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

Overview of the Issue

For people who have Medicare or any other type of health insurance coverage, payments for health care fall into two broad categories: premiums and cost sharing. A premium is a fixed, recurring amount paid by an enrollee in advance for an insurance policy (which then limits financial risk by covering some or all costs of health care goods and services). Cost sharing consists of out-of-pocket payments that enrollees are required to make when they receive health care. The basic Medicare benefit can leave beneficiaries responsible for a substantial amount of cost sharing, so many people obtain supplemental coverage. Many beneficiaries obtain such coverage through a former employer or through a state Medicaid program. Others choose what is known as a medigap plan, an individual insurance policy that covers most or all of Medicare’s cost sharing.

In general, premiums distribute the cost of medical care among all enrollees; cost sharing concentrates costs on people who use more medical care. Insurance plans typically vary three basic elements to determine the cost-sharing obligations of their enrollees:

• The deductible, an initial amount of spending below which an enrollee pays all costs;
• The catastrophic cap, a limit on an enrollee’s total out-of-pocket spending; and
• The share of costs an enrollee pays between the deductible and the catastrophic cap (which may vary according to the type of service covered).

Deductibles and catastrophic caps typically apply on an annual basis. In between those points, the portion of the cost borne by the enrollee is usually specified as a percentage of the total cost of an item or service (in which case it is called coinsurance) or as a fixed amount for each item or service (in which case it is called a copayment). If other aspects of an insurance plan are the same, lower cost-sharing requirements translate to higher premiums—because insurers must charge more to cover their higher share of medical spending—and higher cost-sharing requirements translate to lower premiums.

Research has shown that people who are not subject to cost sharing tend to use more medical care than do people who are required to pay some or all of the costs of their care out of pocket. The RAND health insurance experiment conducted from 1974 to 1982 examined a nonelderly population and showed that health care spending was about 45 percent higher for participants without any cost sharing than for those who effectively faced a high deductible; average spending for people with intermediate levels of cost sharing fell between spending for those two groups. More recent studies also concluded that higher cost sharing led to lower health care spending: A 2010 study found that in response to higher cost-sharing, Medicare beneficiaries reduced both the number of visits to physicians and the use of prescription drugs to a degree roughly consistent with the results of the RAND experiment.

Those findings have driven interest in using additional cost sharing as a tool to restrain the growth of health care spending. However, increases in cost sharing expose people to additional financial risk and may deter some enrollees from obtaining necessary care, including preventive care, that could limit the need for more expensive care in the future. In the RAND experiment, cost sharing reduced the use of effective care and less effective care (as defined by a team of physicians) by roughly equal amounts. Although the RAND researchers found that cost sharing had no effect on health in general, among the poorest and sickest participants, those with no cost sharing were healthier by some measures than those who faced some cost sharing. In theory, to address the concern that patients might forgo necessary care, insurance policies could be designed to apply less cost sharing for services that are preventive or unavoidable and more cost sharing for services that are discretionary or that provide limited health benefits. In practice, however, that distinction can be difficult to draw, so trade-offs often occur between providing insurance protection and restraining total spending on health care.

Medicare’s Current Cost Sharing. In the traditional fee-for-service portion of the Medicare program (Parts A and B), the cost sharing that enrollees face varies significantly depending on the type of service provided. Under Part A, which primarily covers the services of hospitals and other facilities, enrollees are liable for a separate deductible for each “spell of illness” or injury for which they are hospitalized. That deductible will be $1,316 in 2017. In addition, enrollees are subject to substantial daily copayments for extended stays in hospitals and skilled nursing facilities. Under Part B, which mainly covers outpatient services (such as visits to a doctor), enrollees face an annual deductible that will be $183 in 2017. Once their spending on Part B services has reached that deductible amount, enrollees generally pay 20 percent of allowable costs for most Part B services, although cost sharing is higher for some outpatient hospital care. Certain services that Medicare covers—such as preventive care, certain hospice services, home health visits, and laboratory tests—require no cost sharing. Because of those variations, enrollees lack consistent incentives to weigh relative costs when choosing among treatment options. Moreover, Medicare patients who incur extremely high medical costs may be obligated to pay significant amounts because the program does not have a catastrophic cap on cost sharing.

