Common Ground on Medicare Reform?

Listening to reports on recent budget negotiations in Washington may lead you to believe compromise between the two parties is near impossible, considering what sounds like countless irreconcilable differences. However, an article in yesterday’s New York Times shows that House Republicans and the Administration may not be as far apart as it may seem, at least when it comes to Medicare. The article highlights an area of potential consensus on the need to reform Medicare’s antiquated and complex cost sharing rules.

Currently, Medicare beneficiaries face two separate deductibles – a $1,184 deductible for Medicare Part A (hospital insurance) and a $147 deductible for Medicare Part B (physicians' offices) -- along with a hodge podge of other copays and coinsurance. With no out-of-pocket spending cap, many beneficiaries are exposed to significant cost sharing and therefore purchase private supplemental coverage, known as Medigap, to cover the possibility that they will face huge costs. Roughly 50 percent of the Medicare population have supplemental coverage of some form (i.e. Medigap, employer-based, Tricare) compared to 8 percent with only traditional Medicare (the rest have Medicare Advantage or Medicaid assistance). Because the extra coverage often defrays their health care costs, these beneficiaries do not always make cost-conscious decisions, leading to overutilization and driving up spending. As a result, many health economists and experts have called for reforming cost sharing rules by creating a single, combined deductible with a uniform coinsurance and an out-of-pocket cap.

As the article explains, both the President and House leadership have been open to such reforms. The President has included it in his offers dating back to the 2011 debt ceiling debate and House leadership has suggested their willingness to adopt the policy. Even before the 2011 negotiations, the Simpson-Bowles plan proposed creating a unified $550 deductible, a uniform 20 percent coinsurance rate on all services, and a 5 percent catastrophic coinsurance after $5,500 per year of out-of-pocket expenses, up to a $7,500 hard limit. The proposal would save up to $50 or $60 billion through 2022, and even more if combined with other reforms to supplemental coverage. For example, the Fiscal Commission also included an option to restrict first-dollar or near first-dollar Medigap plans by disallowing them to pay for the first $550 per year in cost-sharing and only half of cost-sharing up to $5,500, saving an additional $50 billion over the next decade. Significant savings could also be achieved if similar restrictions were applied to Tricare for Life, the Federal Employee Health Benefits Program, and employer-sponsored retirement plans that provide first dollar coverage as well. The Moment of Truth Project has a report explaining these options in greater detail.

Others have argued for different restrictions or even a tax on these supplemental plans. The President’s FY 2013 budget included a 15 percent tax on Medigap plans. Most recently, we discussed MIT economist Jonathan Gruber’s plan that would implement an excise tax of up to 45 percent on premiums for Medigap plans and employer-sponsored retiree coverage. In addition to yielding savings to the federal government, these reforms would benefit the poorest and sickest seniors on average. A 2011 Kaiser Family Foundation study found that reforming Medigap coverage could reduce out-of-pocket costs for nearly 80 percent of Medigap enrollees.

As these cost sharing reforms have gained considerable support and attention, different proposals have reflected the ability to easily dial the specifics depending on desired savings and policy priorities. In addition to the Medigap tax, Gruber's proposal offers greater protections for low-income beneficiaries by instituting a progressive out-of-pocket limit on a sliding scale based on income. He also proposed reducing the deductible to $250 for seniors below 200 percent of poverty. Similarly, the Urban Institute’s plan proposes a single income-related deductible with higher deductibles for people over 400 percent of the poverty line, about the same for people between 300 and 400 percent, and lower for people below 300 percent. Other options include changing the level of the coinsurance and/or applying higher levels of cost-sharing to specific services such as home health, skilled nursing facilities (SNFs) or clinical labs. Some other examples from our Health Care and Revenue Savings Options report are listed below.

Note: Rough estimates of potential savings from 2013-2022

Any of these changes could substantially reduce or increase the savings. The NYT article suggests the President would apply his policy to new beneficiaries after 2016. This type of grandfathering would erase the majority of the savings within the ten year budget window and increase complexity by leaving different Medicare beneficiaries with different deductibles, different copays, and other different rules. It would also leave current beneficiaries without the catastrophic cost protections which would be newly available to new retirees. A better alternative to grandfathering would be to phase in changes for all beneficiaries.

While there are many different approaches toward implementing cost-sharing reforms, it is clear that both sides agree our current benefit structure is costly and inefficient. They also tend to agree on a basic framework that includes a combined deductible with some level of out-of-pocket protection and restrictions to supplemental coverage. As we anticipate a growing number of baby boomers entering the Medicare rolls and increasing spending over the next several decades, reforming these outdated rules will be an important part of the discussion on serious entitlement reform that could forge a bipartisan agreement.

We are encouraged and hopeful that the emerging consensus on cost-sharing reforms will be used to help bend the health care cost curve and help put our debt on a downward path as a share of the economy.