A Medicare Reform Proposal Everyone Can Love: Finding Common Ground among Medicare Reformers

Studies | Health

No. 306
Saturday, December 01, 2007
by Andrew J. Rettenmaier and Thomas R. Saving

Estimated Cost Sharing by Individual Beneficiaries

The following estimates show how the HIRA annuities combined with the base deductibles grow relative to projected spending for workers born in 1950, 1970 and 1990. 14

Figures Ia-Ic present total cost sharing as a percentage of projected total spending on Medicare-covered services for workers born in different years with different lifetime earnings.  The figures show the size of the total cost sharing divided by estimated spending on Medicare-covered services at each age. 15

Workers Born in 1950.  Figure Ia presents total cost sharing as a percentage of covered spending for workers born in 1950 for ages 66 to 100. 16 For purposes of this graph, average spending on Medicare-covered services by age is assumed to be equal across all income classes, even though there is evidence that expenditures increase with retiree income.  Workers born in 1950 will be eligible for Medicare in 2015 and have eight years to accumulate funds in their HIRAs.  Figure Ia shows that the total cost sharing for a high-income worker born in 1950 is greater than 40 percent of average spending for people ages 66 to 68.  For the medium-income worker, total cost sharing exceeds 30 percent of average spending up to age 69.  Thus, the total cost sharing for retirees who had medium or higher earnings will be more than 30 percent of average projected spending during the first years of retirement. 17

“The government will contribute to the accounts of low-income retirees.”

For members of the 1950 birth year, the real value of the base deductible (in 2007 dollars) is $2,974 when they retire.  The real values of the HIRA annuities for low-, medium- and high-income retirees will be $528, $1,175, and $1,880, producing total cost sharing of $3,502, $4,148, and $4,854, respectively.

The government's contribution to the HIRAs of low-income retirees would be calculated as follows. The subsidy is set so that the low-income retiree's potential out-of-pocket spending is no larger than the medium retiree's spending as a share of their respective Social Security benefits.  For example, the base deductible as a percentage of medium earner's Social Security benefit for workers born in 1950 is 17.6 percent.  The low-income retiree would receive a $1,169 government contribution to their HIRA so that their maximum out-of-pocket cost of $1,805 is also 17.6 percent of their Social Security benefit. 18 Private Spending as a Percent of Average Spending on Medicare Covered Services by Age

“Average Medicare spending increases with age, so the percentage of spending that is privately funded falls.”

Workers Born in 1970. The ratios of cost sharing to total spending depicted in Figure Ib exhibit the same shape as those shown in Figure Ia, but the size of the ratios grows as the number of years of labor force participation increases.  The members of the 1970 birth cohort are 37 in 2007 and have 28 years remaining in the labor force before retiring in 2035. The total cost sharing of the high-income members of this birth year is in excess of 60 percent of average projected spending on Medicare covered services to age 70. For medium earners, total cost sharing is above 60 percent of average covered spending up to the age of 67. In contrast to Figure Ia, where the HIRA annuity differences were small across income groups because of the short contribution period, the HIRA annuities here produce increasing dispersion in the total cost sharing across income groups.  For example, at 75 years of age the total cost sharing requirement of high-income retirees is 31 percent higher than for low income retirees born in 1950, but for those born in 1970 the high-income retirees' total cost sharing is 79 percent higher.

Workers Born in 1990. Workers born in 1990 are 17 years old at the outset of the reform and have their entire work life to contribute to HIRAs. The high earners have total cost sharing in excess of average projected spending until they are 68 years of age.  As shown in Figure Ic, medium earners start retirement with total cost sharing equal to 87 percent of average spending and deductibles in excess of 50 percent of average spending up to age 73.

“If the accounts of workers born in 1990 earn only the government's rate of return, higher wage workers would fund more than half of average spending on Medicare-covered services at age 75.”

As these figures indicate, the annuity payments combined with base deductibles indexed to the projected per capita Medicare spending will ultimately bring about significant cost sharing.  At first, much of the total cost sharing is due to the indexed base deductible.  For later birth cohorts the size of the HIRA annuity exceeds the base deductible.

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