Editor’s note: The following two articles on new approaches to Medicare are the first in a series—Health care entitlement reform: A look at the future—of four articles on entitlement program reform that will be published in the Bulletin. The third article, on Medicaid expansion, will be published in the March 2014 issue, and the fourth will run in the April 2014 Bulletin.
Members of Congress have long acknowledged that the present course of Medicare spending is financially unsustainable. The number of eligible beneficiaries is climbing in record numbers as more and more baby boomers enter the Medicare pool. As American life expectancy increases, beneficiaries are drawing out of the system far more than they contributed to it. The fact that this demographic shift is occurring in the midst of a prolonged recession and when efforts to expand coverage to the uninsured are under way due to the passage of the Affordable Care Act (ACA), means that the conditions are ideal for a “perfect storm” of innovation in health care and an opportunity exists to create better value for the billions of dollars that are spent annually on health care.
Development of a value-based health care system is the challenge of the current decade. However, Congress continues to explore cost-shifting legislation rather than system-wide improvements that would translate into cost savings. For example, the House Ways and Means Committee released draft legislation last year that would increase cost sharing for Medicare Parts B and D and for home health care. This article provides an overview of these components of Medicare, a breakdown of the various provisions in the bill, a look at the literature on cost-sharing, and a discussion of the politics behind the proposed legislation.
Costs and projections
Medicare Parts B and D. According to estimates from the Congressional Budget Office (CBO), 20 percent of the U.S. population will be more than 65 years old in 2050, and 4 percent of these senior citizens will be older than age 85, accounting for the fastest-growing demographic in the next 36 years.1 Needless to say, expenditures on Social Security and Medicare are expected to skyrocket.
Medicare currently covers 52 million Americans.2 Medicare spending has increased steadily from 1965 to the present and accounts for the second largest component of federal mandatory spending.3 Medicare was 2.2 percent of gross domestic product (GDP) in 2000 and is projected to reach 3.5 percent of GDP in 2023, when it is expected to cover 69 million Americans.4 Medicare Parts B and D account for more than half the costs and, subsequently, seem like logical places to look for federal savings.
Medicare Part B covers physician care, laboratory tests, preventive services, clinical research, mental health care, and durable medical equipment. Medicare Part D, established under the Medicare Modernization Act (MMA) of 2003, was implemented in 2006 and provides prescription drug benefits. Figure 1 shows the expected increase in the number of Part B and Part D beneficiaries over the next decade. Figure 2 shows how total expenditures for Parts B and D will increase, as well as the net outlays on these programs by the federal government. The difference in the costs and the net outlays by the government in the graphs for Parts B and D respectively represents the cost of the program that is shifted to the beneficiary in the form of premiums and copayments. The net federal outlays in 2023 for Parts B and D are expected to be $313 and $143 billion, respectively.2
As originally conceived in 1965, Medicare Part B was to have a standard monthly premium for all beneficiaries set at 25 percent of the annual cost per enrollee, with the federal government providing the rest of the funding. The MMA introduced “means testing” and an income-based Part B premium that took effect in 2007. As a result, higher-income beneficiaries saw their premiums rise from 35 percent to 80 percent of the cost of services (see Table 1).
Table 1. Medicare Part B and Part D cost sharing of the monthly premium based on MAGI, 2013
|Cost sharing of monthly premium|
|Part B||Part D*|
|$85,000 or less||Standard premium ($104.90)||25.5% (plan premium)|
|$85,000–$107,000||35% ($146.90)||35% ($11.60 + plan premium)|
|$107,000–$160,000||50% ($209.80)||50% ($29.90 + plan premium)|
|$160,000–$214,000||65% ($272.70)||65% ($48.30 + plan premium)|
|$214,000 or greater||80% ($335.70)||80% ($66.60 + plan premium)|
Income-related Part D payments are calculated based on the national average monthly Part D premium in a given year. Source: Centers for Medicare & Medicaid Services, 2013 Medicare Costs.
