Medicare FFS Cost- Sharing Design

The general design of Medicare FFS cost-sharing has been largely  unchanged since Medicare’s enactment in 1965. Medicare FFS Cost- sharing Can Be Confusing and Lead to Overuse of Services; Modernizing Could Address Concerns, but Would Involve Trade-offs

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. The cost-sharing design also affects beneficiaries’ utilization of services. Annual caps are a common design feature of  private plans, as most are required to have an annual cap, including  those participating in MA. 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. 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. 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. 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. 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. Modernizing Medicare Cost- sharing Design Would Affect Costs Indirectly through Behavioral Responses

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. Agency Comments

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. Appendix I: Direct Effect on Medicare Beneficiaries’ Cost-sharing Responsibilities under Four Illustrative Cost-sharing Designs

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. Each table presents the direct effect of each illustrative design  over 1-, 4-, and 8-year time horizons.
Why GAO Did This Study

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.

What GAO Found

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.