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. 

To whose advantage is Medicare Advantage? Part 1

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Note: Enrollment in Medicare Advantage plans is poised to surpass enrollment in traditional, fee-for-service (FFS) Medicare in 2023. MA's rapid growth raises major questions about the shape of Medicare coverage going forward. This is the first of two posts examining the pros and cons of Medicare Advantage. This post outlines the major issues as framed by MedPAC and select researchers, along with the basic economic tradeoffs for enrollees. Part 2 will report the experience of a hospitalist, brokers, and various stakeholders who responded to a CMS request for feedback about the MA program.

There is a slipknot quality to attempts to compare the value and utility of traditional, fee-for-service (FFS) Medicare and Medicare Advantage.

Medicare Advantage plans generally place bids to CMS far below CMS benchmarks, which are based on an adjusted estimate of what it costs to provide FFS Medicare to enrollees in the plan's geographic area. On average, according to the 2022 MedPAC report, MA plans spend 15% less to provide Part A and B benefits than FFS Medicare would spend.  But CMS pays Medicare Advantage plans an average of 104% of what it would pay for FFS Medicare coverage for the same enrollees. But MA plans use the excess payment to provide an estimated $2,000 per member in surplus benefits or out-of-pocket cost relief. But, according to MedPAC, the value of MA-furnished extra services as actually used by enrollees is elusive, because of inadequate reporting requirements, and the quality ratings that increase payments to MA plans do a poor job measuring quality.

With regard to outcomes, MA plans employ treatment protocols that do minimize some so-called low-value care and, in some cases at least, boost usage of preventive care that, according to some studies, can reduce cardiac events, foot amputations for diabetics, ER trips, hospital admittances, and other conditions and services. But there is also good evidence that MA plans inhibit or impede access to needed or high-value care, introduce expensive and sometimes dangerous bureaucratic hurdles to obtaining needed care, and drive enrollees with intense medical needs back to FFS. 

Most notoriously, by multiple accounts, MA plans often impede, block, limit options and reduce the duration of post-acute care. Comments about MA that CMS recently solicited from stakeholders detail these complaints (from physician and hospital associations, practitioners, acute care personnel, patients, brokers and others) again and again and again. A major strain in these complaints is from state employees forced into MA plans by retirement benefit packages.

This month, the Kaiser Family Foundation published a report, based on a literature review of 62 studies published since 2016, comparing "Beneficiary Experience, Affordability, Utilization, and Quality in Medicare Advantage and Traditional Medicare." The authors' conclusions are...inconclusive:

How will Medicare enhancement change the current public-private Medicare ecosystem?

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Democrats' aspirations to add dental, hearing and vision benefits to Medicare raises questions about the interactions between tradition, fee-for service (FFS) Medicare, Medicare Advantage (MA), and Medigap. These center on MA's growing market share, its funding mechanism, the gaps in FFS Medicare coverage that MA plans partially fill, and the value of Medigap for those who can afford it (or whose employers fund it).

Below, a brief outline (distilled mainly from KFF briefs) of how the three programs (FFS, MA and Medigap) interact/compete at present, followed by questions about how pending legislation may alter the ecosystem.

Will 60-64 year-olds have a choice between Medicare and Obamacare? What will that look like?

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I turned 62 recently. Yesterday, for the first time, I took seriously the possibility that my wife and I might be enrolled in Medicare before we turn 65.

According to the Wall Street Journal's Stephanie Amour and Kristina Peterson, the Democrats' next healthcare initiative, envisioned for spring 2022, is likely to contain

measures to reduce drug prices and expand health coverage, lawmakers said. Proposals to expand Medicare eligibility from age 65 to 60 and to enable the federal government to negotiate drug prices in the health program for seniors—both of which President Biden supported on the campaign trail—are also likely to be included.

I can think of a lot of reasons these measures -- paired so that the prescription drug savings will finance the expanded eligibility -- may not happen.  But the odds that they will be enacted are not negligible. Democrats' success holding together to pass the $1.9 trillion Covid relief package have made a lot of bold initiatives seem possible.

If Democrats do manage to drop the Medicare eligibility age, they are also likely to make permanent the major increases to premium subsidies in the ACA marketplace enacted through 2022 in the Covid relief bill, the American Rescue Plan Act. And the two initiatives could overlap -- or clash -- to some degree.

The possibility of passing all of the above raises questions: will Medicare be offered to 60-65 year-olds on the same terms as Medicare for people over age 65?  Will enrollment delayed past age 60 be penalized on the same terms as enrollment delayed past age 65 at present? If enrollment at 60-65 is optional, will those who lack access to employer-sponsored insurance also be eligible for subsidized ACA marketplace coverage? -- will they have a choice between the two programs?

If Medicare is indeed subsidized as heavily at ages 60-64 as at age 65 and over, and if enrollment is optional, and if the ARPA subsidy schedule for the ACA marketplace (or something close to it) becomes permanent, some 60-65 year-olds will have a tough choice to make between Medicare and marketplace coverage. 

Broadly speaking, those with incomes up to 200% of the Federal Poverty Level (FPL) will likely find lower costs in the marketplace -- if they're not dually eligible for Medicare and Medicaid. Those with incomes over 400% FPL will likely favor Medicare.  In between is a gray area, with tradeoffs that are charted and discussed below.