The modified adjusted gross income (MAGI) thresholds have been indexed to inflation since 2007. For services covered by Part B, including physicians’ services, beneficiaries are responsible for 20 percent of the cost after payment of the annual deductible ($147 in 2013). Part D premiums were fixed at 25.5 percent of the national average cost of the standard drug benefit since 2006. The standard benefit in 2013 includes a $325 deductible and 7 percent coverage up to $2,970. For costs greater than that threshold, beneficiaries pay a certain percentage of the costs based on whether the drugs are generic or brand-name, until a catastrophic limit of $4,750 out-of-pocket spending (the “donut hole”) is reached. Beyond that, beneficiaries receive 95 percent coverage.5 The ACA phases out the donut hole in 2020, at which time beneficiaries will pay 25 percent of drug costs until the catastrophic limit is reached.
In 2011, the ACA established income-based Part D premiums. The national average monthly Part D premium in 2013 was $31.17, although this varied across plans and regions.6 Table 1 shows how the premiums ranged according to income, from an additional $11.60/month to $66.60/month. The ACA froze Part B and Part D income brackets at 2010 levels until 2019. Without inflation adjustment, the MAGI thresholds will increase the number of beneficiaries paying income-adjusted premiums. In 2012, this income-adjusted premium applied to 5 percent of Part B beneficiaries and 3 percent of Part D beneficiaries.7
Home Health Care. Medicare beneficiaries who are home-bound and need intermittent services (nursing, home health aide assistance, physical/occupational/speech-language therapy, or pathology therapy) and medical supplies are eligible for home health care services coverage under Medicare. These services are provided most commonly to patients with diabetes, hypertension, heart failure, and skin ulcers.8 The agencies are paid prospectively for each episode of care lasting 60 days. The home health care benefit as created in 1965 originally included a 20 percent copayment for home health services. Congress repealed this copay in 1972 because of concerns related to financial hardship for the elderly; therefore, no cost-sharing measures apply to home health services at present. The number of users and episodes requiring home health care services has risen substantially in the last decade. Figure 3, depicts these trends, which translated into $18.6 billion of federal spending in 2012.9 This movement has been lucrative for home health care agencies, where for-profit agencies’ average profit margin was 15.7 percent in 2011.9 Medicare costs for these services may reach $32 billion by 2023 (see Figure 4).2
Ways and Means Committee proposals
On July 19, 2013, the House Ways and Means Health Committee, chaired by Dave Camp (R-MI), released draft legislation to reform cost sharing in Medicare.10 The bill has an estimated savings of $54 to $60 billion over 10 years.11,12 This bill would increase the Part B deductible, increase the Part B and Part D income-adjusted premiums, and add a copayment for home health care.
For new enrollees in 2017, Part B deductibles will increase by $25 in 2017, 2019, and 2021. MAGI-adjusted premiums for Part B and Part D will increase starting in 2017 (see Table 2). Consequently, cost sharing across all income brackets above $85,000 will rise and will freeze the brackets from inflation adjustments until 25 percent of beneficiaries are subject to the premiums. A $100 copayment will be required per episode of home health services beginning in 2017, unless hospitalization precedes the episode. Beneficiaries enrolled before 2017 will be exempt from this requirement.
Table 2: Proposed Medicare Parts B and D Income Brackets starting in 2017
|MAGI (Individual tax return)||Cost sharing of monthly premium|
|Less than $85,000||Standard premium*|
|$196,000 or greater||90.0|
*25% for Part B; 25.5% for Part D. Source: Medicare Beneficiary Proposals (May 21 Hearing), released July 19, 2013.
