middle-income beneficiaries. In addition, some proposals tie premiums to much lower income thresholds, or to a sliding scale of percentage amounts above the federal poverty limit.
This terminology refers to the way Part B is financed. The Part B premiums beneficiaries pay cover 25% of Part B’s costs each year. The government finances the remaining 75%, which is referred to as a Part B premium subsidy. Several proposals would increase the percentage beneficiaries pay from 25% to 35% as a way to reduce the amount of government subsidy. People with higher incomes (means testing) would be subject to an even higher Part B (and in some cases Part D) premium with the result that the federal subsidy for those individuals would be even lower.
Many of the proposals to “modernize” Medicare include combinations of the changes described above. Inevitably there will be winners and losers with any re-organization of the Medicare program. A re-organization should take place inside of a national discussion that weighs the benefits and costs to providers and recipients and constructs a balanced, fair system that does the least amount of harm to the sickest and poorest beneficiaries. Current and future beneficiaries should know which of these proposed changes will be made.
It’s important to remember that most Medicare beneficiaries have modest incomes and are vulnerable to increases in the cost of obtaining medical care. In 2012, half of all Medicare beneficiaries had annual incomes below $22,500, which is below 200% of the federal poverty level (FPL).1 One-third of Medicare beneficiaries have annual incomes below $16,755, which is 150% of the FPL for a single person.2 Women are disproportionately represented in these two income groups, in part due to a reduction of income when their spouse dies.
The worst time to make decisions about these changes is during a financial crisis because we are less likely to carefully evaluate the effect on both current and future beneficiaries. During a such a time, solving the financial crisis becomes the focus, rather than re-organization to improve the Medicare program for current and future beneficiaries.
1. Kaiser Family Foundation, “Policy Options to Sustain Medicare for the Future” (January 2013), available at:http://www.kff.org/medicare/upload/8402.pdf.
2. General Accounting Office (GAO), “Medicare Savings Programs: Implementation of Requirements Aimed at Increasing Enrollment” (September 2012), available at: http://www.gao.gov/assets/650/648370.pdf