In 2016, Medicare spent about $380 billion on health care services for beneficiaries enrolled in Medicare FFS, which consists of two separate parts: Medicare Part A, which primarily covers hospital services, and Medicare Part B, which primarily covers outpatient services. The majority of the 38 million Medicare FFS beneficiaries were enrolled in both Part A and Part B, although about 5 million were enrolled in Part A only and 0.3 million were enrolled in Part B only. The general design of Medicare FFS cost-sharing has been largely unchanged since Medicare’s enactment in 1965. It includes separate deductibles for Part A and Part B services, a variety of per-service copayments and coinsurance after the deductibles are met, and no cap on beneficiaries’ cost-sharing responsibilities (see table 1). The current cost-sharing design leaves beneficiaries exposed to potentially catastrophic cost-sharing, and in part because of that, in 2015, 81 percent of Medicare FFS beneficiaries obtained supplemental insurance that covered some or all of their Medicare cost-sharing responsibilities, often in exchange for an additional premium (see table 2). For example, in 2015, 31 percent of Medicare FFS beneficiaries purchased a private Medigap plan, the most common types of which fully insulated them from Medicare cost-sharing responsibilities in exchange for an average annual premium of $2,400. Another 20 percent of Medicare FFS beneficiaries enrolled in Medicaid, which generally covered most of their Medicare cost-sharing responsibilities; however, these low- income beneficiaries generally only paid a limited or no premium for this supplemental coverage. The current Medicare FFS cost-sharing design can be confusing, contribute to beneficiaries’ overuse of services, and leave beneficiaries exposed to catastrophic costs. Modernizing the design could address these concerns, but would involve trade-offs. For example, as shown in four illustrative designs that we evaluated, maintaining Medicare’s share of costs would involve a trade-off between the level of the cap and the deductible (or other cost-sharing). As noted by Medicare advocacy groups and others, the current Medicare FFS cost-sharing design, which includes multiple deductibles, can be confusing for beneficiaries. In 2014, 16 percent of Medicare FFS beneficiaries were responsible for at least one Part A deductible for an episode of inpatient care as well as the annual Part B deductible. (Medicare FFS beneficiaries may be subject to more than one Part A deductible during the year, as the Part A deductible applies to each admission to an inpatient hospital or skilled nursing facility that occurs more than 60 consecutive days after the prior admission.) The Congressional Budget Office has cited the separate deductibles as one way in which Medicare FFS cost-sharing is more complicated than private plans. In 2016, according to a survey conducted by the Kaiser Family Foundation, only 1 percent of workers with employer-sponsored insurance had a separate deductible for inpatient services. Moreover, inpatient services tend to be nondiscretionary, and one or more deductibles for those services can create a financial burden for beneficiaries, while having minimal effect on their use of inpatient services. The cost-sharing design also affects beneficiaries’ utilization of services. For example, as noted by the bipartisan Simpson-Bowles Fiscal Commission, the lack of a coherent cost-sharing system is a significant contributor to overuse and misuse of care. This is particularly true for services such as home health and clinical laboratory services, which currently have no cost-sharing under Medicare FFS and thus do not provide beneficiaries an incentive to decline care of negligible value. Because of these concerns, MedPAC recommended adding a cost- sharing requirement for home health services that were not preceded by hospitalization or post-acute care, noting that the current lack of cost- sharing has likely contributed to the significant rise in utilization for these services, which suggests some overuse. At the same time, the lack of an annual cost-sharing cap prevents Medicare FFS from fulfilling a key purpose of health insurance: protecting beneficiaries from catastrophic medical expenses. While most beneficiaries had cost-sharing responsibilities under $2,000 in 2014, 1 percent—over 300,000 beneficiaries—had responsibilities over $15,000, including several hundred beneficiaries with responsibilities between $100,000 and $3 million. (See fig. 1.) Given the risk of catastrophic medical expenses, a focus group of current and future Medicare beneficiaries convened by MedPAC indicated that an annual cap is the cost-sharing design feature they were most interested in seeing added to the Medicare benefit. Annual caps are a common design feature of private plans, as most are required to have an annual cap, including those participating in MA. Specifically, since 2011, CMS has required most MA plans to have an annual cap of $6,700 or less and grants them additional flexibility in their cost-sharing design if they voluntarily set their cap at or below $3,400. The mandatory and voluntary caps for certain MA plans that provide both in- and out-of-network coverage are the same ($6,700 and $3,400) for in-network services, and 1.5 times higher ($10,000 and $5,100) for combined in- and out-of-network services. In addition to these implications of the cost-sharing design