Budget Options
November 20, 2014

Mandatory Spending Health Option 74

Function 570 - Medicare

Change the Cost-Sharing Rules for Medicare and Restrict Medigap Insurance

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of dollars 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024
Change in Mandatory Outlays                        
  Establish uniform cost sharing for Medicare 0 0 -4 -6 -6 -7 -7 -7 -8 -9 -16 -54
  Restrict medigap plans 0 0 -4 -6 -6 -7 -7 -7 -8 -8 -16 -53
  Both of the above policiesa 0 0 -9 -12 -13 -14 -15 -16 -17 -18 -33 -111

Note: This option would take effect in January 2017. Estimates are relative to CBO’s April 2014 baseline projections.

a. If both policies were enacted together, the total effects would be greater than the sum of the effects for each policy because of interactions between the approaches.

CBO examined three alternative ways to reduce federal spending on Medicare by modifying the cost sharing that fee-for-service enrollees face. The alternatives would apply to all enrollees. The budgetary effects of changing Medicare’s cost-sharing rules depend significantly on the specific parameters chosen.

The first alternative would replace Medicare’s current mix of cost-sharing requirements. A single annual deductible of $650 would cover all services a patient obtained under Medicare’s Part A (Hospital Insurance) and Part B (Medical Insurance), a uniform coinsurance rate of 20 percent would apply for amounts above the deductible (including coverage for inpatient expenses), and there would be an annual cap of $6,500 on each enrollee’s total cost sharing. (Prescription drug coverage under Part D would not be changed.) The changes would take effect on January 1, 2017, and the dollar amounts of the various thresholds would be indexed to increase in later years at the same rate as average fee-for-service Medicare costs per enrollee.

The second alternative would leave Medicare’s cost-sharing rules unchanged and would not affect employment-based supplemental coverage but would restrict current and future medigap policies—individual insurance policies providing supplemental coverage of most or all of Medicare’s cost-sharing requirements. Specifically, it would bar those policies from paying any of the first $650 of an enrollee’s cost-sharing obligations and would limit their coverage to 50 percent of the next $5,850 of an enrollee’s cost sharing. Medigap policies would cover all further cost sharing, so policyholders would not pay more than $3,575 in cost sharing in 2017. The changes would take effect on January 1, 2017, and the dollar amounts of the various thresholds would be indexed as specified in the first alternative.

The third alternative combines the changes from the first two. Thus, in calendar year 2017, all medigap plans would be prohibited from covering any of the new $650 combined deductible for Part A and Part B services, and the annual cap on an enrollee’s out-of-pocket obligations, including payments by supplemental plans on an enrollee’s behalf, would be limited to $6,500. For spending that occurred after meeting the deductible but before reaching the cap, medigap policyholders would face a uniform coinsurance rate of 10 percent for all services, whereas Medicare enrollees without supplemental coverage would face a uniform coinsurance rate of 20 percent for all services. Those provisions would limit the out-of-pocket spending of medigap enrollees (excluding medigap premiums) to $3,575 and the out-of-pocket spending of Medicare enrollees without supplemental coverage to $6,500.

For additional information including discussion of key design choices and other considerations, see the November 2013 version of this option.