Reforming Medicare's Cost-Sharing Requirements

Politicians on all sides of the political spectrum will readily admit that Medicare spending is on an unsustainable long-term path. However, finding feasible options for cutting costs is difficult. Reforming Medicare's cost-sharing requirements will yield the most results without altering any taxes, says Thomas Miller, a resident fellow at the American Enterprise Institute.

• Cost-sharing dictates what portion of a medical bill a senior citizen will be responsible for after Medicare pays its share.
• A higher coinsurance and annual caps tied to income level could provide the fairest and most effective avenue toward the best health outcomes.
• Currently, patient spending on the first day of hospital care is a high deductible of $1,184 for Medicare Part A and a much lower deductible of $147 for Medicare Part B.

For Part B, patients assume a coinsurance cost sharing of 20 percent for each additional dollar of spending with no cap on expenditures.

• The Congressional Budget Office (CBO) estimates that changing the current cost-sharing requirements to one deductible of $550 for Parts A and B with a 20 percent coinsurance rate above that deductible with a $5,500 annual cap would reduce federal spending by approximately $32 billion over the 2012-2021 period.
• The CBO also estimates that if Medigap coverage were restricted from covering the first $550 deductible payment and limited to only half of the 20 percent share after that, the federal government could reduce spending by an estimated $93 billion over the 2012-2021 period.
• The Medicare Payment Advisory Commission (MedPAC) proposed a $500 deductible with copayments, which are a fixed dollar amount, rather than coinsurance, which is a percentage of costs.

Another plan by MIT economist Jonathan Gruber calls for a reduction of the deductible to $250 for seniors below 200 percent of the federal poverty level and creates four income categories that pay a fraction of the Affordable Care Act's health savings account stop-loss limit of $5,950.

• Regardless of the proposal, costs should be unified to slow the future rate of Medicare spending and ensure that health care does not become too expensive for beneficiaries.
• Addressing Medicare's unsustainable path needs to be a policy priority.
• The major-risk cost sharing approach balances protecting beneficiaries more effectively against catastrophic financial risks with increasing their cost consciousness for decisions involving health care costs.

Source: Thomas Miller, "Daring to Be Cautious?: Bigger Steps Needed for Medicare Cost-Sharing Reform," American Enterprise Institute, March 28, 2013.

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