itself, the American Academy of Actuaries and others have noted that the complexity and the possibility of unlimited responsibilities increases demand for supplemental insurance, which can lead to added costs for beneficiaries and the Medicare program. It is uncommon for beneficiaries enrolled in private health insurance to have supplemental coverage. By insulating beneficiaries from some or all cost-sharing responsibilities (and not just catastrophic costs), supplemental insurance further reduces the incentives for beneficiaries to evaluate the need for discretionary care. In part because of these reduced incentives, we previously estimated that both beneficiaries’ average total out-of-pocket costs and average Medicare program spending were higher for Medicare FFS beneficiaries with Medigap than those with FFS only. Modernizing Medicare FFS cost-sharing could address these concerns, but would involve design trade-offs. Specifically, as proposed by various groups, revising Medicare’s cost-sharing design to include a single deductible, modified cost-sharing requirements, and an annual cost- sharing cap could address concerns with the current cost-sharing design. However, there are multiple options for revising within this broad framework, including two key design trade-offs that would affect the extent to which a modernized structure would address concerns about the current design (and possibly also raise new concerns). One trade-off centers on how to modify the existing complicated set of cost-sharing requirements for different services. While the reform proposals have generally suggested moving to a single deductible, they have varied in how to modify the subsequent per-service payments. Some proposals have emphasized the value of simplicity and suggested replacing the complex set of per-service payments above the deductible with a uniform coinsurance. A uniform coinsurance would simplify the cost-sharing design, provide beneficiaries insight into the total cost of each service, and introduce cost-sharing for certain potentially discretionary services, such as home health services. However, as noted by the Medicare Payment Advisory Commission and Congressional Budget Office, uniform coinsurance also has drawbacks, such as a fixed percentage of an unknown bill being harder for beneficiaries to understand and predict than copayments. Other proposals have emphasized the need to set cost-sharing based on the value of services, and have suggested moving Medicare toward a value-based insurance design in which per-service cost-sharing would vary based on the clinical value of the service to an individual beneficiary. While a value-based design would specifically target cost-sharing to promote prudent use of health care services, implementing it is challenging in practice and would be more complicated for beneficiaries to understand and for CMS to administer, though CMS is testing the feasibility of value-based insurance design in MA. A second design trade-off centers on how to set the level of the deductible and the annual cap. As shown in the four illustrative cost- sharing designs we evaluated, the lower the cap, the higher the deductible (or other cost-sharing requirements) would need to be to maintain Medicare’s and beneficiaries’ aggregate share of costs similar to that of the current design. For example, holding utilization and enrollment constant, we found that even without any deductible, a uniform coinsurance of 18 percent (a level below the existing 20 percent coinsurance for most Part B services) would be sufficient to add a cap near $10,000 (the mandatory cap for certain MA plans that allow beneficiaries to see any provider). In contrast, it would take a deductible near $1,225 (a level similar to the existing Part A deductible for each inpatient episode) and a uniform coinsurance of 20 percent to establish a cap of $3,400 (the voluntary cap for most MA plans). (See table 3.) Different levels of the deductible and cap would address certain concerns of the current design raised by GAO and others but also could create new ones. For example, as our analysis of four illustrative cost-sharing designs shows, designs with relatively high caps would provide some additional protection from catastrophic costs while maintaining a deductible and coinsurance near or below the current levels for Part B services. However, per an analysis conducted by Kaiser Family Foundation and the Urban Institute, half of Medicare beneficiaries in 2016 were living on less than $26,200 in income; thus, caps of $6,700 or higher may still leave some beneficiaries vulnerable to costs that are catastrophic for them and may not significantly decrease the associated demand for supplemental insurance. In contrast, designs with relatively low caps would provide greater protection from catastrophic costs. However, as noted by the Congressional Budget Office, beneficiaries who reached the cap would have less incentive to use services prudently. In addition, the higher deductible needed to offset a lower cap while maintaining Medicare’s share of costs could present a financial barrier for some beneficiaries to obtain necessary care. The direct effect of modernizing the Medicare FFS cost-sharing design (i.e., the effect when holding utilization and enrollment constant) on beneficiaries’ cost-sharing responsibilities would depend on the specific revisions and the time horizon examined. As we noted above, modernizing the