Medicare’s cost sharing differs in two significant ways from that of private plans, which provide health insurance for most people under age 65. First, private health insurance plans generally are less complicated because they typically have a single annual deductible that includes all or most medical costs rather than the separate deductibles for hospital and outpatient services under fee-for-service Medicare. Second, unlike fee-for-service Medicare, most private health insurance plans include a catastrophic cap on out-of-pocket costs that limits enrollees’ annual spending—so those plans provide more protection from financial risk than Medicare does. Medicare is not unique, however, in charging different cost-sharing amounts for different types of services; many private insurance plans do that as well.

Although proposals to change Medicare’s cost sharing generally focus on the traditional fee-for-service program, roughly a third of Medicare enrollees choose private insurance plans (known as Medicare Advantage plans) instead. In order to contract with the Medicare program, Medicare Advantage plans must provide catastrophic caps on cost sharing and meet other federal requirements. However, those plans have some flexibility in structuring other cost-sharing requirements as long as the overall value of the benefit is at least equal to the benefit that fee-for-service Medicare provides. In general, cost-sharing requirements in Medicare Advantage plans are lower than those in the fee-for-service program. Such features as out-of-pocket caps make Medicare Advantage plans more like plans in the private insurance market.

Part D of Medicare, which provides coverage for prescription drugs, also is administered by private insurers that set their plans’ cost sharing (subject to certain statutory and regulatory requirements). By 2020, the standard Part D benefit will include a deductible, a range of spending over which enrollees face 25 percent coinsurance, and a catastrophic threshold above which enrollees are liable for 5 percent of their drug costs. Beyond those required elements, Part D insurers have some ability to specify which drugs are covered and the cost sharing enrollees must pay, requiring more cost sharing for expensive, brand-name drugs and less for generic drugs. Because private insurers administering Medicare Advantage and Part D plans can specify cost-sharing requirements (within limits) and Medicare enrollees can choose a plan on the basis of cost sharing and other factors, proposals to redesign Medicare’s cost sharing generally do not focus on those parts of the program. Consequently, policies that would affect cost sharing in Medicare Advantage or Part D are not included in this option.

Supplemental Insurance for Medicare Enrollees. About 85 percent of people who enroll in fee-for-service Medicare have some form of supplemental insurance that reduces or eliminates their cost-sharing obligations and protects them from high medical costs. (Such coverage of cost sharing is uncommon outside fee-for-service Medicare and thus is another difference between that program and typical private insurance.) About 20 percent of enrollees in fee-for-service Medicare receive cost-sharing coverage from Medicaid, which is available to Medicare enrollees with low income and few assets. (Those enrollees often are referred to as dual-eligible beneficiaries.) About 40 percent of fee-for-service enrollees have supplemental coverage through a current or former employer, which tends to reduce, but not eliminate, their cost-sharing liability. About 20 percent of enrollees purchase medigap policies individually, and 5 percent have some other form of supplemental coverage.

Federal law requires medigap plans to conform to one of 10 standard plan types that vary by the extent of their coverage of cost sharing. Roughly half of medigap enrollees choose a plan that offers first-dollar coverage, which pays all deductibles, copayments, and coinsurance. Most other enrollees choose a plan that provides first-dollar coverage for Part A and covers all cost sharing above the deductible for Part B. Starting in 2020, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) will prohibit new Medicare beneficiaries from purchasing the most popular types of supplemental plans—those that cover the Part B deductible.

According to a study for the Medicare Payment Advisory Commission, Medicare spends 27 percent more per person on enrollees who have medigap coverage and 14 percent more per person on enrollees who have supplemental coverage from a former employer than it does on enrollees without supplemental coverage. Those estimates are largely consistent with the results of older studies of the relationship between supplemental coverage and Medicare spending, and they take into account various ways in which medigap policyholders and other Medicare enrollees may differ. The researchers also concluded that those differences in spending were mainly attributable to higher use of discretionary or preventive services by people with supplemental coverage, particularly those with first-dollar coverage. Another study demonstrated that spending by Medicare enrollees with supplemental coverage was growing more rapidly than spending by enrollees without such coverage.

Unadjusted differences in spending between groups with and without supplemental coverage partly reflect differences in their health status, but research has generally shown that the differences in spending were still large, even after adjusting for enrollees’ health status. People with medigap policies may differ from other Medicare enrollees in other ways because medigap coverage is not assigned randomly, as it might be in a scientific experiment or trial. The 2010 study of Medicare beneficiaries’ response to increases in cost sharing is important because it more closely resembled an experiment. That study also showed that about 20 percent of the gross savings generated by higher cost sharing for physician visits and prescription drugs—stemming from reduced use—was offset by increases in hospital spending, perhaps because people delayed treatment until a condition worsened.