Implications of the proposed bill. Although cost sharing has traditionally been part of Medicare financing and means testing has been in place since 2007, the average Medicare beneficiary is already subject to tremendous health care costs. In 2012, 50 percent of beneficiaries were estimated to have an income of $22,500 or less. The top 5 percent had an income greater than $88,900.6 Approximately 44 percent of beneficiaries have three or more chronic conditions and 15 percent have two or more functional limitations.13 Recipients have not only seen premiums and deductibles increase, but also out-of-pocket costs, including copayments, coinsurance, and uncovered services, such as dental, hearing, vision, and long-term care. Medicare households spend more than 15 percent of their income on health care compared with 5 percent for non-Medicare households.14 In 2010, the average beneficiary paid 27 percent of their Social Security benefits to cover premiums and cost sharing.14 The proposed bill will increase receipts for Medicare and may lower costs through decreased use of services. However, ample evidence in the literature suggests that such cost savings in one area, through increased cost sharing, will result in greater costs elsewhere in the system.
Approximately $50 to $56 billion of the savings in this bill come from freezing the MAGI brackets for Parts B and D premiums indefinitely.11,12 Freezing these brackets will result in a growing share of the elderly who would not be considered high-income by today’s standards and who would encounter higher premiums over the next two decades. Kaiser projections reveal that 26 percent of Part B beneficiaries will pay income-adjusted premiums by 2035, if the brackets are frozen as proposed in this bill (see Figure 5). However, this number would be 9 percent if inflation adjustments were to continue. The rest would, therefore, be subject to the higher premiums without being high-income as defined by current standards. The income threshold for the lowest bracket in 2035 will be the equivalent of about $47,000 in today’s inflation-adjusted dollars. This bill also will impose higher levels of cost sharing on those individuals who pay income-adjusted premiums. For instance, those beneficiaries at the lowest income bracket level would pay a 40 percent premium in 2017, compared with 35 percent at present.
Faced with increasing costs, beneficiaries may choose to drop out of Part B or underuse services to save on copayments or coinsurance costs. The home health care copayment may result in beneficiaries forgoing home health care. Numerous studies show the introduction of nominal cost sharing results in decreased use of necessary health care services. A 2010 study of more than 70,000 Medicare patients showed that adding a $10 copayment resulted in fewer office visits but led to greater Medicare costs for increased use of inpatient services.15 Another 2010 study of nearly 900,000 Medicare beneficiaries showed that raising copayments for outpatient care resulted in fewer outpatient visits but more annual hospital admissions and inpatient days per enrollee, with costs exceeding savings.16 An extensive body of literature also shows decreased compliance with prescription drug therapy with increased cost sharing.17,18
The House Ways and Means Committee proposal is a Republican bill, and although it draws upon recommendations from several bipartisan organizations that support cost-sharing increases, the bill does not address any of the financial protections for beneficiaries suggested by those groups and is unlikely to garner sufficient Democratic support to pass. For example, the Medicare Payment Advisory Commission (MedPAC)—an independent federal body established in 1997 to advise Congress on issues related to Medicare—recommends a $150 home health care copayment per episode, as well as a $500 combined Part A and Part B deductible and an out-of-pocket maximum of $5,000.19 The Simpson-Bowles Commission, which President Obama created in 2010 to identify policies to improve fiscal sustainability, proposes an increase of income-related premiums and lower income thresholds, but also proposes a combined deductible and income-related out-of-pocket spending limits.20 The Bipartisan Policy Commission, a not-for-profit organization founded in 2007 by former Senate majority leaders, proposes a reduction in subsidies for higher income beneficiaries, but also proposes an annual out-of-pocket limit of $5,315 and federalizing cost-sharing assistance for low-income beneficiaries.21 The CBO proposes a 10 percent copayment for home health care episodes, as well as an out-of-pocket maximum of $5,500.22
Notably missing in the proposed bill at press time were caps on out-of-pocket spending for beneficiaries for which these bipartisan organizations have advocated. A number of advocacy groups have expressed opposition to the higher Medicare Part B and Part D premiums and the home health care copayment proposed in this bill, citing the increased financial burden to the elderly over the next few decades. These organizations include the National Association for Home Care and Hospice, the American Federation of Labor and Congress of Industrial Organizations, Leadership Council of Aging Organizations, and the Medicare Rights Center.23-26 In addition, prominent Democrats, including Ranking Subcommittee Member Jim McDermott (D-WA), have spoken out in opposition to the bill, citing “cherry-picking” from the various bipartisan proposals.
Radical changes will have to occur to the Medicare program if it is to remain financially viable over the next 40 years. Although cost sharing has always been a part of Medicare, increases in overall health care costs have led to increased spending not only by the federal government but also by individual beneficiaries. The proposed bill would increase cost sharing for Medicare beneficiaries for Parts B and D and home health care. A large segment of the beneficiaries live near the poverty level and cannot afford higher fees eroding their fixed Social Security income. Whereas a number of bipartisan organizations support elements of the Ways and Means plan, opponents draw upon the vast literature on cost sharing, which demonstrates that cost sharing decreases use of both necessary and unnecessary health care services, resulting in worse patient outcomes and greater use of more costly services, especially among low-income patients.
Medicare outlays do have to be offset by increased receipts and decreased costs to prevent the program’s financial collapse. However, merely shifting the costs to elderly beneficiaries will not address overall rising costs. Savings must be system-wide, and all stakeholders must contribute to the effort. Good stewardship of these funds means discouraging the delivery of futile care, which consumes a large part of the outlays in the last six months of life. Pharmaceutical companies have been protected from allowing Medicare Part D to negotiate prices. This loophole will need to be addressed to decrease overall Part D costs. There should be greater transparency and uniformity in hospital charges to encourage lower costs. Surgeons must support efforts to ensure our elderly, low-income patients have access to high-quality surgical care without additional financial burdens.
- Congressional Budget Office. Medicare. Available at: www.cbo.gov/topics/health-care/medicare. Accessed August 5, 2013.
- Congressional Budget Office. Medicare—May 2013 baseline. Available at: www.cbo.gov/publication/44205. Accessed August 5, 2013.
- Congressional Budget Office. A closer look at mandatory spending. Available at: www.cbo.gov/sites/default/files/cbofiles/attachments/BS_Mandatory_print.pdf. Accessed August 5, 2013.
- Congressional Budget Office. Updated budget projections: Fiscal years 2013 to 2023. Available at: www.cbo.gov/sites/default/files/cbofiles/attachments/44172-Baseline2.pdf. Accessed August 5, 2013.
- Centers for Medicare & Medicaid Services. Announcement of calendar year (CY) 2013 Medicare Advantage capitation rates and Medicare Advantage and Part D payment policies and final call letter. April 2, 2012. Available at: www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/downloads/Announcement2013.pdf. Accessed August 12, 2013.
- Centers for Medicare & Medicaid Services: 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. Available at: http://downloads.cms.gov/files/TR2013.pdf. Accessed December 14, 2013.
- The Henry J. Kaiser Family Foundation. Medicare Issue Brief. Income relating Medicare Part B and Part D premiums: How many Medicare beneficiaries will be affected? Available at: http://kaiserfamilyfoundation.files.wordpress.com/2013/01/8126.pdf. Accessed August 5, 2013.
- Centers for Medicare & Medicaid Services. Home Health Study Report. Literature review. January 11, 2011. Available at: www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/HomeHealthPPS/Downloads/HHPPS_LiteratureReview.pdf. Accessed August 8, 2013.
- Medicare Payment Advisory Commission. A data book: Health care spending and the Medicare program. June 2013. Available at: www.medpac.gov/documents/Jun13DataBookEntireReport.pdf. Accessed August 8, 2013.
- House Ways and Means Committee. Modernizing cost sharing legislative language. July 2013. Available at: http://waysandmeans.house.gov/uploadedfiles/modernizing_cost-sharing_legislative_language.pdf. Accessed August 12, 2013.
- Executive Office of the President of the United States. Fiscal year 2014 budget of the U.S. government. Available at: www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/budget.pdf. Accessed August 8, 2013.
