Out-of-pocket spending cap would make Medicare more affordable, Urban Institute finds

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A policy that would cap cost sharing at $5,000 for traditional Medicare would reduce cost sharing for enrollees with the greatest healthcare needs by about 53%, according to data published this week by the Urban Institute.

This comes with a tradeoff: The same cap would increase per capita spending on Medicare by $1,000,or 7.8%, on average relative to current law. When taken together, this would cost about $39 billion in 2023. And Medicare spending for Part A services would increase by $9 billion, or about 4.2%.

But there would also be benefits for high-spending enrollees. For that group, it would reduce current out-of-pocket spending by about 51%, reduce supplementary plan spending by about 51%, and reduce Medicaid spending by about 58%.

While the reduction in out-of-pocket spending would benefit enrollees directly, the reductions in supplementary health payments would reduce the need to purchase such policies or dramatically reduce their premiums. The reduction in Medicaid spending, meanwhile, would offset some of the federal cost of the cap and generate savings for state governments, the report found.

WHAT'S THE IMPACT?

Medicare spending, according to the Urban Institute, is highly skewed. More than 9% of traditional Medicare beneficiaries have cost-sharing expenses greater than $5,000. They have average total Medicare expenditures of about $76,900, indicating they're a group with serious health problems. 

Of that amount, Medicare pays about $66,400. The remainder, about $10,500, is paid out of pocket, or paid by supplementary health insurance or Medicaid.

The proposed $5,000 cap would not come without some associated costs. Medicare Part A, for example, doesn't require most beneficiaries to pay premiums and is instead almost entirely financed by the Medicare Hospital Insurance Trust Fund, which in turn is financed primarily by payroll taxes. Because of that, a $5,000 cap would likely require an increase in payroll taxes, unless another financing source is provided.

But the Medicare Hospital Insurance Trust Fund is already projected to be depleted by 2026 under current law. Any increase in payroll taxes, or another funding source, would have to be levied on top of those increases in the revenues, or spending cuts, needed to keep the trust fund solvent.

At the same time, Medicare Part B spending for traditional Medicare enrollees would increase by $23 billion, or 9.7%, under a $5,000 cap. Part D Medicare spending would increase by $7 billion, or 13.1%. Parts B and D spending are financed through a combination of enrollee premiums and general federal revenues. Due to this, the increased spending for Part B and Part D services under the $5,000 cap would likely result in an increase in enrollee premiums for Parts B and D services. Other possibilities could include changes in deductibles or coinsurance in ways that would provide offsetting savings.

Per capita spending for Part A and Part B services would rise by 7.1%, which the report predicts would place upward pressure on the spending benchmarks against which Medicare Advantage plans bid. This would potentially enable MA plans to provide more benefits to enrollees, or provide savings to MA enrollees in the form of premium rebates.

As modeled for 2023, the $5,000 spending cap would directly affect 12% of traditional Medicare beneficiaries. But over time the percentage of enrollees who would benefit would grow considerably, UI found, unless the cap is indexed to Medicare cost growth. Even in the near term, all Medicare beneficiaries, not just the high spenders, would benefit from the reduced costs of supplementary insurance.

THE LARGER TREND

Trustees of the Social Security and Medicare trust funds found that Medicare and Social Security are both facing long-term financing shortfalls under currently scheduled benefits and financing. Medicare costs are projected to grow faster than GDP through the late 2070s due to expected increases in the volume and intensity of services provided.

The Supplemental Medical Insurance Trust Fund, meanwhile, is adequately financed into the indefinite future, because current law provides financing from general revenues and beneficiary premiums each year to meet the next year's expected costs.

Due to these funding provisions and the rapid growth of its costs, SMI will place steadily increasing demands on both taxpayers and beneficiaries, the trustees found.

And for the sixth straight year, they're issuing a determination of projected excess general revenue Medicare funding, as is required by law whenever annual tax and premium revenues of the combined Medicare funds will be below 55% of projected combined annual outlays within the next seven fiscal years.
 

Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com