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||2019||2020||2021||2022||2023||2024||2025||2026||2027||2028||2019-
|Change in Outlays|
|Establish uniform cost sharing for Medicare||0||0||0||-4||-5||-6||-6||-6||-7||-10||-9||-44|
|Restrict medigap plans||0||0||0||-7||-9||-10||-10||-11||-12||-13||-16||-72|
|Both alternatives above||0||0||0||-11||-15||-15||-16||-17||-19||-22||-25||-116|
In the traditional fee-for-service (FFS) portion of the Medicare program, cost sharing—the payments for which enrollees are responsible when they receive health care—varies significantly depending on the type of service provided. Cost sharing in FFS Medicare can take the following forms: deductibles, coinsurance, or copayments. Deductibles are the amount of spending an enrollee incurs before coverage begins, and coinsurance (a specified percentage) and copayments (a specified amount) represent the portion of spending an enrollee pays at the time of service.
Under Part A, which primarily covers services provided by hospitals and other facilities, enrollees are liable for an initial copayment (sometimes called the Part A deductible) for each "spell of illness" that requires hospitalization. In 2019, that copayment will be $1,364. 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 $185 in 2019. Once their spending on Part B services has reached that deductible, enrollees generally pay 20 percent of allowable costs for most Part B services. Some services that Medicare covers under Parts A and B—such as preventive care, certain hospice services, home health visits, and laboratory tests—require no cost sharing. However, Medicare beneficiaries 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.
In 2013, about 80 percent of people who enrolled in fee-for-service Medicare had some form of supplemental insurance that reduced or eliminated their cost-sharing obligations and protected them from high medical costs. Approximately 25 percent of FFS enrollees had supplemental coverage that was subsidized by the federal government. That coverage was available through Medicaid, TRICARE (the civilian component of the Military Health System), or a retiree policy from the Federal Employees Health Benefits (FEHB) program. In addition, about 35 percent of FFS enrollees had supplemental coverage through nonfederal retiree policies, and about 20 percent purchased individual medigap policies. In recent years, roughly two-thirds of medigap enrollees chose a plan that offered "first dollar" coverage, which paid all Part A and Part B Medicare cost sharing and the Part B deductible. The plans chosen by the other medigap enrollees did not cover the Part B deductible but covered all or most other FFS cost sharing. Starting in 2020, new Medicare beneficiaries will be prohibited from purchasing medigap plans that cover the Part B deductible.
The option consists of three alternatives, each of which would take effect in January 2022:
- The first 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 all spending above that deductible; and an annual out-of-pocket cap of $7,500.
- The second alternative would leave Medicare's cost-sharing rules unchanged but would restrict existing and new medigap policies. Specifically, it would bar those policies from paying any of the first $750 of an enrollee's cost-sharing obligations for Part A and Part B services in calendar year 2022 and would limit 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 2022.
- The third alternative would combine the changes from the first and second 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 2022, 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, beneficiaries would be responsible for a uniform coinsurance rate of 20 percent for all services. Because medigap policies would cover 50 percent of that coinsurance, medigap policyholders would effectively face a 10 percent coinsurance rate. In 2022, 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.
After 2022, dollar amounts in all three alternatives, such as the combined deductible and cap (the first and third alternatives), along with the medigap thresholds (the second and third alternatives), would be indexed by the rate of growth of average FFS Medicare spending per enrollee.
Effects on the Budget
All three alternatives would decrease mandatory outlays between 2022 and 2028. Those effects would largely be driven by lower FFS Medicare spending but also would reflect interactions between FFS Medicare and other parts of Medicare as well as other federal programs. All three alternatives would shift spending from Medicare to beneficiaries in part by reducing the amount of services used by enrollees in response to higher out-of-pocket costs. The Congressional Budget Office obtained its estimates using a microsimulation model the agency developed to analyze proposals that would change cost-sharing rules for Medicare and restrict medigap insurance. Estimates of changes in utilization are based on research that concludes that people reduce their use of health care in response to higher out-of-pocket costs and, conversely, increase their use of health care in response to lower out-of-pocket costs.
