Option 81
Replace Medicare’s Current Cost-Sharing Requirements with a Unified Deductible, a Uniform Coinsurance Rate, and a Catastrophic Limit

In Medicare’s traditional fee-for-service program—consisting of services covered under Part A (hospital and other acute care) and Part B (which covers physicians’ and other outpatient services)—enrollees’ cost sharing varies significantly depending on the type of service provided. For example, enrollees who are hospitalized must pay a Part A deductible, which the Congressional Budget Office estimates will be $1,148 in 2011, for each “spell” of illness for which they are hospitalized; in addition,they are subject to daily copayments for extended stays in the hospital and for skilled nursing care. Meanwhile, the annual deductible for outpatient services covered under Medicare’s Part B is estimated to be $142 in 2011. Beyond that deductible, enrollees generally pay 20 percent of allowable costs for most Part B services, but cost sharing can be significantly higher for outpatient hospital care. At the same time, certain services that are covered by Medicare, such as home health visits and laboratory tests, require no cost sharing. As a result of those variations, enrollees lack consistent incentives to weigh relative costs when choosing among options for treatment. Moreover, if Medicare patients incur extremely high medical costs, they can face a significant amount of cost sharing because the program does not cap those expenses.

This option would replace the current complicated mix of cost-sharing provisions with, first, a single combined annual deductible covering all services in Parts A and B of Medicare; second, a uniform coinsurance rate of 20 percent for amounts above that deductible (including inpatient expenses); and, third, an annual cap on each enrollee’s total cost-sharing liabilities. Specifically, under this option, the combined deductible would be $525 in 2011, and the cap on total cost sharing would be $5,250. In later years, those amounts would grow at the same rate as Medicare’s costs per capita. According to CBO’s estimates, if this option took effect on January 1, 2011, federal outlays would be reduced by about $7 billion over the 2010–2014 period and by $26 billion over the 2010– 2019 period.

An argument in support of this option is that it would provide greater protection against catastrophic costs while reducing Medicare’s coverage of more predictable expenses. Capping enrollees’ out-of-pocket expenses would especially help people who developed serious illnesses, required extended care, or underwent repeated hospitalizations but lacked supplemental (medigap) coverage for their cost sharing. The option would also increase incentives for enrollees to use medical services prudently. Deductibles and coinsurance rates expose enrollees to some of the financial consequences of their decisions about health care treatments and are aimed at ensuring that services are used only when an enrollee’s benefits exceed those costs. Although this option’s combined deductible would be lower than the Part A deductible, the vast majority of Medicare enrollees are not hospitalized in a given year; thus, most people without supplemental coverage would face the full cost for a larger share of the Part B services that they used. The uniform coinsurance rate across services would also encourage enrollees to compare the costs of different treatments in a more consistent way. In addition, the reductions in costs under this option for Medicare’s Part B program would translate into lower premiums for all enrollees.

An argument against the option is that it would increase cost-sharing liabilities for most Medicare enrollees. Specifically, those liabilities would rise modestly in 2011 for more than three-fourths of enrollees (by about $500, on average) and would stay the same for another 13 percent. (For the remaining 9 percent of enrollees, cost-sharing liabilities would fall by an average of about $4,500.) Enrollees who were hospitalized only once in a year would generally face higher costs because of the coinsurance that would apply to that care; however, most enrollees have supplemental insurance and would be insulated from those direct effects. (Some enrollees might see the effects in the form of higher premiums for their supplemental policies.) In addition, the option would make enrollees responsible for paying coinsurance for certain services—such as home health care—that are not currently subject to cost sharing. That requirement would increase administrative costs for some types of health care providers and could discourage enrollees from seeking treatment in some cases.

Source: Budget Options, Volume 1: Health Care