Collectively, such research provides considerable evidence that Medicare enrollees who are subject to less cost sharing—because of more generous supplemental insurance—use more medical services than other enrollees do. Enrollees with supplemental coverage are liable for only a portion of the costs of any additional services they use (through any remaining cost sharing and through the effect on their premiums for supplemental coverage); taxpayers (through Medicare) bear most of the cost for the additional services.

Key Design Choices That Would Affect Savings

Policymakers could alter Medicare’s cost sharing and restrict medigap coverage in various ways to produce savings for the federal government, reduce total health care spending, and create greater uniformity in cost sharing for Medicare enrollees. Those different ways also would alter the distribution of health care costs between healthier and less healthy enrollees.

In particular, there are four main ways to alter cost sharing in Medicare: Deductibles could be increased, decreased, or combined; coinsurance rates and copayments could be changed; a catastrophic cap could be added; and additional limits could be imposed on supplemental insurance coverage of Medicare’s cost-sharing obligations. Such changes would interact in important ways. For example, higher deductibles or coinsurance rates would cause enrollees to reach a catastrophic cap more quickly (and at a lower amount of total spending), and limits on supplemental insurance would expose more enrollees to changes in Medicare’s cost-sharing rules and thus increase the effects of those changes on Medicare spending. Policymakers also could grandfather current enrollees by applying changes only to new enrollees.

Deductibles. In general, raising the Part A and Part B deductibles would generate savings for the federal government in two ways. First, higher deductibles would increase the initial cost borne by enrollees, leading to a corresponding reduction in the cost borne by the government. Second, some enrollees would choose to forgo some care because of its higher cost, decreasing the amount of health care for which the federal government would be required to pay. The Part A and Part B deductibles could be increased separately, or they could be combined into a single yearly deductible for all services covered by traditional fee-for-service Medicare. Depending on the dollar amount of that combined deductible, federal spending would decrease, increase, or remain the same.

Proposals for a combined deductible generally call for setting it between the current Part A and Part B deductibles. That approach would tend to increase cost sharing for the roughly 65 percent of enrollees who have only Part B spending in a given year and decrease cost sharing for the roughly 20 percent of enrollees who have some Part A spending (usually for an inpatient hospital stay). (About 15 percent of enrollees use no Part A or Part B services in a given year.) In principle, a combined deductible could also encompass spending for drugs under Part D, but such a change would be complicated because Part D is administered separately by private insurance plans.

Coinsurance and Copayments. Raising coinsurance rates and copayments would reduce federal spending in the same way that higher deductibles would, shifting some costs from the federal government to Medicare enrollees and causing enrollees to forgo some care because of higher out-of-pocket costs. Applying higher coinsurance or copayments to types of care that patients are likely to forgo at higher prices, such as elective surgery, would tend to emphasize that effect, decreasing the amount of care provided and thereby magnifying the budgetary effects. Conversely, applying higher cost sharing to types of care for which patients are particularly insensitive to price, such as emergency surgery, would tend to increase costs for enrollees with little effect on the amount of care provided. Some proposals envision wide-ranging changes to Medicare’s cost-sharing rules, whereas others would apply changes more narrowly, by introducing coinsurance or copayments for specific services that do not currently require cost sharing, such as home health care, laboratory tests, or the first 20 days of a stay in a skilled nursing facility.

Policymakers face trade-offs in changing coinsurance and copayment rules to reduce Medicare’s costs. Coinsurance can make patients more sensitive to the cost of their care, but it also can give them less clarity about what the total costs will be. That trade-off is particularly important for someone facing a hospital admission, use of a particular drug, or other costly aspects of health care. Coinsurance can encourage patients to choose lower-cost services, but it can also significantly increase their financial burden. In addition, when coinsurance is combined with an out-of-pocket cap, all subsequent services will be exempt from cost sharing. Patients in that circumstance have no incentive to use services prudently. To manage that trade-off, many private health plans charge a daily copayment for hospital stays (subject to a limit) instead of collecting coinsurance. (Medicare also charges a daily copayment for hospital care, but only for extremely long stays.)

