10 Proposed Changes to Medicare You Should Know About
Copyright © 2015 AARP
The future of Medicare is increasingly a contentious topic of debate in Congress and among health policy experts. One question is whether Medicare can stay financially viable under its current funding arrangements so that older and disabled Americans will continue to receive the same benefits in the near and far future.
The other question is whether the country can afford to continue subsidizing the program as it now does while its costs swell to consume ever greater proportions of the nation’s economy — 5.4 percent in 2035 and rising to 6.9 percent by 2088, according to estimates in the 2014 Medicare Trustees report.
The quick answer to both these questions is “Almost certainly not, unless changes are made.” The problem is deciding which changes to make. Many proposals are on the table — some radical, others more in the nature of tweaks — but all focus on trimming Medicare’s costs to reduce its rate of spending and/or increase the viability of the program.
Changing the structure of Medicare
Medicare currently offers two ways to receive benefits. If you’re in traditional Medicare, the government pays directly for each covered medical service you use. If you’re in a Medicare Advantage private plan, the government pays a set annual amount to the plan for your care.
Under proposals to change Medicare into what its advocates call “premium support” and its critics call a “voucher system,” the government would allow you a certain amount of money to buy coverage from competing private plans or from a revised version of traditional Medicare.
Pro: This plan would put Medicare on a budget to hold down spending and reduce the tax burden on future generations. You’d receive a share of this budget to help you buy your own health care and have more flexibility to make choices. For example, if you wanted a more generous plan (such as seeing any doctor of your choice), you’d pay the premium difference out of your own pocket; if the difference became too high, you could switch to a less expensive plan. The changed system would apply only to people under age 55 when it starts. Older people could choose to stay in the current Medicare program.
Con: The value of the voucher would be tied to some economic index — not to actual health costs, which generally rise faster than other costs. So this approach presents a high risk that benefits would become increasingly inadequate and more costs would be shifted to consumers. Medicare already has competing private plans (in the Medicare Advantage program), yet the hoped-for savings from them haven’t yet materialized. The changed system would inevitably raise premiums and co-pays for people who stay in the traditional Medicare program because over time fewer would remain in it to share the cost.
Raising the age of eligibility to 67
The eligibility age for Medicare has always been 65, except for younger people with disabilities. This proposal aims to bring Medicare in line with Social Security’s full retirement age — now 66 but due to rise to 67 by 2027.
Pro: Americans are living longer, but health spending on older people is rising, so it makes sense to raise the eligibility age. Doing so would reduce federal spending on Medicare by about 5 percent over the next 20 years. The new health insurance exchanges, which began in 2014 under the Affordable Care Act (“ObamaCare”), provide options for people age 65 to 67 with medical problems who in earlier years couldn’t buy insurance.
Con: Though saving Medicare some money, this proposal would increase other health care spending — especially costs for employer health plans and Medicaid. The insurance plans that people age 65 to 67 buy through the health exchanges may cost much more than Medicare, depending on the state. Medicare premiums would rise because fewer people would be in the program to share costs, especially because the healthiest ones (ages 65 and 66) would no longer participate.
Increasing the Medicare payroll tax
The Medicare payroll tax, which funds Part A hospital insurance, is currently assessed on 2.9 percent of all earnings (1.45 percent each for employers and employees, 2.9 percent for the self-employed), plus an extra 0.9 percent for those earning more than $200,000 a year (single) or $250,000 (married couple).
Pro: Because of the rising numbers of retirees in relation to working people, current estimates predict that Part A won’t have enough funds to fully pay for all services after 2026. Raising the tax by 0.5 percent each for employers and employees would more than fix that problem, leaving a small surplus that could act as a cushion for Medicare’s costs or provide more benefits.
Con: This proposal would mean a higher rate of tax for each dollar earned by working people, increasing the tax burden on future generations. Even workers not earning enough to pay income taxes would pay this higher tax.
Raising premiums for Parts B and D
Most people currently pay monthly premiums for Part B and Part D, which collectively pay for about 25 percent of the cost of these services, while the government pays the remaining 75 percent out of tax revenues. People with incomes over a certain level pay more.
Pro: More money could be generated for Medicare by raising premiums for everyone (to cover about 35 percent of the costs, say); raising premiums even more for higher-income people so that the wealthiest beneficiaries pay the full cost and receive no taxpayer-funded subsidies; or lowering the level at which the higher-income surcharge kicks in so that more people have to pay it.
Con: Raising premiums across the board would be a hardship for many low- and middle-income people. Higher-income earners have already paid more into the Medicare program through higher payroll and income taxes and currently pay up to three times as much for the same Part B and Part D coverage as others. If increased premiums make wealthier and healthier people drop out of the program, standard premiums would eventually become more expensive for everyone.
Redesigning co-pays and deductibles
Currently, Parts A and B in traditional Medicare have different co-pays and deductibles. Some proposals would combine the programs to have only one deductible — for example, $550 annually — and uniform co-pays for Part A and B services, plus an annual out-of-pocket expense limit, similar to those in Medicare Advantage plans and some employer plans.
