On adding an out-of-pocket cost cap to traditional Medicare

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Medicare's annual Open Enrollment Period is in progress, and enrollment in Medicare Advantage (MA) is poised to exceed enrollment in traditional, fee-for-service (FFS) Medicare for the first time in 2023. Stat's Bob Herman spotlights advocates' case for erasing MA's most consequential competitive advantage by adding an annual out-of-pocket cost cap (OOP cap) to traditional, fee-for-service Medicare:

At least 1 in 5 people* who choose Medicare Advantage — the alternative to traditional Medicare that is operated by health insurance companies — say they choose it because of the out-of-pocket limits that insurers offer, according to a new survey from the Commonwealth Fund.

According to a Kaiser Family Foundation estimate, as of 2018, about one in six FFS Medicare enrollees (counting only those enrolled in both Part A and Part B**) lacked an OOP cap and were thus exposed to potentially catastrophic out-of-pocket costs. That comes to about 5 million enrollees in 2022. The other 25 million FFS enrollees in Parts A  and B have access to OOP caps -- usually quite low --  via either Medigap, an employer-sponsored supplemental plan, or dual eligibility in Medicare and Medicaid.

In a study commissioned by America's Health Insurance Plans (AHIP), Wakely actuaries calculated that adding a $6,700 OOP cap to FFS Medicare Parts A and B would increase per-person spending by 3.5%. Wakely cast that estimate as conservative, as it does not include an estimate of "induced demand"-- i.e., enrollees using more care because it's more affordable. A June 2022 Urban Institute analysis bears that out. Urban estimated the cost of a $7,550 cap -- the highest currently allowable by MA plans for in-network care -- at $25 billion per year, a 5% increase. But that cap is inclusive of Part D, which according to Urban's estimate accounts for about 18% of cost increases. A $7,550 cap for Parts A and B alone would presumably increase FFS costs by about 4%. Urban estimates that induced demand triggered by a $7,550 cap will increase total spending by all payers by $8 billion, or 1.6% (perhaps 1.3% with Part D omitted).  That added cost (not accounted for by Wakely) does seem to bring the Urban and Wakely estimates more or less in line. 

The Urban study's primary focus is on a $5,000 cap -- roughly equivalent to the MA average for in-network care, though Urban includes Part D in the cap. Urban estimates that such a cap would raise federal Medicare spending by 7.8%. Removing Part D's share takes that to about 6.4%. About 20% of the additional federal spending on Medicare would reduce Medicaid spending, for which the federal government contributes somewhat more than half. Thus net federal spending, according to Urban's model might rise by a bit less than 6% under a $5,000 cap for Parts A and B.

It should be noted that an OOP cap in FFS Medicare would be more valuable than a cap of the same dollar value in MA, in that the FFS cap would apply to almost all providers. While some MA plans have separate caps for in-network and out-of-network care -- the latter as high as $11,300 this year and averaging $9,245 -- many MA plans provide no coverage for out-of-network care.

MedPAC estimates per-person spending for Medicare Advantage enrollees in 2022 at 104% of what spending would be for the same population in FFS Medicare. AHIP's claim (based on the Wakely analysis) that an "apples-to-apples" comparison accounting for the value of the MA OOP cap shows MA saving the federal government money has an element of truth -- even leaving aside a more radical Wakely critique of MedPAC's current calculation of the per-person cost of FFS Medicare.*** 

The "apples" provided by MA and FFS remain too different on other fronts, however, for a clear value comparison, On one side of the equation, MA plans offer extra benefits that MedPAC values at $2,000 per person (while complaining that data is lacking as to usage and outcomes), lower premiums for most (especially compared to FFS plus a Medigap plan), and the OOP cap. On the other side, FFS offers near-unlimited choice of providers and freedom from MA's sometimes onerous prior authorization requirements and coverage denials and limitations (e.g., on post-acute care venues and lengths of stay). (See this post for a closer look at these tradeoffs.)

The problem with AHIP's hypothetical value comparison -- MA vs. FFS with OOP cap -- is that at present, the federal government does fund a cap for MA and does not fund one for FFS. That tilts the market toward MA, and the gap keeps widening as MA gains market share while federal generosity to MA plans, currently embedded in benchmarks, quality bonuses and, most worrisomely, leniency toward MA plans inflating enrollees' risk scores, continues. While MA may currently be offering roughly equivalent value to the federal government on net, current funding practices offer growing numbers of incoming seniors a deal they feel they can't refuse: Giving up provider choice and comparatively low-friction access to covered services in exchange for lower premiums and ancillary benefits. A similar gravitational pull on employers that offer retirement health benefits is shrinking the pool of those for whom subsidized supplementary coverage makes FFS viable.

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* The OOP cap was the second most-cited "main reason" for choosing MA in the Commonwealth Fund survey. 24% of respondents chose "more benefits" as their main reason. Those benefits generally include some measure (often quite limited) of dental, vision and hearing coverage. 

** In 2022, 5.7 million Medicare enrollees are enrolled only in Part A or only in Part B and so are ineligible for MA plans.

*** The Wakely actuaries argues that MedPAC's inclusion of single-part enrollees in FFS Medicare (those in Part A only or Part B only) skews the per-person cost estimate far more than MedPAC assumes. That claim is viewed skeptically by analysts at KFF and elsewhere.   I outlined the claim in this post.

More on Medicare Advantage

AHIP's hooray for Medicare Advantage

To whose advantage is Medicare Advantage? Part 1

To whose advantage is Medicare Advantage? Part 2

Is avoiding overpayment of MA plans beyond U.S. government capacity?

Will Medicare Advantage swallow fee-for-service Medicare?

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