Catastrophic Caps. Most private insurance plans include a catastrophic cap that limits enrollees’ out-of-pocket costs; Medicare Parts A and B have no catastrophic cap on cost sharing. Thus, without other changes to Medicare’s cost-sharing rules, establishing a catastrophic cap would increase Medicare spending—by requiring the program to pay the entire cost of care above a cap and possibly by increasing the amount of care enrollees sought that exceeded the cap because they would no longer face costs for additional care. Generally, a higher cap would produce a smaller increase in federal spending.

For enrollees in fee-for-service Medicare who have supplemental coverage, adding a catastrophic cap to Medicare would reduce the costs paid by their supplemental policies, resulting in lower premiums for those policies but little change in enrollees’ financial risk. For enrollees without supplemental coverage, establishing a cap would reduce financial risk and decrease out-of-pocket costs once their spending exceeded the cap. Imposing modest cost sharing above the catastrophic cap (as in Part D) could preserve some incentive for enrollees who exceeded the cap to use medical care judiciously (although supplemental coverage of that additional cost sharing would eliminate that incentive).

Supplemental Coverage of Medicare’s Cost Sharing. About 20 percent of enrollees in fee-for-service Medicare purchase medigap policies, and about 40 percent have retiree coverage through a current or former employer. By reducing or eliminating enrollees’ cost-sharing obligations, those policies can mute the incentives for prudent use of medical care that cost sharing is designed to generate. Lawmakers could impose three types of restrictions on supplemental coverage of Medicare’s cost-sharing obligations:

• Supplemental policies could be barred from paying for care until an enrollee’s out-of-pocket spending reached a specified amount, thus prohibiting medigap plans from offering first-dollar coverage. That limit could be set to match Medicare’s deductibles, which would force all enrollees with medigap plans to pay for costs out of pocket until they reached those deductible amounts.
• The percentage or dollar amount of cost sharing above the deductible that medigap plans pay could be limited. Such limits could allow for a catastrophic cap—above which a medigap policy could cover all cost sharing—to reduce enrollees’ financial risk. Both that and the previous restriction could be applied to retiree coverage as well as to medigap plans, but regulations on retiree coverage would be more complex to administer than those on medigap insurance.
• A surcharge could be imposed on enrollees who buy medigap policies with first-dollar coverage. (Retiree policies generally do not provide first-dollar coverage.) That surcharge, which could be a flat fee or a percentage of the policy’s premium, could be designed to reflect the effect of such coverage on Medicare’s costs. To the extent that enrollees continued to buy first-dollar policies, however, total spending on health care would be higher than it would be if such policies were prohibited.

Grandfathering. Another design question for policymakers is whether changes to the rules for cost sharing and supplemental insurance should apply to all Medicare enrollees. One rationale for grandfathering medigap policyholders is that changing the terms of medigap policies already purchased could be considered unfair or unduly burdensome. Medicare enrollees who do not buy medigap insurance when they turn 65 may be charged much higher premiums for such insurance if they delay the purchase until they develop health problems. Thus, many Medicare enrollees pay medigap premiums for years to ensure access to the financial protection of supplemental insurance if their health deteriorates. In the near term, however, the effects on Medicare spending would be smaller if current enrollees were exempt from changes to cost sharing or restrictions on medigap plans, and operating several sets of rules would add to the program’s administrative complexity.

Specific Alternatives and Estimates

CBO examined four ways to reduce federal spending on Medicare by modifying its cost-sharing provisions for Part A and Part B services. (Prescription drug coverage under Part D would not change.) The alternatives would apply to all enrollees, with no grandfathering.

The first alternative would seek to simplify Medicare’s current mix of cost-sharing requirements by replacing them with a single annual deductible of $750 that would cover most Part A services and all Part B services, a uniform coinsurance rate of 20 percent for all spending above the deductible on those services, and an annual out-of-pocket cap of $7,500. The only exception to those rules would be for inpatient hospital services, for which beneficiaries would be charged a copayment of $250 per day—for up to five days for each hospital spell—instead of the current combination of deductibles and copayments. Medicare would cover all costs for inpatient care after the first five days of each spell. The inpatient hospital copayments would not count toward the combined deductible, but the cost of hospital copayments and all coinsurance would count toward a beneficiary’s annual spending cap. CBO estimates that if those changes took effect in January 2020 and if the various thresholds were indexed to increase in later years at the same rate as average fee-for-service Medicare costs per enrollee, this approach would reduce federal outlays by $18 billion between 2020 and 2026.

