ONE OF THE ODDITIES of Medicare is that the elderly population it covers — the group most likely to face huge medical costs — receives no protection against catastrophic expenses. Under Medicare, there is no limit on annual out-of-pocket medical costs that seniors must pay. Almost all of those who participate in traditional Medicare, as opposed to managed-care plans, obtain supplemental coverage, either through their retirement packages (about 40 percent); from Medicaid in the case of low-income seniors (about 15 percent); or by purchasing private insurance policies known as Medigap (about 30 percent).
Given the irrational structure of Medicare, Medigap policies serve an important function. But they also play a less productive role. Many of the them provide what’s called first-dollar coverage, reimbursing all deductibles and co-payments. This structure insulates seniors from the economic consequences of their health-care choices and, studies suggest, drives up costs. The Congressional Budget Office has estimated that seniors with first-dollar Medigap policies spend about 25 percent more than those with Medicare alone.
This works well for beneficiaries and private insurers who offer the plans, such as those sponsored by AARP. It works less well for taxpayers; to the extent seniors consume more health care with first-dollar coverage than they would otherwise, Medicare foots the lion’s share of the bill. The optimal response would be to overhaul Medicare itself to provide a more rational structure of deductibles and co-payments than the current hodgepodge, increasing some cost-sharing while providing shelter against catastrophic expenses. Absent that, however, changing Medigap to require or encourage more cost-sharing — and therefore more cost-consciousness among consumers — merits serious consideration.
One approach, suggested by the Simpson-Bowles debt reduction commission, would be to prohibit Medigap plans from covering the first $550 of cost-sharing liabilities and limit coverage to 50 percent of the next $5,000. If implemented in 2013, the CBO estimates, the plan would save $54 billion over 10 years. Another plan, proposed by President Obama in his new debt plan, would impose a hefty premium surcharge — 30 percent of Medicare premiums — on seniors who choose to buy Medigap plans without adequate cost-sharing. To some extent, this is Medicare reform lite: The change would not take effect until 2017 and would apply only to newly enrolled beneficiaries; it would save only about $2.5 billion through 2021.
Cost awareness, of course, can be a two-edged sword. It could dissuade seniors from obtaining unnecessary care that drives up health costs — but it could also deter them from seeking needed services. Also, the change could disproportionately affect less wealthy and sicker beneficiaries. A majority would likely end up paying less for health care, with lowered premiums (reflecting less generous coverage) greater than the additional out-of-pocket expenses. However, as the Kaiser Family Foundation reported, “Medigap reforms would have a disproportionately negative impact on enrollees with modest incomes, in relatively poor health, and those with any inpatient hospital utilization.” It is important to keep such effects in mind in designing changes to Medigap.
There is no way to constrain health-care spending without inflicting some pain. Reforming Medigap policies, along with other changes to steer consumers and providers toward more efficient care, offers the prospect of lowering costs rather than shifting them within the system, as with proposals to raise the Medicare eligibility age. That change may also be warranted, but the first steps should be those with the greatest potential to control the current, unsustainable rise in costs.