Under the first alternative, establishing uniform cost sharing, mandatory outlays would decrease by $44 billion, on net, from 2022 through 2028. Outlays for FFS Medicare would decrease by $22 billion. Although spending on Part B would increase under this alternative, that effect would be more than offset by a decrease in spending on Part A services. Decreased outlays for FFS Medicare would reduce other mandatory spending over the same period because of the net effect of four factors, three of which would reduce spending and one of which would increase spending:
- First, the reduction in FFS Medicare spending would reduce the benchmarks used to set payments to Medicare Advantage plans, reducing federal payments to those plans. (Medicare Advantage plans are offered by private health insurers, which assume the responsibility for, and the financial risk of, providing Medicare benefits.)
- Second, receipts from Part B premiums would increase, partially offsetting the increase in spending on Part B services. (Part B premiums increase when Part B spending increases because standard premiums are set to cover about 25 percent of Part B costs annually.)
- Third, federal spending on Medicaid would decrease for people, known as dual-eligible beneficiaries, who are enrolled in both Medicare and Medicaid. Medicaid pays cost sharing and Part B premiums for most of those beneficiaries. Under this alternative, the reduction in Medicaid payments for cost sharing above the catastrophic cap would more than offset the increase in spending from higher Part B premiums.
- Fourth, those reductions in spending would be partially offset by increases in federal spending on the FEHB program and TRICARE stemming from increases in cost sharing for Medicare beneficiaries covered by those programs. Changes in cost sharing would affect federal spending on Medicaid differently than spending on FEHB and TRICARE because dual-eligible beneficiaries have more spending that exceeds the catastrophic cap.
On net, the interactions between changes in outlays for FFS Medicare and lower federal payments to Medicare Advantage plans, higher Part B premiums, lower federal spending on Medicaid, and higher spending through the FEHB and TRICARE programs would decrease other mandatory outlays by $22 billion.
The budgetary effects of changing Medicare's cost-sharing rules would depend to a large extent on the dollar amounts at which the deductible and catastrophic cap were set. To illustrate that variability, CBO estimated the effects on federal spending of making several types of changes to the deductible and the catastrophic cap. Raising the deductible by an additional $100 in 2022 (from $750 to $850) while keeping the catastrophic cap at $7,500 would increase CBO's estimate of federal savings from about $44 billion to $65 billion between 2022 and 2028. If the deductible was instead lowered by $100 to $650, CBO's estimate of the savings during those years would be reduced by about $21 billion to $22 billion. If, instead, the deductible remained unchanged at $750 but the catastrophic cap was raised by an additional $500 in 2022 (from $7,500 to $8,000), the estimated savings would increase by about $25 billion to $69 billion. Reducing the catastrophic cap by $500 to $7,000 would reduce the estimated savings by about $27 billion to $17 billion over the period.
Under the second alternative, restricting medigap plans, mandatory outlays would decrease by $72 billion. Outlays for FFS Medicare (Parts A and B) would decrease by $60 billion because medigap enrollees would face a larger fraction of their Medicare cost sharing out of pocket and would therefore use fewer services, resulting in less Medicare spending. As a result of lower FFS Medicare spending, payments to Medicare Advantage plans and Part B premium receipts would both decrease. In addition, Medicaid spending would decrease as a result of the decrease in the Part B premium. Altogether, the interactions would further decrease spending by about $12 billion. Federal spending on the FEHB program and TRICARE would not change under the second alternative.
Under the third alternative, which entails simultaneously changing Medicare's cost sharing and restricting medigap plans, mandatory outlays would decrease by $116 billion. Outlays for FFS Medicare (Parts A and B) would decrease by $81 billion. The remaining $35 billion in savings would result from the effects of interactions between FFS Medicare and other parts of Medicare as well as other federal programs. Although the total savings from this alternative would approximate the sum of the savings from the first two alternatives, that relationship might not apply using different dollar amounts for the deductible and catastrophic cap.
For all three alternatives, the estimates reflect impacts on the entire FFS Medicare population; however, the effects on individual beneficiaries would differ depending on their spending for particular health care services. For example, under the third alternative, out-of-pocket costs would rise in 2026 for more than 55 percent of enrollees (by about $900, on average) and would stay the same for another 43 percent. For the remaining 2 percent of enrollees, out-of-pocket costs would fall by an average of about $5,800.