The second alternative would replace Medicare’s current cost sharing with a single annual deductible of $750 for all Part A and Part B services, a uniform coinsurance rate of 20 percent for amounts above that deductible (including inpatient expenses), and an annual out-of-pocket cap of $7,500. This benefit design is the same as the design in the first alternative except that hospital inpatient spending is subject to the 20 percent uniform coinsurance rather than daily inpatient copayments. CBO estimates that if those changes took effect in January 2020 and if the amounts of the various thresholds were indexed as specified in the first alternative, this approach would reduce federal outlays by $19 billion between 2020 and 2026. Estimated savings are greater for this alternative than for the first alternative because Medicare would cover less of the cost for hospital inpatient spending.

The third 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. Specifically, it would bar those policies from paying any of the first $750 of an enrollee’s cost-sharing obligations for calendar year 2020 and would limit their coverage to 50 percent of the next $6,750 of an enrollee’s cost sharing. (Medigap policies would cover all further cost sharing, so policyholders would not pay more than $4,125 in cost sharing in 2020.) CBO estimates that if this option took effect in January 2020 and if the various dollar thresholds were indexed as specified in the first alternative, federal outlays would be reduced by $45 billion between 2020 and 2026.

The fourth alternative combines the changes from the second and third alternatives. All medigap plans would be prohibited from covering any of the new $750 combined deductible for Part A and Part B services, and in 2020, the annual cap on an enrollee’s out-of-pocket obligations (including payments by supplemental plans on an enrollee’s behalf) would be $7,500. For spending that occurred after the deductible was met but before the cap was reached, 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. In 2020, those provisions would limit medigap enrollees’ out-of-pocket spending (excluding medigap premiums) to $4,125; Medicare enrollees without supplemental coverage would pay no more than $7,500 out of pocket. If, like the other alternatives, this combined version took effect in January 2020 and if the various thresholds were indexed to the growth of per-enrollee Medicare costs thereafter, CBO estimates that federal outlays would be $66 billion lower than under current law from 2020 to 2026. Those savings would exceed the sum of the savings from the second and third alternatives because the changes to the cost-sharing rules for Medicare and the restrictions on medigap policies interact, increasing medigap enrollees’ exposure to cost sharing. In CBO’s estimation, this alternative would further reduce their use of care and thus lower the federal government’s costs.

The budgetary effects of changing Medicare’s cost-sharing rules would depend to a large extent on the way each alternative was structured. To illustrate that variability, CBO estimated the effects on federal spending of making several types of changes to the deductible and the catastrophic cap in 2020, the first year in which the alternatives would take effect. CBO examined modifications of the second alternative, which would establish uniform cost sharing for Medicare. Raising the deductible by $100 (from $750 to $850) while keeping the catastrophic cap at $7,500 would increase CBO’s estimate of federal savings for 2020 through 2026 from about $19 billion to $35 billion. Raising the catastrophic cap by $500 (from $7,500 to $8,000) while keeping the deductible at $750 would increase the estimate to $41 billion. Conversely, lowering the deductible by $100 (from $750 to $650) while keeping the catastrophic cap at $7,500 would reduce CBO’s estimate of federal savings to $1 billion. Reducing the catastrophic cap by $500 (from $7,500 to $7,000) while keeping the deductible at $750 would eliminate all savings and increase federal spending to about $5 billion over the period.

Estimates of savings in these alternatives are lower than those that CBO has published in past versions of this volume. In 2014, for example, CBO estimated that changing Medicare’s cost-sharing rules would save $54 billion over 10 years and that changing medigap rules would save $53 billion. Those differences arise for several reasons. First, because CBO now estimates that more time would be needed to implement such policies, the savings over the next 10 years for those alternatives would be smaller. Second, CBO made technical improvements in modeling cost-sharing liabilities for Medicare’s beneficiaries that reduced the savings that could be achieved from changing Medicare cost-sharing rules. Third, some of MACRA’s provisions now prohibit new Medicare beneficiaries from purchasing medigap plans to cover the Part B deductible; those provisions reduced the savings that could be achieved from making additional changes to the medigap rules.

Other Considerations

Substantial changes to the cost-sharing structure of fee‑for-service Medicare and the coverage provided by medigap plans would not only reduce costs to the federal government but also would affect Medicare enrollees, other types of supplemental insurance, and administration of the Medicare program.

