Several presidential candidates and Democratic members of Congress have proposed extending Medicare coverage to those under the age of 65 years. Spurred by concerns about the costs and complexity of private insurance, these policy proposals fall into two broad types of plans: (1) “Medicare for All,” which would replace current sources of coverage with a single national health plan modeled on Medicare, and (2) “Medicare Choices for All,” which would offer redesigned traditional Medicare coverage and Medicare managed care plans to additional enrollees such as older adults, those covered through insurance marketplaces, and employer groups.
Before serious consideration can be given to either type of proposal, Medicare’s limited benefits will need to be addressed. Unlike employer plans and private plans sold through insurance marketplaces or Medicare Advantage, traditional Medicare has no limit on enrollee out-of-pocket costs. In addition, it has a high hospital deductible; does not cover benefits such as dental, vision, and hearing care; and does not cover most long-term services and supports for those who are physically disabled or cognitively impaired.
Redesigning Medicare to Improve Benefits for Elderly and Disabled Beneficiaries
Gaps in Medicare Benefit Design
Medicare is a pillar of the U.S. health insurance system. But with no ceiling on out-of-pocket costs for covered benefits, a high deductible for hospital episodes, and exclusion of needed costly benefits such as dental, vision, and hearing care as well as personal care aides for the disabled, Medicare leaves its enrollees exposed to burdensome health costs unless they buy expensive supplemental coverage. The hospital deductible is currently $1,364 per hospital episode, and physician services are covered after a $185 annual deductible is met, with beneficiaries then paying 20% of all covered charges (including the costs of surgeons and physician-administered drugs for the treatment of cancer). As a result, one-fourth of Medicare beneficiaries spend ≥10% of their income on health care even with Medicare coverage. Forty percent of out-of-pocket spending is for non-covered services such as long-term care and dental, vision, and hearing care. Subsidies for low-income beneficiaries are also limited, resulting in one-third of those with incomes between 100% and 400% of the federal poverty level spending >10% of their income on medical care alone.
This lack of financial protection has long been recognized as a flaw in the program’s design. Given Medicare’s inadequate financial protection, 90% of Medicare beneficiaries have supplemental coverage through retiree health plans, Medicare Advantage managed care plans, other private coverage, or Medicaid. The annual premium costs of private supplemental coverage amount to $2,500 to $4,000 a year, depending on the comprehensiveness of coverage. In addition to premium costs, such supplemental coverage adds administrative layers and complexity.
Reforming Medicare’s Benefits to Improve Financial Protection
In 2018, we proposed redesigning Medicare to provide enhanced financial protection to beneficiaries. The proposed reform would avoid the need to supplement core benefits and would streamline insurance coverage. Specifically, in our proposal, we modeled a policy option that would replace the Part A hospital deductible with a $100 copayment per hospital admission and place a $3,500 ceiling on annual out-of-pocket expenses for Medicare Part A and B benefits. The improved benefits would cost Medicare an additional $44 per beneficiary per month. This increase could be financed by an $11 increase in Medicare beneficiary premiums combined with a 0.4 percentage-point increase in the Medicare payroll tax (split between employer and employee).
If such a reform were coupled with another reform designed to expand Medicare premium subsidies and lower cost-sharing for beneficiaries with incomes up to 150% of the poverty level, Medicare would provide cost protection similar to that available under the Affordable Care Act (ACA) for those who are not yet eligible for Medicare. This targeted low-income reform would help an estimated 8.1 million Medicare beneficiaries who do not currently receive Medicaid or extra assistance. If Medicare benefits were improved for those with low income, the reform would also lower the cost of state government Medicaid programs that currently fill in the gaps in Medicare coverage for beneficiaries who are dually eligible for Medicaid and Medicare.
In 2019, Medicare beneficiaries pay annual premiums of $1,626 for Part B Medicare coverage. Beneficiaries who are covered by traditional Medicare face an additional $400 a year on average for Medicare Part D prescription drugs and potentially more depending on plan choice. In addition, beneficiaries need to pay a $2,500 to $4,000 premium for Medigap coverage, depending on the comprehensiveness of the Medigap plan.
Those willing to leave traditional Medicare and enroll in Medicare Advantage plans with more limited networks may avoid such supplemental premium costs. However, in recent years, Medicare Advantage enrollees have faced rising out-of-pocket costs as Medicare Advantage plans increase cost-sharing to keep premiums low.
The proposed reforms would enable Medicare to offer improved core benefits at a fraction of the additional premium cost that enrollees now pay for private supplementary coverage. As a result, beneficiaries would see substantial premium savings. Moreover, adding an out-of-pocket cost limit within traditional Medicare would place it on a more equal footing with Medicare Advantage plans, which are required to have such limits. With more protective core benefits, traditional Medicare could challenge Medicare Advantage plans in the provision of health care and care coordination.
Improving Choice and Affordability for Those Under 65
Improving the core benefits also could make Medicare a more attractive choice for those who now obtain coverage through ACA private marketplaces and those covered by employer plans. Nearly all such plans have a limit on enrollee out-of-pocket costs.
The marketplace for individual coverage nationwide is currently plagued by risk selection, premium instability, and the withdrawal of private insurers. Many markets also lack affordable plan choices. For the under-65 market, including employer groups, prices paid by private plans to hospitals and physicians have continued to increase at rates much faster than Medicare, driving up premiums.
Offering Medicare as an Option for Patients Under 65
One option for ensuring more affordable plan choices for people under 65 would be to offer an improved traditional Medicare plan, including prescription drug coverage, to those insured in private individual marketplaces and the small-group market. This plan could include optional dental, vision, and hearing care and personal care for those who are disabled. Medicare has the strong advantages of low administrative costs and broad provider networks. Improving traditional Medicare and then offering it as a choice could help to stabilize the insurance market for those seeking individual coverage or small employer groups who are not yet eligible for Medicare. The expanded choice would be especially attractive to older adults who are preparing for coverage under Medicare when they retire. A viable Medicare option in the individual and small-business markets with predictable and affordable benefits would put pressure on private plans to generate value for the coverage that they offer.
A step further would be to require Medicare Advantage insurers to offer plans in individual marketplaces established by the Affordable Care Act where they have substantial networks. Medicare Advantage plans, by regulation, have enhanced leverage to establish provider payment rates by using Medicare payment rates as benchmarks for in-network and out-of-network providers. Requiring Medicare Advantage plans to offer coverage in the individual market could thus expand choice and help to stabilize premium rates.
In combination, offering a choice of a redesigned traditional Medicare plan and requiring Medicare Advantage plans to open their networks to the under-65 population would begin to unify insurance markets across beneficiaries’ lifetimes and simplify provider payments. Over time, the incremental approach offers the potential to help slow the increases in health care premiums and prices.
Expanding Medicare Step by Step
A better Medicare benefit package, therefore, is an investment in more affordable coverage as well as lower health care costs across insurance markets. It would ensure that beneficiaries have financial protection, simplify coverage choices, and remove waste from the health care system.
Reforming Medicare to provide protection against catastrophic costs would bring cost relief to beneficiaries. Furthermore, reforming Medicare’s traditional benefit design by including a limit on out-of-pocket costs and replacing the high hospital deductible with a modest copayment would (1) enable Medicare to offer more affordable care to current beneficiaries and (2) facilitate the expansion of coverage to other markets in a step-by-step fashion. If Medicare further offered some coverage for dental, vision, and hearing care as well as for personal care services for the disabled, it would further protect aging beneficiaries and ensure access to essential care. In sum, starting with the reform of Medicare’s core benefits could pave the way toward a more equitable, affordable insurance system across markets that are now divided by age and income.
Offering Medicare as a Choice to Those Not Yet Eligible
Medicare for All proposals, as advanced by several presidential candidates and Democratic members of Congress, call for full replacement of all other insurance sources by a tax-financed “single payer” program with a comprehensive benefit for everyone. Key challenges to replacing existing coverage in one comprehensive step include (1) the loss of employer health benefit contributions as a source of financing and (2) displacement of current coverage under employer plans that cover 159 million people and state-run Medicaid programs that cover 44 million people.
A less disruptive option would be to offer traditional Medicare and Medicare Advantage plans as choices in the individual and small-firm insurance markets. A “Medicare Choices” approach would build on Medicare payment policies, using the purchasing power of Medicare to enable more affordable premiums than are available in current private insurance markets. As illustrated in the figure below, for the past 10 years, private insurance costs per enrollee have been rising much faster than Medicare costs per enrollee, by a cumulative 48% compared with 21%. Studies have shown that the increase has been driven by rising prices.
An incremental approach, however, would require reform of Medicare’s core benefit design to avoid the need for supplemental coverage. If Medicare included a limit on out-of-pocket costs and replaced the hospital deductible with a modest hospital copayment, Medicare’s core benefits would provide more affordable coverage to current beneficiaries. Such reforms also would improve benefit-design standards for Medicare Advantage plans, ensuring competition between traditional Medicare and Medicare Advantage plans in terms of the value that they offer in the provision of care.
Improving Medicare benefits by limiting patient out-of-pocket costs would provide much-needed financial protection to financially strapped Medicare beneficiaries, especially those with low or modest incomes. Half of all Medicare beneficiaries have limited savings (<$75,000) and live on modest or low incomes. If combined with expanded low-income premium subsidies as people age into Medicare, reform also would safeguard low-wage retirees as they lose income from employment.
Building on Medicare Offers a Way Forward
Building on what now exists, including Medicare’s strengths of low administrative cost and its provider payment system, the nation could move either by steps or through comprehensive reform to an administratively more efficient, easier-to-navigate, and lower-cost health care system. In sum, redesigning Medicare and offering it as choice to the under-65 population could provide much-needed financial relief to families, employers, and state governments strapped by high and rising bills for health care.