FFS cost-sharing design while maintaining Medicare’s aggregate share of costs similar to the current design requires a trade-off between the level of the deductible and cap. At the beneficiary level, this design trade-off affects beneficiaries’ annual cost-sharing and the degree to which beneficiaries would be protected from catastrophic costs. One way of viewing how the design trade-off affects beneficiaries is to compare across different designs the median annual cost-sharing responsibility with the level of the cap (see fig. 2). In examining the direct effect of the four illustrative modernized designs we analyzed, we found the following: During year 1, cost-sharing designs that feature relatively low deductibles and relatively high caps would result in a median annual beneficiary cost-sharing responsibility close to or below that of the current design. In contrast, designs with relatively low caps—and therefore greater beneficiary protection from catastrophic costs— would result in a median annual beneficiary cost-sharing responsibility above that of the current design. For example, during year 1 of a design with no deductible, 18 percent coinsurance, and a cap near $10,000, we found that the median annual cost-sharing responsibility would be $479, which is below that of the current design ($621), despite the addition of a cap. In contrast, during year 1 of a design with a $1,225 deductible, 20 percent coinsurance, and a cap near $3,400, the median annual cost-sharing responsibility would be $1,486, which is 2.4 times higher than that of the current design. However, in exchange for this higher median annual cost-sharing responsibility, beneficiaries would have much greater protection from catastrophic costs, as their annual cost-sharing responsibilities would be capped near $3,400. By the end of 8 years, there would still be differences in the median annual beneficiary cost-sharing responsibility across different designs, but they would become less pronounced—despite the significantly different levels of catastrophic protection. As beneficiaries age and become more likely to have catastrophic costs in at least one year, the median annual cost-sharing responsibility would increase, regardless of the cost-sharing design. However, by the end of 8 years the differences in the median annual cost-sharing responsibility across different designs would become less pronounced. For example, the median annual cost-sharing responsibility under the design with a cap near $10,000 would increase from below that of the current design in year 1 to 1.1 times higher than the current design by the end of 8 years. In contrast, the median annual cost-sharing responsibility under the design with the cap near $3,400 would decrease from 2.4 times higher than the current design in year 1 to only 1.6 times higher by the end of 8 years. (See app. I table 4 for more details, including results on our other two illustrative designs and results over 4 years.) The same patterns held when looking at how the design trade-off affects beneficiaries in another way: the percentage of beneficiaries with cost- sharing responsibilities lower and higher than under the current design (see fig. 3). In examining the direct effect of our four illustrative designs, we found the following: During year 1, designs that feature relatively low deductibles and relatively high caps would result in a minority of beneficiaries having cost-sharing responsibilities that are at least $100 higher than under the current design. In contrast, designs with relatively high deductibles and relatively low caps would result in the majority of beneficiaries having cost-sharing responsibilities that are higher than under the current design. For example, during year 1 of a design with no deductible, 18 percent coinsurance, and a cap near $10,000, 16 percent of beneficiaries would have cost-sharing responsibilities at least $100 higher than their responsibilities under the current design. In contrast, during year 1 of a design with a $1,225 deductible, 20 percent coinsurance, and a cap near $3,400, 69 percent of beneficiaries would have cost-sharing responsibilities at least $100 higher than their responsibilities under the current design. By the end of 8 years, there would still be differences across the designs, but they would become less pronounced—despite levels of catastrophic protection that vary significantly. Over a longer time horizon, a larger percentage of beneficiaries would reach the cap at least once, regardless of the cost-sharing design (ranging from 23 percent reaching the cap at least once over 8 years under the design with a cap near $10,000 to 66 percent under the design with a cap near $3,400). However, the subset of these beneficiaries who nonetheless had annual cost-sharing responsibilities at least $100 higher would also increase. Whether this increase would be augmented or offset by the changes over time in the percentage of beneficiaries who never reached the cap and had higher cost-sharing responsibilities would depend on the specific design. For example, the percentage of beneficiaries with annual cost-sharing responsibilities at least $100 higher than the current design would increase from 16 percent in year 1 to 38 percent by year 8 under the design with a cap near $10,000. In contrast, this percentage would decrease from 69 percent in year 1 to 67 percent by year 8 under the design with a cap near $3,400. (See app. I