By 2025, people on Medicare who take expensive medications will feel significant financial relief: They will not have to pay more than $2,000 in a year for all of their drugs.
But the 35 million people who are enrolled in the traditional Medicare program still won’t have that same relief anytime soon for their hospital, outpatient, home health, and nursing home care, leaving them exposed to potentially unlimited costs if they become seriously ill and don’t have supplemental coverage.
“Many people don’t know that traditional Medicare does not have a cap on catastrophic out-of-pocket expenses, because most insurance does,” said Cristina Boccuti, director of health policy at research firm West Health. “People don’t realize it until they enroll in Medicare.”
The issue is especially relevant as Medicare’s annual enrollment is underway, ending Dec. 7. 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.
Adding an out-of-pocket maximum to the main Medicare program would cost taxpayers money, like it will for drug costs. A vast majority of Medicare patients also wouldn’t hit that cap — roughly 88% don’t spend $5,000 out of their pockets in a year, according to recent estimates from the Urban Institute. But Medicare policy experts say there’s momentum to establish that kind of cap for all services, in part to level the playing field with Medicare Advantage, and most importantly, to give millions of seniors and people with disabilities peace of mind if their health takes a turn.
“There’s the really intangible feeling of financial security that people get from having an out-of-pocket cap even if they’re not going to reach the cap, and that’s an important thing to not overlook,” said Gretchen Jacobson, vice president of Medicare at the Commonwealth Fund.
Nearly all commercial health plans have an annual out-of-pocket maximum, meaning the insurance company or employer covers the entire tab for medical care after someone pays the designated maximum amount. Medicare used to have a cap more than 30 years ago, but it was short-lived. Congress passed a law in 1988 to cap Medicare’s deductibles and copays for hospital and physician care. Lawmakers repealed the law less than a year later after facing backlash from the public.
Many seniors did not understand what was included in the new law, polling at the time showed. However, they knew it meant higher taxes for them. There was a maximum tax liability, so no adult would pay more than $800 in extra annual taxes — but for the wealthy and well-insured, it was a step too far, even if it meant some financial protection for the poorest and sickest patients.
“Many elderly resented the idea of paying additional taxes to finance the new coverage,” researchers wrote in Health Affairs in 1990. “Resentment appeared to be highest among people who already had comprehensive health insurance coverage from a former employer. Not only did they bear the brunt of the financing, but the benefits of the new legislation added little to their existing coverage.”
Congress hasn’t substantively touched the issue since then, so the gap in coverage still exists. Many people in traditional Medicare bridge that gap through a few primary options: retiree coverage if it’s offered by their employer, simultaneously qualifying for Medicaid, or by buying Medigap plans, which limit copays and deductibles but can come with expensive monthly premiums.
It’s worth noting people who first choose a Medicare Advantage plan but later decide to go to traditional Medicare could get locked out of the Medigap market, depending on where they live, because Medigap plans can deny coverage based on pre-existing conditions.
But as the Commonwealth Fund survey and federal enrollment data show, millions of people who don’t have feasible or affordable options for extra coverage have gravitated toward Medicare Advantage, which by law has to limit out-of-pocket costs. Patients who choose those plans are foregoing traditional Medicare’s national network of doctors, hospitals, and other providers in exchange for that security blanket. For this year, the average maximum out-of-pocket in Medicare Advantage plans is around $5,000, and it cannot exceed $7,550 for in-network care, according to the Kaiser Family Foundation.
“For better or for worse, Medicare Advantage has been a vehicle for the government to increase benefits to Medicare beneficiaries without needing legislative changes by Congress,” said Susan Dentzer, CEO of America’s Physicians Groups, an industry-funded group that supports Medicare Advantage.
Creating an out-of-pocket cap for all services in Medicare that is similar to the one in Medicare Advantage would cost billions of dollars because taxpayers would be covering the lion’s share of those catastrophic events instead of patients. A calculator created by West Health estimates a $5,000 limit would increase Medicare spending by $10 billion in 2023.
However, some proposals suggest adding an out-of-pocket max to Medicare could save the government and taxpayers money — when paired with other changes that shift spending away from Medicare. A $7,000 max combined with a policy that bars Medigap plans from covering certain amounts of a person’s deductible and coinsurance could save the government more than $14 billion per year by 2028, according to a Congressional Budget Office report from 2020.
Health insurers aren’t enthusiastic about adding a maximum out-of-pocket to traditional Medicare, which would make the program more appealing and as a result could lead to people dropping their Medicare Advantage and Medigap plans. STAT reached out to the largest insurance lobbying groups — America’s Health Insurance Plans, Better Medicare Alliance, Alliance of Community Health Plans, and AARP — and none offered a full-throated endorsement of capping costs in traditional Medicare.
AHIP released a report last month that said federal spending would be higher in traditional Medicare if it had out-of-pocket limits like Medicare Advantage — a hypothetical the group used to justify the higher payments that Medicare Advantage insurers receive. So would the group support adding a cap to traditional Medicare to compete with Medicare Advantage? Maybe, but only if the government raised payments to insurers even more.
“Should Congress consider enhancing original Medicare’s basic benefits, the existing structure to costs must be included in MA benchmarks to be consistent with the payment structure under the MA program and to be fair to Americans who choose MA,” AHIP said in a statement.
The Better Medicare Alliance did not explicitly support a maximum out-of-pocket for traditional Medicare beneficiaries, saying in a statement that it wants seniors to have financial protection, but “an out-of-pocket cap will not itself replicate the coordinated, whole-person care found in Medicare Advantage.”
The Alliance of Community Health Plans did not offer an official stance on a maximum out-of-pocket in traditional Medicare, and said it believes “the best path forward is Medicare Advantage and [we] are advocating for a next generation of the program, not the volume-based care in traditional Medicare.”
AARP, which generates revenue from the sale of Medigap plans and has a financial relationship with UnitedHealth Group, the largest Medicare Advantage insurer in the country, did not comment.
Congress isn’t any closer to addressing this gap, but that doesn’t make it any less of a concern for the 17% of patients in the traditional Medicare program — roughly 5 million to 6 million people — who have no extra coverage whatsoever.
“There are many Americans who can’t afford supplemental coverage or don’t want to be in a [Medicare Advantage] health plan, and want to stay in traditional Medicare,” Boccuti of West Health said. “They’re really exposed to a year of high out-of-pocket costs if they have a serious health event.”
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