Pro: Simplifying Medicare benefits would make them less confusing for consumers and could save the program billions of dollars over time. An out-of-pocket cap would provide great financial protection, especially for sicker people, and reduce the need for Medigap supplemental insurance.
Con: Some beneficiaries may pay less, but others — especially those who use few services or spend longer periods in the hospital — would pay more out of pocket than they do now unless they had additional insurance.
Adding co-pays for some services
Medicare currently charges no co-pays for home health services, for the first 20 days in a skilled nursing facility, or for lab tests (such as blood and urine analyses). Several proposals would require co-pays for these services.
Pro: Co-pays would discourage unnecessary use of these services and would generate more money for Medicare. Medigap supplemental insurance would pick up the extra costs for people who have this coverage.
Con: Many people who couldn’t afford co-pays (or Medigap) could forgo needed care. Medigap premiums would rise to offset the extra coverage. State governments would be required to spend more money on low-income Medicare beneficiaries whose co-pays are covered by Medicaid.
Making Medigap more expensive
Medigap supplemental insurance covers many out-of-pocket expenses in traditional Medicare, such as the 20-percent co-pays typically charged for Part B services. This proposal would limit Medigap coverage, requiring policy holders to bear more out-of-pocket costs. One step in this direction was taken in 2015, when Congress passed a law that requires policy holders to pay the annual deductible on Part B services ($147 in 2015) before Medigap coverage kicks in. This deductible is currently covered in only two Medigap policies (C and F), and the new rule affects only people who buy them for the first time from 2020 onward.
Pro: People with Medigap insurance pay less for their care, so they tend to use more Medicare services, increasing the burden for taxpayers.
Con: No evidence indicates that raising Medigap premiums or reducing coverage would deter people from using health services unnecessarily, and most patients can’t tell whether a service is necessary or not. But evidence does show that postponing treatment leads to greater health problems that cost Medicare more to fix. Also, Medigap is insurance that people choose to buy and pay for out of their own pockets; it’s not a government program.
Changing ways to pay doctors
The traditional Medicare program relies on the fee-for-service system in which Medicare pays doctors separately for each service they provide — leading to the risk that many expensive medical tests are prescribed unnecessarily. On all sides, fee for service is considered a major driver of Medicare spending.
Medicare is now beginning to test and introduce new payment systems that reward doctors for the quality of care they provide — how well they look after patients, especially those with chronic conditions such as heart disease and diabetes — in ways promoted by the Affordable Care Act. These include “patient-centered medical homes” and “accountable care organizations” in which comprehensive care is provided by teams of professionals from different medical disciplines.
Getting a better deal from drug makers
By law, the government can’t negotiate drug prices directly on behalf of the whole Medicare Part D prescription drug program. Instead, each Part D drug plan negotiates prices with the manufacturers. Nor are the manufacturers required to provide rebates for the Medicare program as they do for Medicaid. Some proposals would reverse either or both of these situations.
Pro: Medicare has huge market power. If it were allowed to negotiate prices collectively for the millions of people enrolled in Part D (as the government does for the federal Veterans Affairs health care system), costs would be much lower. Also, before 2006 (when Part D began), drug companies provided rebates for drugs prescribed under Medicaid. But since then, Medicaid recipients who are also enrolled in Medicare have had to get their drugs through Part D, and the rebates have lapsed. Restoring them would save an estimated $112 billion over ten years.
Con: Medicare has huge market power, so it could effectively dictate prices instead of truly negotiating them, which amounts to price controls. If prices were lowered in this way — or by providing rebates on drugs prescribed for people jointly on Medicare and Medicaid — the manufacturers would increase prices for other consumers and spend less on research and development of new medications.
Reining in health care costs generally
The Affordable Care Act of 2010 mandates measures to slow the growth in health care costs over a 20-year period, which involves saving an estimated $500 billion in Medicare without cutting benefits. These measures include
Paying doctors and other providers in new ways to reward them for the results of quality care rather than the number of services they prescribe
Reducing the number of medical errors and costly hospital readmissions
Reducing government subsidies to private Medicare Advantage plans
Cracking down more on fraud and waste
Establishing an Independent Payment Advisory Board (IPAB), a group of 15 health experts required to recommend ways to hold down Medicare spending if it goes over a certain limit
Of these measures, the IPAB is the most controversial.
Pro: The job of the IPAB isn’t to ration care but rather to improve incentives for health care providers to deliver higher-quality care at reasonable cost. The law specifically prohibits it from reducing Medicare benefits or from raising beneficiaries’ premiums and other costs, but it can recommend reducing payments to doctors and other providers. Congress can reverse any recommendation the board makes.
Con: The IPAB was created to limit Medicare spending so that it grows only a little more each year than the economy grows. To do so, 15 unelected board members will be able to suggest cutting payments to doctors, hospitals, and Medicare plans each year by however much it takes to stay under the cap. If Congress can’t agree on cuts of its own, the board’s recommendations will go into effect automatically.