Beneficiaries enrolled in traditional fee-for-service Medicare are exposed to significant out-of-pocket expenses. Beneficiaries are responsible for monthly Part B and Part D premiums, deductibles, and coinsurance (Figure 7-2), as well as for the costs of services and products not covered by Medicare. Even with supplemental coverage to help pay for Medicare’s cost-sharing, beneficiaries spend a significant amount on health care expenses. In 2012—the most recent year for which personal spending figures are available—half of beneficiaries spent more than 17 percent of their income on health care expenses.
Some researchers and policymakers have proposed increasing beneficiary cost-sharing to save Medicare money and to induce beneficiaries to use fewer services. These proposals typically assume that Medicare beneficiaries pay very little toward the cost of their care. In fact, the opposite holds true. In 2012 estimated average out-of-pocket expenses per person for all beneficiaries totaled $5,586, ranging from $3,626 for those younger than 65 to $9,711 for those 85 and older. These costs include Medicare cost-sharing payments and premiums, private insurance premiums, and payments for goods and services not covered by the program.
Traditional Medicare does not limit out-of-pocket spending by beneficiaries (in other words, there is no catastrophic cap). Without a catastrophic cap on out-of-pocket spending, Medicare beneficiaries with serious medical problems may face steep expenses.
Most beneficiaries with traditional Medicare (i.e., who are not in MA plans that have out-of-pocket cost limits) have supplemental insurance to pay costs that Medicare does not cover. In addition, the Medicaid program covers out-of-pocket costs for some low-income Medicare beneficiaries. In 2012, 88 percent of beneficiaries in traditional Medicare had supplemental coverage or Medicaid. Those with supplemental insurance coverage typically purchased private insurance, such as an individual Medigap plan, but some had coverage through a former employer. Beneficiaries with such coverage must pay monthly premiums for that coverage, in addition to any Medicare premiums.
Having supplemental coverage does not, however, guarantee low out-of-pocket expenses. In 2012, median out-of-pocket spending for Medicare beneficiaries with supplemental insurance was $3,985. Those without supplemental coverage who are not eligible for Medicaid are fully responsible for all their Medicare cost-sharing responsibilities, unless they are able to obtain some type of assistance through a charitable organization or other public program.
Eligibility for full Medicaid benefits protects some of the poorest beneficiaries from high health care costs. Yet experts estimate that only about half of beneficiaries age 65 and older with incomes below the poverty level actually receive Medicaid assistance. Those who do not receive it exceed state income and asset requirements or do not meet certain federal requirements; others may not realize they are eligible for benefits or decline to participate.
People eligible for partial Medicaid benefits through the Qualified Medicare Beneficiary program or the Specified Low-Income Medicare Beneficiary program may also face substantial expenses. (More information about these programs can be found in the Health Care Coverage: Medicaid—Medicaid Assistance for Low-Income Beneficiaries section of this chapter.)
Beneficiaries who enroll in Part B pay monthly premiums. The Part B premium is $121.80 in 2016, with higher-income beneficiaries paying more. Because Part B premiums and coinsurance payments are determined by Part B spending, annual increases in spending also increase premiums and coinsurance. Some beneficiaries have faced steep increases in Part B premiums in recent years. The Part B deductible also increases annually by the same rate as growth in Part B costs; it stands at $166 in 2016.
Medicare Part D’s prescription drug coverage reduces out-of-pocket spending for many beneficiaries, particularly those who receive the LIS. The standard Medicare Part D benefit has an annual deductible; an initial coverage period during which beneficiaries pay 25 percent of their drug costs; and catastrophic coverage that limits beneficiaries’ spending to roughly 5 percent of their drug costs. The “doughnut hole”—the coverage gap in which Part D enrollees who do not receive the LIS are responsible for all of their prescription drug costs—is between the initial coverage period and catastrophic coverage.
The Part D benefit is currently undergoing several changes because of the ACA. For example, starting in 2011, the doughnut hole began to close due to a series of escalating discounts from Medicare and brand-name drug companies.
By 2020, non-LIS Part D beneficiaries will be responsible for just 25 percent of their prescription drug costs from the time they meet their deductible to the time they enter catastrophic coverage, effectively eliminating the coverage gap. In addition, the growth rate for the catastrophic spending threshold under Part D, which is the amount a beneficiary must spend out-of-pocket before a much lower coinsurance applies, will be artificially slowed from 2014 through 2019. In 2020, the growth rate will again rise along with enrollees’ per capita drug spending.
The ACA also requires higher-income beneficiaries to pay higher Part D premiums starting in 2011, with the same income thresholds used for Part B premiums. The law imposed a freeze on the income thresholds from 2011 through 2019, rather than allowing them to rise with inflation. The result is that the number and share of Medicare beneficiaries who will have to pay the higher income-related Part B and Part D premiums will increase over time.
While CMS data suggest that Part D premiums are growing slowly, the average enrollment-weighted monthly premium for stand-alone PDPs has increased by more than 60 percent since the benefit was first offered in 2006. It is now more than $43 a month, which beneficiaries pay in addition to their other premiums and cost-sharing.
Cost-sharing under Part D is also growing: Median copayments for many prescription drugs have increased by 50 percent or more since 2006. Furthermore, the share of PDPs using coinsurance instead of copayments has increased over recent years. In 2016, 97 percent of PDP enrollees were in plans that used coinsurance on two or more of their formulary tiers. When combined with rapidly escalating prescription drug prices, this trend will have beneficiaries paying considerably more at the pharmacy counter.
Further, while Medicare Part D technically has an out-of-pocket limit ($4,950 in 2017), it is not a hard cap. Enrollees who reach catastrophic coverage are still responsible for 5 percent of their prescription drug spending. This benefit design can lead to out-of-pocket costs that exceed $10,000 for enrollees taking expensive prescription drugs.
Thus the trend is toward higher beneficiary out-of-pocket spending, rather than lower. Although capping beneficiary spending would increase program costs, it would align Medicare with MA plans and other private health plans (all of which cap out-of-pocket spending) and it would protect beneficiaries from high out-of-pocket costs.
Traditional Fee-for-Service Medicare/Beneficiary Out-of-Pocket Costs: Policy
Making Medicare more affordable
- close gaps in Medicare coverage that lead to burdensome out-of-pocket costs;
- limit increases in out-of-pocket costs, including increases in Medicare’s overall cost-sharing requirements and premiums for current benefits; and
- ensure that low-income beneficiaries are protected against high out-of-pocket expenses.
When considering program changes (e.g., cost-sharing or provider-reimbursement reforms), Congress should explicitly analyze and report on the direct and indirect effects on beneficiaries’ out-of-pocket spending.
CMS should monitor the effect of increases in Part B and Part D premiums on both high- and low-income beneficiaries, particularly those without Medicaid coverage, and determine whether premium cost is a barrier to Part B services and outpatient prescription drugs.
Medicare reforms should explicitly recognize the special health care and economic needs of low-income beneficiaries, the vast majority of whom are women, and protect them from bearing undue out-of-pocket health costs.
Pharmacies, prescription drug plans, and MA plans should be allowed to forgive copayments in cases where they would hinder a low-income beneficiary’s ability to obtain medically necessary prescription drugs.