Effects on Enrollees. The cost-sharing and medigap changes included in this option would affect total health care spending for Medicare enrollees (by changing the amount of health care services they use) and the way in which that spending was divided between the federal government and enrollees and among enrollees themselves. The restrictions on medigap coverage also would affect the premiums enrollees’ would pay as well as how much of enrollees’ cost-sharing obligations the plans would cover.

Under current law, CBO estimates, Medicare’s costs for the average fee-for-service enrollee will be about $13,000 in 2020 and the average enrollee will have about $2,400 in cost-sharing obligations, which may be paid by the enrollee directly out of pocket, by supplemental insurance, or through some combination of the two. Those averages mask substantial variation in individuals’ cost-sharing obligations, stemming from differences in health and the use of medical care. For example, in CBO’s projections, only one-quarter of enrollees have cost-sharing obligations of more than $2,600 in 2020; their obligations average about $7,100, compared with an average of about $750 for the other three-quarters of fee-for-service enrollees.

Under the fourth alternative, which combines changes in the Medicare benefit with changes in coverage by medigap policies, CBO estimates that Medicare’s costs for the average fee-for-service enrollee would be $12,800 in 2020, or $200 below its estimate under current law. However, under the alternative’s specific cost-sharing changes and medigap restrictions, enrollees’ average cost-sharing obligations would not change because the higher fraction of total health care costs they paid as cost sharing would be offset, on average, by savings from the resulting reduction in their use of health care. (Various combinations of deductibles, coinsurance, catastrophic caps, and medigap restrictions could increase or decrease enrollees’ average cost-sharing obligations.) Even so, that alternative would alter the distribution of cost-sharing obligations among enrollees: One-quarter would face cost-sharing obligations of more than $3,200 in 2020; their obligations would average about $6,100. The obligations of the other three-quarters would average about $1,100. (Roughly 10 percent of enrollees would reach the $7,500 cap on cost-sharing obligations.) Those changes reflect a relatively large average decrease in obligations for enrollees with serious illnesses that require extensive care or extended hospitalization and a relatively small average increase in obligations for healthier enrollees who use less care.

For the first alternative, which would add a daily inpatient copayment to a combined deductible and a catastrophic cap, CBO estimates that Medicare’s costs for the average fee-for-service enrollee in 2020 would be $12,900, or $100 less than its current-law estimate. Cost-sharing obligations would increase for most beneficiaries, but those with inpatient hospital stays would, on average, pay less of their overall costs and consume slightly more inpatient care. Average cost sharing for beneficiaries with no inpatient hospital stays would rise from the current-law amount of $1,200 to $1,500 by 2020. For beneficiaries with any inpatient hospital stays, average cost sharing would decrease from $7,300 under current law to $5,200. Reductions in financial obligations would be particularly large for beneficiaries with hospital stays of more than 60 days; their average cost sharing would decrease from $23,000 under current law to $7,300 under the first alternative.

The medigap restrictions under the four alternatives would increase the average amount of cost sharing a medigap policyholder paid out of pocket and would decrease, to roughly the same extent, the average amount a medigap plan paid on an enrollee’s behalf. Because medigap insurers must compete for business and are subject to state insurance regulations, they would most likely reduce premiums to reflect that reduction in their costs. Overall, most medigap policyholders would have lower health care expenses under this option because their medigap premiums would decrease more than their out-of-pocket payments would increase (mainly because most of a medigap plan’s liabilities are generated by a small share of policyholders). However, under this option, in any given year, some enrollees would face higher combined costs for medigap premiums and out-of-pocket payments.

Beyond altering how and how much Medicare enrollees paid for care, the changes included in the alternatives CBO considered would have other effects on enrollees. The changes would give Medicare beneficiaries stronger incentives to use medical services more prudently.

However, as noted above, studies have shown that people who are subject to higher cost sharing reduce their use of effective health care and ineffective health care. To avoid reductions in effective care, enrollees’ cost sharing could be selectively reduced or eliminated for high-value services—an approach called value-based insurance design. In practice, defining such services can be challenging, and the use of value-based design in private insurance plans has been limited. Furthermore, restricting medigap coverage would prevent Medicare enrollees from buying policies with the low levels of cost sharing that they have shown a preference for in the past. Although most medigap enrollees would have lower overall health care costs under this option, some enrollees would prefer the financial certainty and simplicity of a medigap plan that covered all of their cost-sharing obligations. Those enrollees would probably object to any legislation or regulation that denied them access to full supplemental coverage for their cost sharing.