How the ACA marketplace falls short of Medicare

When Americans turn 65, they're faced with a huge variety in Medicare offerings. In addition to or in place of the three parts of traditional, fee-for-service (FFS) Medicare, two of which require enrollee action to enroll, a typical enrollee may choose from among 10 distinct types of Medigap plan, each with a mandatory benefit structure, or from an average of 24 Medicare Advantage offerings that incorporate, with some tradeoffs, the benefits of  Medicare Parts A, B and D (hospital, medical  and prescription drug coverage). Low income enrollees may need often hard-to-find assistance, and a wheelbarrow full of financial documents, to access supplementary Medicaid or Medicare Savings Program (MSP) benefits that pick up all, most or some of their out-of-pocket costs.

Notwithstanding this Byzantine array of programs and choices, the generous national subsidization and fixed benefit structure of  FFM Medicare provide a stable backbone to the program. The bottom line is that 95% of the over-65 population has access to health insurance with an actuarial value a bit north of  80%  for something under $200 per month, with options that take AV up to 100% for up to about $400 per month. Step-ups for the wealthiest 5% of the eligible population are proportionate and affordable.  Roughly a sixth of some 45 million Medicare enrollees over age 65 are low income "dual eligibles" for whom Medicaid picks up much or all of out-of-pocket costs.

Think ACA enrollment is complicated? Try Medicare

One of the early and persistent raps against the ACA is that the benefit structure and application process are too complex. There's a lot of questions to answer. It takes a half hour to an hour -- if you're not called on to provide extra verification for your identity or immigration status or income. There are benefit cliffs -- between Medicaid and the marketplace; between marketplace enrollees who qualify for strong Cost Sharing Reduction and those who don't; and, most precipitous (for older enrollees), between those who qualify for premium subsidies and those who don't. As for plan offerings, in some markets a dominant insurer will throw up a half-dozen minutely differentiated plans, sowing confusion.

All this is true. But I'd like to take a first pass here at a myth that I'd like to explore more fully later: that by comparison, Medicare is a blessed zone of simplicity, equity and benefit adequacy.

What would Simpson-Bowles 2.0 do to Medicare?

Liberals are up in arms about the new Simpson-Bowles deficit reduction framework because, in brief, it calls for about $1.4 trillion less in revenue over ten years than Simpson-Bowles 1.0  (let's call it SB 1) along with roughly another $1.8 trillion in spending cuts, counting interest savings. That's more cuts than those mandated by the looming sequester, but more back-loaded, and with $600 billion coming from Medicare and Medicaid, which the sequester doesn't touch.

The shock comes from the reduction in proposed new revenue compared to the original plan, a change that simply reflects Obama's more limited revenue goals ($1.2 trillion over ten years at last ask, compared to $2.6 in SB 1). Spending cuts remain approximately the same, making the whole package proportionately more cut-heavy.

I want to look for a moment at the $600 billion in savings SB 2 proposes for "health care reforms" -- $200 billion more than SB 1 laid out, but  no more than Obama put forward in his last "grand bargain" offer to Boehner.  Simpson and Bowles envision bending the health care curve in ways that overlap with those envisioned by Obama -- though BS 1 cuts benefits in ways that Obama would not approve, and BS 2 would presumably cut benefits still more. Their rather sketchy new framework takes an "all of the above' approach to reducing healthcare costs -- hitting providers, beneficiaries, and drug companies:

Reduce Medicare and Medicaid spending by improving provider and beneficiary incentives throughout the health care system, reducing provider payments, reforming cost-sharing, increasing premiums for higher earners, adjusting benefits to account for population aging, reducing drug costs, and getting better value for our health care dollars (Feb-Dec 2013)

In which Henry Aaron talks himself into supporting a raised Medicare eligibility age

Henry Aaron of Brookings, one of the nation's top healthcare economists, has a rather odd perspective on the current brewing battle over so-called "entitlement reform." On the one hand, he focuses his concern on the older elderly, with their ever-dwindling purchasing power, which leaves him less hostile to raising the Medicare eligibility age than other left-of-center economists who acknowledge a need to trim benefits. He is more distressed by proposals to trim cost-of-living increases, e.g. the so-called chained CPU, which seem to strike most observers as a milder, more gradual mode of trimming benefits. Indeed, in the fullness of time, when the ACA is fully up and running and providing affordable care to the uninsured, Aaron favors raising the Medicare eligibility age to expand the ratio of working to retired adults.

On another front, Aaron at once provides historical and comparative data to demonstrate that U.S. senior health and pension benefits are unduly skimpy, and effectively concedes that given our political culture, we need to plan how best to make them skimpier still. He suggests that only by agreeing to benefit cuts can Democrats forestall more radical proposals to shred the safety net, e.g. via private accounts for social security or voucherization of Medicare. At the same time, he argues for benefits that increase with age, with offsets for lower-income younger elderly for whom raised retirement ages are a burden, and for a variety of formulas to shift costs onto the wealthier elderly (his Medicare reforms look something like those proposed by Senators Lieberman and Coburn: providing catastrophic insurance but ending Medigap as we know it, and making the wealthy elderly pay a much higher percentage of the actuarial value of their coverage).

I find it odd that Aaron argues, in effect, for preemptive concessions -- proposing policy choices he regards as less than optimal as a means of forestalling more radical, Paul Ryanesque attacks on safety net programs: