Merging Medicare Parts A and B: Potential effects on beneficiaries, surgeons, and other stakeholders

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.

Figure 1. Fragmented coverage design

With more baby boomers reaching retirement age and health care costs continuing to rise, it is clear that Medicare is in need of reform. The current system is unsustainable. Total federal Medicare spending has more than doubled in the past decade, and this trend is predicted to continue without government intervention.1 For example, the Hospital Insurance (HI) Trust’s (Part A trust fund) expenditures are expected to surpass revenue in 2016, leading to insolvency by 2029.2 In 2011, national health care expenditures (NHE) comprised 17.9 percent of the gross domestic product (GDP). Medicare comprises 21 percent of NHE.3 Studies comparing quality of care of beneficiaries in high- and low-cost regions of the U.S. showed that higher costs do not translate to better care.4 Furthermore, to obtain comprehensive, affordable medical coverage, beneficiaries often enroll in up to four different plans (see Figure 1).

Medicare’s structure and administration is outdated partially because of the fact that little reform has occurred since its inception. Originally, the program was modeled on the most popular insurance plans of the time. Those plans have since reformed; Medicare has not. For example, most private insurers today have just a single deductible for both hospital and outpatient care.2 Merging Medicare Parts A and B would bring the program more in line with how other insurance plans are structured and make the delivery of services more cost-effective and efficient.

A brief history of Medicare

The concept of Medicare has been discussed and debated since the 1940s. It was formally established in 1965, and officially implemented in 1966 with the intention of reducing the financial burden on the elderly and improving access to care for those Americans over the age of 65. In 1972, disabled and end-stage renal disease patients regardless of age were added to the program.5 At that time, hospital care was quite costly and thus it was prioritized to be included in the legislation.

However, many physicians’ organizations opposed the concept of government-regulated health insurance, which made provider service inclusion a challenging notion.2 Consensus could not be reached on precisely which services would be covered under Medicare, so a two-part system was established. The original two-part system was modeled on the major private insurers of that time—Blue Cross for Medicare Part A, which covered hospital-based services, and Aetna for Part B, which covered outpatient care. Neither included prescription, dental, vision, or long-term care services.5

Present-day Medicare

According to the Centers for Medicare & Medicaid Services (CMS), in 2010, approximately 46 million people were enrolled in Part A.6 Medicare Part A covers the following:

  • Inpatient medical/surgical hospitalization (up to 90 days per benefit period plus 60 lifetime reserve days)
  • Inpatient psychiatric care (190-day lifetime limit in psychiatric hospitals); hospice care
  • Skilled nursing facility (SNF) services
  • Up to 100 home health visits after a three-day hospitalization1

Although Medicare Part A doesn’t charge a monthly premium for most beneficiaries, the deductible cost scheme can be quite complex. (See Table 1 for a summary of Part A beneficiary out-of-pocket expenditures as of 2013.)7,8

Table 1. Medicare Part A Beneficiary Out-of-Pocket Spending 2013

Part A 2013 Cost
Monthly premium If you don’t qualify for free premium, you pay $441
Deductible $1,184 for each benefit period
Hospital care Days 1–60: no additional cost beyond deductible
Days 61–90: $296 coinsurance per day of each benefit period in 2013
Days 91 and beyond: $592 coinsurance per each “lifetime reserve day” after day 90 for each benefit period (up to 60 days over your lifetime) in 2013
Skilled nursing facility care Days 1–20: $0 for each benefit period in 2013
Days 21–100: $148 coinsurance per day of each benefit period in 2013
Days 101 and beyond: all costs
Home health care $0 for home health care services
Hospice care $0 for hospice care; $5 copayment for prescription drugs
Blood All costs for the first 3 units unless the hospital can get it from a blood bank

Part A is financed through 2.9 percent of payroll taxes, of which 1.45 percent is paid by employees and 1.45 percent is from employers. These payments go into what is known as the Medicare Part A HI trust fund. Current workers are paying for future beneficiaries, which makes Part A an entitlement service. In any given year when the revenue of the HI trust exceeds the benefits it pays out, the trust fund exchanges the excess funds for securities. In years when the benefits are greater than revenues, the trust can redeem these securities with interest to compensate for the shortfall.9

Part B covers a much broader range of services, including physician visits and consultations, surgical procedures, diagnostic tests, outpatient care, mental health services, durable medical equipment, preventive care, clinical research, ambulance transport, second opinions before an operation, and home health visits without a previous hospital stay, as well those visits beyond the 100-visit threshold following a three-day hospital stay. The beneficiary out-of-pocket expenditures of Part B are demonstrated in Table 2.8

Table 2. Medicare Part B Beneficiary Out-of-Pocket Spending 2013

Part B 2013 Cost
Monthly premium Stratified costs based on yearly income; beneficiaries pay $104.90, $146.90, $209.80, $272.70, or $335.70
Deductible $147 per year
Physician and other medical services 20% of Medicare-approved amount
Outpatient hospital services 20% of Medicare-approved amount
Outpatient mental health services 20% of Medicare-approved amount
20-40% of Medicare-approved amount for treatment in hospital outpatient clinic
35% of Medicare-approved amount for treatment in doctor’s outpatient department
Clinical laboratory services $0 if Medicare-approved
Home health care $0
Durable medical equipment 20% of Medicare-approved amount
Blood All costs for the first 3 units unless the hospital can get it from a blood bank. If from blood bank, beneficiary pays copayment for blood processing and handling services and Part B deductible.

According to CMS, in 2010, 43 million Americans were enrolled in Medicare Part B.6 Part B is not an entitlement program, and enrollment is primarily voluntary. It is partially funded by premiums paid by the beneficiary. Currently premiums cover approximately 25 percent of Part B costs, whereas the rest is funded by federal general revenues, making this component of Medicare akin to federally subsidized insurance.5

Figure 2. Types of Supplemental Coverage held by Medicare Beneficiaries, 2009

To compensate for the high cost of health care, up to 90 percent of Medicare beneficiaries enroll in a supplemental coverage plan (see Figure 2, for an example from 2009).10 These plans cover costs such as copayments, deductibles, and coinsurances, which are not covered by Part A and B. Medigap is a popular option, with 10 million beneficiaries enrolled among the various plans.11 There are as many as 10 different plans offered in every state. The cost and benefits offered vary both by state and type of plan.

Plan to merge Parts A and B

Proposals to merge Medicare Part A and Part B have emerged at a time when the U.S. is still struggling to overcome the economic downturn of 2008. As a result, both federal and state governments are seeking to trim their finances. Meanwhile, total federal spending on Medicare has doubled in the past 10 years, with no respite projected in the foreseeable future.1 Furthermore, Medicare costs accounted for 16 percent of the annual federal budget in 2012, and 21 percent of total health care spending.12 The current proposal calls for Medicare reform such as a unified Part A and Part B deductible are partially a result of this economic maelstrom.

As of June 2013, 80 percent of Medicare beneficiaries indicated that the current system is working well.13 However, as more and more baby boomers become eligible for Medicare coverage, it will become increasingly difficult for the current system to remain fiscally viable without some measure of reform.5 A unified deductible is an attractive cost-cutting compromise that would not require a complete overhaul of the modern Medicare system. Various health policy groups and congressional leaders have offered plans to merge the two parts. Table 3 summarizes a selection of the most popular proposals.12

Table 3. Outline of Medicare Restructuring Proposals

Proposal Deductible Coinsurance Cost-sharing limit Medigap restrictions
National Commission on Fiscal Responsibility and Reform (2010) $550 20% $7,500 Eliminates coverage for first $500 and caps coverage in cost sharing at 50% of the next $5,000
Rivlin-Domenici Debt Reduction Task Force (2010) $560 20% $5,250 Unspecified
Rivlin-Ryan Proposal (2010) $600 20% $6,000 Eliminates coverage for first $500 and caps coverage in cost sharing at 50% above $500
Lieberman-Coburn Proposal (2011) $550 Unspecified $7,500– $22,500, depending on income Eliminates coverage for first $550 and caps coverage in cost sharing at 50% above $500

Possible effects on patients

A merger of Parts A and B would affect all stakeholders in the Medicare system, perhaps most notably Medicare patients. In 2011, the Kaiser Foundation analyzed the Congressional Budget Office’s (CBO) proposal of a $550 combined deductible, a 20 percent flat coinsurance rate on virtually all services, and a $5,500 cap to determine what the plan would mean for beneficiaries and the federal government.12

The Kaiser report showed that 71 percent of beneficiaries would see a rise in costs, averaging $180 per year; 5 percent would see a decrease in costs, averaging $1,570; and 24 percent would see no change.12 Two main factors contributed to whether beneficiaries would experience an increase or a decrease in costs. The first factor is individual health status and anticipated use of services. Beneficiaries who would have higher costs with a merged deductible are patients who use health care services less frequently, require no hospitalization, and who are relatively healthy.

In contrast, beneficiaries with lower out-of-pocket costs under a reformed system are those who had or have hospitalizations, use post-acute care or high-cost outpatient services, and are generally in poor health. The second factor is whether they have supplemental insurance—including Medigap plans, employer-based retiree coverage, and Medicaid—and the type and generosity of this coverage. For the 39 percent of beneficiaries with employment-based coverage, 87 percent would experience a rise in out-of-pocket costs averaging $50 for a given year, $40 of which is an increased premium. These beneficiaries tend to be healthier. Among those beneficiaries who have Medigap, 93 percent would see rises averaging $140 for a given year. For Medicaid beneficiaries, 83 percent would see no change because Medicaid pays the premium and deductible for dual eligibles unless they are in a state that does not pay coinsurance in full. Lastly, of the 4 million beneficiaries lacking supplementary insurance, 56 percent would have a rise in out-of-pocket costs due to the combined deductible, 4 percent would see a decrease in costs, and 40 percent no change.

A basic subgroup analysis based on income and race/ethnicity showed lower-income and minority patients would be less affected than high-income and Caucasian beneficiaries. This disparity results from the Medicare and Medicaid Savings Program that helps to cover all cost-sharing.

In 2009, a Medicare Payment Advisory Commission (MedPAC) report indicated that among beneficiaries who subscribed to Medigap supplemental coverage, Medicare spending was 33 percent higher, and among beneficiaries with employer-sponsored supplemental insurance, Medicare spending was 17 percent greater. For Part B services, these figures are even higher (50 percent rise for Medigap and 30 percent for employer-sponsored plans).7 These findings showed a significant inverse relationship between enrollee cost-sharing demand and Medicare spending. Lower out-of-pocket costs for the patient translated to substantial Medicare spending.

In light of these findings, the Kaiser Foundation also analyzed the new restructure proposal if the following Medigap restrictions were applied: plans do not cover the initial combined $550 deductible and more than 50 percent of the $5,500 out-of-pocket limit. Overall, 24 percent would see a reduction in out-of-pocket spending, mainly due to decreased premiums because policies cover a smaller share of claims and less use; 26 percent would have no change; and 50 percent would see an increase in out-of-pocket costs. These findings reflect similar trends to those in the analysis of a combined deductible without Medigap restrictions, with key factors including health care service usage and the health profile of the beneficiary. Regardless of Medigap restrictions, those beneficiaries who are hospitalized more frequently and who use more SNF services have more savings.

The majority of the Kaiser analysis examined the benefit design with a $5,500 out-of-pocket limit, but other caps have been suggested. Overall, higher caps favor the federal government with a savings increase, while lower caps favor the patient because they will see the highest reduction in out-of-pocket costs based on this design.

Importantly, the Kaiser report described projections for a given year, not over a span of time. Even if only a small subset of beneficiaries required Part A subsidized hospitalization in any given year, the overall number of patients using Part A from eligibility to death is substantial. In fact, a study of Part A users from 2006 to 2009 found 46 percent of beneficiaries experienced at least one hospital stay in that time span.7 Therefore, even if most beneficiaries may pay more in any given year under the merger described here, the higher out-of-pocket cost would be balanced with the greater amount of money they will save if they are hospitalized or require expensive care in the future.

However, a combined deductible may have other unintended consequences. One possibility is that the increased cost would deter some beneficiaries from seeking necessary care, which ultimately could lead to worse health outcomes that may require more complicated care and hospitalization in the future. This scenario would then lead to increased costs.14 Few studies on the effects of cost sharing on the elderly have been done, and they have yielded mixed results. Several showed a correlation with decline in health status, while others showed no effects.8 Another issue is the lack of a clear framework for how to handle low-income beneficiaries who are not in a position to pay a higher deductible.2,5

Nonetheless, combining Medicare Parts A and B would likely yield myriad improvements in efficiency. A unified deductible would create a more modern, streamlined, and accessible system for patients.2 The system would be unified rather than compartmentalized and fragmented.5 Such a system would share one large pool of money without any arbitrary distinctions between which services are classified under Part A and Part B.5 A unified system would also lead to a smoother transition from employer-based insurance to Medicare among new retirees.15

Effects on the federal government

In Kaiser’s analysis without Medigap restrictions, total Medicare spending decreased by $4.2 billion in 2013.12 Furthermore, according to the CBO, Medicare spending would decrease by $32.2 billion between 2013 and 2021.16 Additionally, total health care spending would decrease by $0.7 billion in 2013, according to Kaiser’s analysis. If Medigap restrictions are implemented, the savings would be even greater, with Medicare totaling $8.8 billion savings in a single year and, according to the CBO, $92.5 billion from 2013 to 2021. Meanwhile, total health care expenditures would decrease by $9.5 billion.

It is also important to note that a unified Medicare system would promote flexibility. Having two disparate financing systems restricts potential options for restructuring.5 Many of the recognized efficiencies in the private insurance sector stem from a unified, single coverage system. One centralized record allows for utilization review and management to enhance quality of care. Centralization is also crucial in detecting fraud and system abuse. For example, a 1999 Medicare Part A and B audit of SNF claims showed that roughly $47 million in improper payments were made, which could have been avoided under a unified reimbursement system.2

However, a merger of Medicare Parts A and B could have a somewhat negative effect on the HI trust fund. The trust functions as a warning signal for future financing concerns. When reserves in the HI trust fund reach a critically low level, it alerts Congress and policymakers to potential solvency issues.5 Moreover, federal general revenue is not used to subsidize Part A, but it is the main funding source for Part B. If the two were to merge, federal general revenue support might increase or beneficiary premiums could substantially rise, with the trust fund losing its function as an “alarm clock.”5

The proposal to merge Medicare Parts A and B has had bipartisan support since 1999. In fact, a recent white paper presented on August 29, 2013, by the chairs of the House subcommittees that oversee Medicare Parts A and B, respectively—the health subcommittees of the Ways and Means Committee and the Energy and Commerce Committee—expressed support for merging A and B. The legislators’ stated goals are to make Medicare easier to navigate, protect seniors, and reduce costs.16

Effects on hospitals and surgeons

None of the existing data and policy analyses evaluate how a restructuring would affect hospitals and surgeons. If final legislation were to resemble a plan similar to the CBO model, then a speculated outcome may be more price-sensitive, quality-oriented patients. This outcome would align well with the current paradigm shift in health care delivery overall, which heavily focuses on quality and cost-effectiveness. However, research has shown that when beneficiaries had more cost-sharing responsibility, they used more acute care services and fewer outpatient services. Specifically, they had less scheduled inpatient admissions and underwent fewer procedures that they considered too expensive and that were for non–life-threatening conditions.7,17 Thus, there could potentially be a decline in elective surgical services requiring inpatient admission and a rise in acute surgical services. The magnitude of this possible shift is currently unknown.