CBO's analysis of the effects of the three alternatives is subject to uncertainty. One source of uncertainty is the extent to which future changes in enrollment in FFS Medicare and supplemental insurance and spending by category align with CBO's baseline projections. A second source stems from the use in this analysis of a 5 percent sample of Medicare beneficiaries from 2013, with the sample adjusted to reflect differences in Medicare FFS enrollment and spending in CBO's baseline by category of medical service between 2013 and each year between 2022 and 2028. Patterns of medical spending and utilization among Medicare FFS beneficiaries could differ between 2013 and the 2022-2028 period in important ways in addition to those related to the baseline projections.
Another important source of uncertainty is how beneficiaries would change their use of Medicare services in response to changes in cost sharing or restrictions to medigap insurance. CBO relied on published research to estimate that response, but those research findings can only approximate how Medicare FFS beneficiaries would respond in the future. To what extent the alternatives would affect enrollment in medigap or Medicare Advantage plans is another source of uncertainty because such a response is likely, but there is little evidence to inform CBO's analysis. CBO did not incorporate the effects of any change in medigap or Medicare Advantage enrollment into its estimates.
An argument in favor of this option is that it would increase incentives for enrollees to use medical services prudently. The third alternative would provide the strongest incentives because it would expose beneficiaries to the highest out-of-pocket costs. Higher deductibles and coinsurance rates expose enrollees to some of the financial consequences of their decisions about health care utilization and are aimed at ensuring that services are used only when an enrollee's benefits exceed those costs.
An advantage of introducing uniform cost sharing with a catastrophic cap and a combined deductible (the first and third alternatives) is that the catastrophic cap would reduce cost sharing for enrollees whose total spending exceeded the cap. Capping enrollees' out-of-pocket expenses would especially help people who developed serious illnesses, required extended care, or underwent repeated hospitalizations but lacked supplemental coverage for their cost sharing. Also, the combined deductible would be lower than the current initial copayment for inpatient hospital services, potentially decreasing Part A cost sharing for some beneficiaries. The uniform coinsurance rate across services could also encourage enrollees to compare the costs of different treatments in a more consistent way.
An argument in favor of restricting the level of cost sharing covered by medigap plans (the second alternative) is that the decline in Part B spending would in turn reduce Part B premiums. Lower Part B premiums would benefit all beneficiaries who pay them (including Medicare Advantage enrollees). State Medicaid spending would also decrease because Medicaid pays the Part B premiums for dual-eligible beneficiaries.
An argument against the option is that in any given year, some enrollees would see their combined payments for premiums and cost sharing rise, which could cause some people to forgo needed health care services and could adversely affect their health. Studies have shown that people who are subject to higher cost sharing reduce not only their use of less effective care but also their use of effective care (for example, Swartz 2010). In the RAND Health Insurance Experiment, researchers found that cost sharing had no substantial effect on health in general. However, among the poorest and sickest participants, those with no cost sharing were healthier by some measures than those who faced some cost sharing (Manning and others 1987).
Two other arguments against the introduction of uniform cost sharing (the first and third alternatives) are higher supplemental insurance premiums for some plans and increased administrative burdens. To begin with, premiums would increase for supplemental retiree policies. Next, the first and third alternatives would increase administrative burdens for both the federal government and some types of health care providers because some services would be newly subject to cost sharing and because the administrative structures supporting Part A and Part B services would need to be integrated.
An argument against the change to medigap cost sharing (the second and third alternatives) is that changing the terms of current medigap policies could be considered unfair or unduly burdensome. Under current law, 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 might pay medigap premiums for years to ensure access to the financial protection of supplemental insurance if their health deteriorates. In addition, current and future policyholders would face more uncertainty about their out-of-pocket costs. For those reasons, some policyholders might object to being prevented from having coverage for all of their cost sharing above the deductible, even if they would be better off financially in most years under this option. (In recent years, most medigap policyholders have purchased coverage for the Part B deductible; high-deductible medigap policies have attracted only limited enrollment despite their lower premiums.)