Medicare Benefit Redesign: Proposals to Restructure Could Hurt More than Help

The Medicare program can be confusing for those trying to navigate the differences between Parts A, B, C, and D.  Since the program's inception in 1965, changes made to the program have made it a more complex system for beneficiaries, particularly with the introduction of private insurance plans to the Medicare program.  Medicare beneficiaries can also face significant out-of-pocket costs for premiums, deductibles, coinsurance and copayments.  Simplifying the program, including how the benefits are structured, could, in theory, reduce this confusion and ease beneficiaries' financial burdens depending on how the restructuring is modeled.

However, over the last few years, there have been several proposals that seek to alter Medicare's benefit structure, under the guise of streamlining or simplifying the program.  Upon closer inspection, however, these proposals would actually harm the majority of beneficiaries.  Many of these proposals have similar elements, including creating a single, combined deductible for Parts A and B, a uniform coinsurance rate of 20% for all covered services, an out-of-pocket cap on beneficiary expenses (which does not currently exist in Traditional Medicare) and various other piecemeal changes, including introducing home health copayments.  Often these proposals to redesign Medicare's benefits are coupled with proposals to restrict Medigap "first-dollar coverage", in other words, policies that provide coverage for Medicare deductibles and co-payments.

Redesigning the Medicare benefit structure is receiving increased attention in Congress and by the President.[1]   As noted by the New York Times, the goal of bipartisan proposals to restructure Parts A and B "is to discourage people from seeking unneeded treatment, shrink health spending and offset the costs of a cap on beneficiaries' total out-of-pocket costs."[2]   Often lost in discussions about benefit redesign proposals, though, is how they would actually impact Medicare beneficiaries.

Current Redesign Proposals Would Save Federal Dollars by Increasing Beneficiary Costs and Discouraging Access to Care

While details are lacking in most proposals to redesign the Medicare program's benefit structure, the broad outlines of proposals currently under discussion would increase costs for most people with Medicare, and do so most significantly for those who can least afford it.[3]  Under these proposals, the burden of health care costs would be redistributed onto the most vulnerable, including those with low- and moderate-incomes and those with persistent and chronic health needs.[4]

For example, a Kaiser Family Foundation report analyzed the impact of a benefit redesign proposal modeled on one offered by the Bowles-Simpson deficit reduction committee and found that 71% of beneficiaries in Traditional Medicare would have higher out-of-pocket spending – even with a spending cap.  Only 5% would have lower out-of-pocket spending.  Roughly five million beneficiaries would experience cost increases of more than $250 annually, with a total average increase of $660 per year.[5]  Similarly, the Medicare Payment Advisory Commission's (MedPAC's) analysis of its own redesign proposal reveals that combining the deductibles for Parts A and B would increase costs in a given year for the majority of beneficiaries who use only physician and outpatient services.[6]

The additional upfront cost of a higher deductible for Part B services, as well as any higher ongoing costs, such as new and/or higher coinsurance amounts, will make needed care unaffordable for many beneficiaries – particularly those who live on limited incomes, but incomes that are just too high to qualify for low-income subsidy programs.  Because care will be less affordable, increased cost-sharing will also, in turn, limit access to necessary health care services.

Many redesign proposals are based on the premise that increased cost-sharing will reduce "overuse" of health care services and encourage individuals to make better decisions about their health care services because they have more "skin in the game."   However, shifting additional costs onto Medicare beneficiaries will deter people from obtaining medically necessary care, thus increasing long-term costs.  As concluded by the National Association of Insurance Commissioners (NAIC) following a review of potential changes to Medigap plans, research demonstrates that increased cost-sharing for health care services leads individuals to forgo needed health care services in the short-term.  This, in turn, is shown to result in worsening health, the need for more intensive care and higher costs to the Medicare program in the long-term.[7]

Sensible Benefit Redesign Must Not Shift Additional Costs onto Beneficiaries

Most Medicare beneficiaries have low- or moderate- incomes, and cannot afford to pay more for their health care.[8]  In 2012, for example, half of all Medicare beneficiaries had annual incomes below $22,500.  Women on Medicare fare worse, with an average annual income of less than $15,000.  Medicare households, in general, devote a substantially larger share of their income to medical expenses than do average households; 15% vs. 5% respectively. In short, most Medicare beneficiaries cannot absorb more costs without facing significant hardship. 

Any discussion regarding redesigning Medicare's benefit structure, even one that is projected to be budget neutral for beneficiaries, must include proposals to strengthen programs for those with low-incomes.  Current protections for low-income individuals are inadequate, as full Part A, B and D subsidy protection is provided only for those with incomes up to 100% of the federal poverty level.  In order to assist more people who truly cannot afford to pay for necessary health care services, the income thresholds for full subsidy protection should be increased and asset tests should be eliminated.

Conclusion

Taking a measured, thoughtful look at Medicare's benefit structure and how it could be improved would be a welcome exercise.  As long as this discussion occurs within the context of deficit reduction, though, any changes to the Medicare program will be done specifically to save federal dollars, not to truly improve the program for those it serves.