- Congressional Budget Office. Estimated effects on direct spending and revenues for health care programs of proposals in the President’s 2014 budget. May 2013. Available at: www.cbo.gov/sites/default/files/cbofiles/attachments/44247_APB_HealthCarePrograms.pdf. Accessed August 8, 2013.
- The Henry J. Kaiser Family Foundation. Medicare: A primer 2010. Available at: http://kaiserfamilyfoundation.files.wordpress.com/2013/01/7615-03.pdf. Accessed August 1, 2013.
- The Henry J. Kaiser Family Foundation. A primer on Medicare financing. Available at: http://kff.org/health-reform/issue-brief/a-primer-on-medicare-financing/. August 1, 2013.
- Chandra A, Gruber J, McKnight R. Patient cost-sharing and hospitalization offsets in the elderly. Am Econ Rev. 2010;100(1):193-213.
- Trivedi N, Moloo H, Mor V. Increased ambulatory care copayments and hospitalizations among the elderly. N Engl J Med. 2010;362(4):320-328.
- Ku L, Deschamps E, Hilman J. Center on Budget and Policy Priorities. The effects of nominal copayments on the use of medical services and prescription drugs in Utah’s Medicaid program. November 2, 2004. Available at: www.cbpp.org/11-2-04health.htm#_ftn1. Accessed August 18, 2013.
- Goldman DP, Joyce GF, Zheng Y. Prescription drug cost sharing: Associations with medication and medical utilization and spending and health. JAMA. 2007;298(1):61-69.
- Medicare Payment Advisory Commission. Report to the Congress: Medicare and the health care delivery payment system, June 2012. Available at: www.medpac.gov/documents/Jun12_EntireReport.pdf. Accessed August 12, 2013.
- Moment of Truth Project. Bowles and Simpson letter on Medicare cost sharing to House Ways and Means Committee Chairman Camp. Available at: http://momentoftruthproject.org/publications/bowles-and-simpson-letter-medicare-cost-sharing-house-ways-and-means-committee-chairman#sthash.owzlNwWw.dpuf. Accessed August 28, 2013.
- Daschle T, Domenici PV, Frist B, Rivlin AM. Bipartisan Policy Center. A bipartisan Rx for patient-centered care and system-wide cost containment. Available at: http://bipartisanpolicy.org/library/report/health-care-cost-containment. Accessed August 12, 2013.
- Congressional Budget Office. Reducing the deficit: Spending and revenue options, March 2011. Available at: www.cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/doc12085/03-10-reducingthedeficit.pdf. Accessed August 12, 2013.
- National Association for Home Care and Hospice (NAHCH). Statement submitted by Andrea Devoti, chair, NAHCH board of directors to the House Ways and Means Subcommittee on Health. June 14, 2013. Available at: www.nahc.org/assets/1/7/nr130620Testimony.docx. Accessed Aug 12, 2013
- American Federation of Labor–Congress of Industrial Organizations. Testimony before the Subcommittee on Health of the House Ways and Means Committee examining traditional Medicare’s benefit design. Available at: www.aflcio.org/Legislation-and-Politics/Testimonies/Testimony-Before-the-Subcommittee-on-Health-of-the-House-Ways-and-Means-Committee-Examining-Traditional-Medicare-s-Benefit-Design. Accessed August 28, 2013.
- Leadership Council of Aging Organizations. Issue Brief. Medicare home health copayments: Harmful for beneficiaries. December 2012. Available at: www.lcao.org/files/2013/02/LCAO-Medicare-Home-Health-Copayments-Issue-Brief-Dec2012.pdf. Accessed August 12, 2013.
- Medicare Rights Center. Testimony of Joe Baker, president of the Medicare Rights Center. May 2013. Available at: http://waysandmeans.house.gov/uploadedfiles/baker_testimony_final_hl_052113.pdf. Accessed August 12, 2013.