tables 5 and 6 for more details, including results on our other two illustrative designs and results over 4 years.) Modernizing the Medicare FFS cost-sharing design would affect beneficiaries’ costs indirectly through beneficiaries’ and supplemental insurers’ behavioral responses to altered incentives, according to the studies we reviewed and the experts we spoke to. These studies and experts identified several types of behavioral responses that would influence the net effect of a modernized design on beneficiaries’ out-of- pocket costs, including changes in beneficiaries’ demand for, and insurers’ supply of, supplemental insurance; changes in beneficiaries’ utilization of services; changes in Medicare beneficiaries’ enrollment in FFS versus MA; and interactions among these and other behavioral responses, including effects on the price of supplemental insurance. According to studies we reviewed and experts we spoke to, implementing a modernized cost-sharing design would likely trigger changes in the demand for and supply of supplemental insurance. For example, a focus group of current and future Medicare beneficiaries convened by MedPAC and a report from the American Academy of Actuaries stated that the addition of an annual cap would reduce the need of some beneficiaries to purchase supplemental insurance. While beneficiaries who drop their supplemental insurance would then need to pay all their Medicare cost- sharing responsibilities, those might be less than their annual premium for supplemental insurance. Additionally, according to the same MedPAC study and a Congressional Budget Office report, retiree coverage may change under a modernized design. For example, with a cap in place, there would be less difference between employer-sponsored plans and Medicare, and employers may choose to alter the supplemental insurance they offer. CMS officials told us that this would continue the trend of private employers reducing retiree health coverage. Several studies we reviewed and experts we interviewed indicated that implementing a modernized design could also trigger changes in utilization of Medicare services, the extent of which would affect beneficiaries’ out-of-pocket costs. For example, the RAND Health Insurance Experiment (HIE), which some experts consider to be the most comprehensive study on price and utilization, found that patients were “moderately sensitive to price.” The RAND HIE found that patients respond to increases in cost-sharing that they need to pay at least partly out-of-pocket by decreasing their use of some services. Similarly, CMS officials told us that they would expect utilization to decrease as beneficiaries’ out-of-pocket costs increased, while a study in the American Economic Review found that the addition of a copayment led to a decline in office visits. The RAND HIE study suggests that a 10 percent increase in cost-sharing would lead to a 1 to 2 percent decline in patients’ use of services. In the case of the RAND HIE study, cost- sharing affected the number of contacts people initiated with their physician, which impacted preventive care and diagnostic tests. The study found that this could potentially affect patients’ use of both effective and less effective services. According to several studies and interviews with experts, design changes could trigger other behavioral responses. For example, a study by the Kaiser Family Foundation and a report by the Congressional Budget Office both anticipated that a modernized design could change the proportion of Medicare beneficiaries who decide to enroll in FFS or MA. Similarly, officials from the American Academy of Actuaries told us that they would expect a change in demand for MA under a modernized design. Under the current Medicare design, all MA plans have an annual cap that protects beneficiaries from catastrophic medical expenses. Between 2008 and 2017, the percentage of Medicare beneficiaries who chose to enroll in an MA plan increased from 22 to 33 percent. CMS officials told us that the increases in MA enrollment may be due in part to the requirement that MA plans must include an annual cost-sharing cap. The Kaiser Family Foundation study found that a modernized design, similar to that of an MA plan, might incentivize some MA beneficiaries to move back to FFS. According to experts we interviewed and studies we reviewed, different behavioral responses described above would also likely interact and affect beneficiaries’ out-of-pocket costs. CMS officials told us that when all of the factors contributing to out-of-pocket costs are combined, it is difficult to assess the net effect of a modernized cost-sharing design on beneficiaries’ out-of-pocket costs. For example, officials with the National Association of Insurance Commissioners emphasized that as both demand for supplemental insurance and expected utilization changed, supplemental premiums would also change, which would change out-of- pocket costs. Similarly, studies by both MedPAC and the Congressional Budget Office found that changes in beneficiaries’ level of supplemental insurance might trigger additional changes in utilization, which would also result in changes to the pricing of supplemental insurance. Specifically, if a number of relatively healthy beneficiaries dropped their supplemental insurance, and the beneficiaries left were sicker (that is, more costly), premiums for supplemental insurance might increase. Officials from the Congressional