In addition, with the already existing decline in employer-sponsored supplemental coverage and a merger like the one proposed here, rates of Medigap participation will likely decline. Thus, Medicare billing will be simplified because there will only be one Medicare program to bill, rather than Part B and supplementary insurance.


Combining Parts A and B deductibles likely would be a worthwhile step toward modernizing Medicare. It would yield a comprehensive health care package with an improved cost-sharing structure, and potentially saves the federal government billions of dollars. Administrative improvements would lead to increased flexibility and room for a new financing structure.

However, with the benefits of change come challenges. One of the biggest challenges would be managing potential increases in financial demands on beneficiaries, as it appears a significant portion of patients would incur higher service fees and deductibles. It also may be difficult to merge an entitled service with a voluntary one.

Even accounting for these difficulties, there is convincing evidence of the potential benefit of the merge for very sick patients and the federal government. Even though costs may be higher for many beneficiaries, they will not be prohibitive. The effects for hospitals and surgeons, on the other hand, are not well-defined beyond a potential shift in case mix of more acute rather than elective admissions.


  1. Randofsky L, Hook J. Common ground on Medicare emerges. Wall St J. April 4, 2013. Available at: Accessed December 16, 2013.
  2. U.S. Subcommittee on Health of Committee on Energy and Commerce of the House of Representatives. Medicare Reform: Modernizing Medicare and Merging Parts A and B. Hearing 107-40. 107th Congress. First Session. June 14, 2001.Available at: Accessed December 16, 2013.
  3. Centers for Medicare & Medicaid Services. National health expenditure fact sheet. Available at: Accessed December 16, 2013.
  4. Hackbarth G, Reischauer R, Mutti A. Collective accountability for medical care—Toward bundled Medicare payments. N Engl J Med. 2008;359(1):3.
  5. Caplan CF, Gross DJ. The effects of merging Part A and Part B of Medicare. AARP Policy Institute. Available at: Accessed December 16, 2013.
  6. Centers for Medicare & Medicaid Services. Medicare enrollment reports. 2013. Available at: Accessed December 16, 2013.
  7. Medicare Payment Advisory Commission. Medicare and the Health Care Delivery System. June 2012. Available at: Assessed December 16, 2013.
  8. Centers for Medicare & Medicaid Services. Medicare 2013 and 2014 costs at a glance. Available at: Accessed January 16, 2014.
  9. Davis PA. Medicare: Insolvency projections. Congressional Research Service. 2013. Available at: Accessed December 16, 2013.
  10. The Henry J. Kaiser Family Foundation. Sources of supplemental coverage among Medicare beneficiaries, 2009. Available at: Accessed August 23, 2013.
  11. American Medical Association. Medigap enrollment on the upswing. Am Med News. July 8, 2013. Available at: Accessed December 16, 2013.
  12. Cubanski J, Newman T, Levinson Z, Brenner M, Mays J. The Henry J. Kaiser Family Foundation. Restructuring Medicare’s benefit design: Implications for beneficiaries and spending. November 2011. Available at: Accessed August 15, 2013.
  13. Medical Rights Center. Medicare rights center outlines promising Medicare cost savers. [press release]. May 15, 2013. Available at: Accessed December 16, 2013.
  14. Cassidy A. Restructuring Medicare. Health Aff. June 20, 2013. Available at: December 16, 2013.
  15. Zuckerman S, Shang B, Waidmann T. Reforming beneficiary cost sharing to improve Medicare performance. Inquiry. 2010;47(3):215-225.
  16. Pitts J, Upton F, Camp D, Brady K. Modernizing Medicare for the 21st century: Why Medicare is outdated and beneficiaries deserve better. 2013. Available at: . Accessed September 5, 2013.
  17. Hogan C. Exploring the effects of secondary insurance on Medicare spending for the elderly. Direct Research LLC. June 2009. Available at: Accessed December 16, 2013.

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