Effects on Supplemental Insurance. Altering Medicare’s cost-sharing structure and limiting supplemental coverage would probably lead to changes in medigap premiums and in enrollees’ demand for medigap policies. If those plans were barred from paying the first $750 of an enrollee’s cost-sharing liabilities and then from fully covering all cost sharing up to a catastrophic cap—as in the second and third alternatives—the costs borne by medigap plans would decrease; as a result, so would premiums for those plans. On the one hand, lower premiums would make medigap policies more appealing. On the other hand, the restrictions on medigap benefits would reduce the value of such policies to enrollees.

A key reason that people buy medigap coverage is for protection against high out-of-pocket costs. Adding a catastrophic cap to Medicare would reduce financial risk for enrollees in the traditional fee-for-service program who lack supplemental coverage. Therefore, adding a catastrophic cap to Medicare and restricting the coverage provided by medigap plans would probably cause some enrollees, particularly healthier beneficiaries, to forgo purchasing supplemental insurance. Those beneficiaries would tend to consume less health care, and thus to have lower cost sharing, than sicker enrollees would. A decrease in medigap enrollment by relatively healthy people would increase average per-enrollee costs for medigap plans, leading to higher policy premiums (if everything else was equal).

Altering the cost-sharing structure of Medicare, as in the first, second, and fourth alternatives, also would affect costs for employers that provide supplemental coverage for retirees. A unified deductible would tend to increase costs for employers, but the introduction of a catastrophic cap would decrease their costs, particularly for retirees with very high costs for health care. The net effect on an employer’s costs would depend on the extent of the coverage and on the health of the retirees. Additionally, the creation of a catastrophic cap for Medicare might cause some employers to scale back or discontinue supplemental coverage for current or future retirees, on the theory that their retirees would be sufficiently protected from financial risk by Medicare alone.

Changing the structure of Medicare cost sharing or supplemental plans also could affect enrollment in Medicare Advantage plans, which currently may provide first-dollar coverage and also must set out-of-pocket spending limits. Policy changes that prohibited medigap plans from providing first-dollar coverage would tend to make Medicare Advantage plans more attractive to some beneficiaries and increase Medicare Advantage enrollment. Setting catastrophic limits on spending, however, would tend to make Medicare Advantage less attractive and decrease Medicare Advantage enrollment. The net effects of changes in enrollment in Medicare Advantage plans on federal spending are unclear and would depend on which plans were affected.

CBO estimates that implementing a unified deductible and catastrophic cap as described above would decrease federal spending on Medicaid by a small amount between 2020 and 2026. Those provisions would have two largely offsetting effects. First, the introduction of a catastrophic cap would shift costs from Medicaid to Medicare for some enrollees with high medical expenses. Second, the unified deductible and uniform coinsurance rate would shift some costs from Medicare to Medicaid for enrollees with lower medical expenses. Under the alternatives examined above, CBO estimates, the net result of those offsetting changes would be a small overall decrease in federal spending on Medicaid.

Because the effects of changes in cost sharing would vary from one state to another, estimates of their implications for federal spending on Medicaid are highly uncertain. Many states cap cost-sharing payments to providers of Medicare services to keep the total amounts that providers receive at or below Medicaid’s payment rates for the same services. Because the amounts that many state Medicaid programs pay providers are below those established for Medicare, some states end up covering only a small portion—if any—of Medicare beneficiaries’ cost-sharing obligations. That constraint reduces the effects on Medicaid spending that would otherwise arise from a change in Medicare’s cost sharing.  CBO accounts for the average effects of state-level variation in Medicaid payment policies, but the agency’s analysis does not incorporate detailed estimates of different states’ cost-sharing limits. 

Administrative Effects. Altering the cost-sharing rules for Medicare and medigap plans would raise myriad administrative issues. Health care providers might not know how much to collect from a Medicare enrollee during an office visit because it might be difficult to determine whether the enrollee’s cost-sharing payments had reached the combined deductible or exceeded the new catastrophic cap. Moreover, administering the new cost-sharing structure would require coordination that currently does not exist among the organizations that review and process Medicare claims, insurers that provide supplemental coverage, and Medicare. In addition, changes to Medicare’s cost-sharing structure could affect the total amount of bad debt from unpaid cost-sharing obligations owed to service providers. At the same time, lower enrollment in supplemental plans and reduced use of medical care by some enrollees with supplemental coverage would decrease the amount of billing paperwork for some insurers.