Budget Office told us that, conversely, if the more costly beneficiaries dropped their supplemental insurance, premiums might be lower. We provided a draft of this report to the Department of Health and Human Services for comment. The Department provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to appropriate congressional committees, the Secretary of Health and Human Services, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. The direct effect of modernizing the Medicare fee-for-service (FFS) cost- sharing design (i.e., the effect when holding utilization and enrollment constant) on beneficiaries’ cost-sharing responsibilities would depend on the specific revisions and the time horizon examined. Tables 4, 5, and 6 present the direct effect of modernizing the Medicare FFS cost-sharing design on beneficiaries’ cost-sharing responsibilities under four illustrative designs. Each table presents the direct effect of each illustrative design over 1-, 4-, and 8-year time horizons. In addition to the contact named above, Greg Giusto (Assistant Director), Alison Binkowski, George Bogart, Reed Meyer, Beth Morrison, Brandon Nakawaki, and Brian O’Donnell made key contributions to this report. Also contributing were Todd Anderson, Emei Li, Yesook Merrill, Vikki Porter, and Frank Todisco.
To address concerns with the current Medicare FFS cost-sharing design, various groups have proposed modernizing the design to make it simpler and include features found in private plans. These proposals have generally included a single deductible, modified cost-sharing requirements (e.g., a uniform coinsurance), and the addition of a cap on beneficiaries' annual cost-sharing responsibilities. GAO was asked to review how modernized cost-sharing designs would affect beneficiaries' costs over multiple years. This report describes implications of the current cost-sharing design; options for modernizing; and how modernized cost-sharing designs could directly and indirectly affect beneficiaries' costs. GAO reviewed studies related to modernizing Medicare's cost-sharing design and interviewed authors of those studies and other experts. GAO also used summarized Medicare claims data from 2007 to 2014 (the most recent data available) to develop four illustrative modernized designs, each including a single deductible, uniform coinsurance, and an annual cap while maintaining Medicare program spending similar to the current design. For each design, GAO calculated how beneficiaries' annual cost-sharing responsibilities compared with the current design over a 1-, 4-, and 8-year time horizon. The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate. GAO and others have raised concerns about the design of Medicare fee-for-service (FFS) cost-sharing—the portion of costs beneficiaries are responsible for when they receive care. The current cost-sharing design has been largely unchanged since Medicare's enactment in 1965, can be confusing for beneficiaries, and can contribute to overuse of services. Additionally, the design leaves some beneficiaries exposed to catastrophic costs that can exceed tens of thousands of dollars annually. The complexity of the design and lack of an annual cap on cost-sharing responsibilities also increases demand for supplemental insurance, which can cost beneficiaries thousands annually and further contribute to overuse of services. Modernizing Medicare FFS's cost-sharing design to include features found in private plans could help address these concerns, but would involve design trade-offs. For example, adding an annual cap on cost-sharing responsibilities while maintaining Medicare's aggregate share of costs similar to the current design would involve a trade-off between the level of the cap and other cost-sharing requirements. In analyzing four illustrative FFS cost-sharing designs, GAO found that the direct effect of modernizing the design on beneficiaries' cost-sharing responsibilities—that is, the effect when holding utilization and enrollment constant—would depend on the specific revisions and the time horizon examined. For example, GAO found that During year 1, cost-sharing designs that feature relatively low deductibles (costs a beneficiary is responsible for before Medicare starts to pay) and relatively high caps would result in a median annual beneficiary cost-sharing responsibility close to or below that of the current design. In contrast, designs with relatively low caps—and therefore greater beneficiary protection from catastrophic costs—would result in a median annual cost-sharing responsibility above that of the current design. By the end of 8 years, there would still be differences in the median annual beneficiary cost-sharing responsibility across different designs, but they would become less pronounced. Modernizing the Medicare FFS cost-sharing design would also affect beneficiaries' costs indirectly through altered incentives. The studies GAO reviewed and experts GAO interviewed identified several types of behavioral responses that would influence the net effect of a modernized design on beneficiaries' out-of-pocket costs, including changes in beneficiaries' demand for and insurers' supply of supplemental insurance; changes in beneficiaries' use of services; changes in Medicare beneficiaries' enrollment in FFS versus Medicare's private plan alternative; and interactions among these and other behavioral responses, including effects on the price of supplemental insurance.