Background Medicare FFS Program In 2016, Medicare spent about $380 billion on health care services for  beneficiaries enrolled in Medicare FFS, which consists of two separate  parts: Medicare Part A, which primarily covers hospital services, and  Medicare Part B, which primarily covers outpatient services. The majority  of the 38 million Medicare FFS beneficiaries were enrolled in both Part A  and Part B, although about 5 million were enrolled in Part A only and 0.3  million were enrolled in Part B only. Medicare FFS Cost- Sharing Design The general design of Medicare FFS cost-sharing has been largely  unchanged since Medicare’s enactment in 1965. It includes separate  deductibles for Part A and Part B services, a variety of per-service  copayments and coinsurance after the deductibles are met, and no cap  on beneficiaries’ cost-sharing responsibilities (see table 1). Supplemental Insurance  among Medicare FFS  Beneficiaries The current cost-sharing design leaves beneficiaries exposed to  potentially catastrophic cost-sharing, and in part because of that, in 2015,  81 percent of Medicare FFS beneficiaries obtained supplemental  insurance that covered some or all of their Medicare cost-sharing  responsibilities, often in exchange for an additional premium (see table 2).  For example, in 2015, 31 percent of Medicare FFS beneficiaries  purchased a private Medigap plan, the most common types of which fully  insulated them from Medicare cost-sharing responsibilities in exchange  for an average annual premium of $2,400. Another 20 percent of  Medicare FFS beneficiaries enrolled in Medicaid, which generally covered  most of their Medicare cost-sharing responsibilities; however, these low- income beneficiaries generally only paid a limited or no premium for this  supplemental coverage. Medicare FFS Cost- sharing Can Be  Confusing and Lead  to Overuse of  Services;  Modernizing Could  Address Concerns,  but Would Involve  Trade-offs The current Medicare FFS cost-sharing design can be confusing,  contribute to beneficiaries’ overuse of services, and leave beneficiaries  exposed to catastrophic costs. Modernizing the design could address  these concerns, but would involve trade-offs. For example, as shown in  four illustrative designs that we evaluated, maintaining Medicare’s share  of costs would involve a trade-off between the level of the cap and the  deductible (or other cost-sharing). Medicare FFS Cost- sharing Design Can Be  Confusing, Contribute to  Beneficiaries’ Overuse of  Services, and Leave Them  Exposed to Catastrophic  Costs As noted by Medicare advocacy groups and others, the current Medicare  FFS cost-sharing design, which includes multiple deductibles, can be  confusing for beneficiaries. In 2014, 16 percent of Medicare FFS  beneficiaries were responsible for at least one Part A deductible for an  episode of inpatient care as well as the annual Part B deductible.  (Medicare FFS beneficiaries may be subject to more than one Part A  deductible during the year, as the Part A deductible applies to each  admission to an inpatient hospital or skilled nursing facility that occurs  more than 60 consecutive days after the prior admission.) The  Congressional Budget Office has cited the separate deductibles as one  way in which Medicare FFS cost-sharing is more complicated than private  plans. In 2016, according to a survey conducted by the Kaiser Family  Foundation, only 1 percent of workers with employer-sponsored  insurance had a separate deductible for inpatient services. Moreover,  inpatient services tend to be nondiscretionary, and one or more  deductibles for those services can create a financial burden for  beneficiaries, while having minimal effect on their use of inpatient  services. The cost-sharing design also affects beneficiaries’ utilization of services.  For example, as noted by the bipartisan Simpson-Bowles Fiscal  Commission, the lack of a coherent cost-sharing system is a significant  contributor to overuse and misuse of care. This is particularly true for  services such as home health and clinical laboratory services, which  currently have no cost-sharing under Medicare FFS and thus do not  provide beneficiaries an incentive to decline care of negligible value.  Because of these concerns, MedPAC recommended adding a cost- sharing requirement for home health services that were not preceded by  hospitalization or post-acute care, noting that the current lack of cost- sharing has likely contributed to the significant rise in utilization for these  services, which suggests some overuse. At the same time, the lack of an annual cost-sharing cap prevents  Medicare FFS from fulfilling a key purpose of health insurance: protecting  beneficiaries from catastrophic medical expenses. While most  beneficiaries had cost-sharing responsibilities under $2,000 in 2014, 1  percent—over 300,000 beneficiaries—had responsibilities over $15,000,  including several hundred beneficiaries with responsibilities between  $100,000 and $3 million. (See fig. 1.) Given the risk of catastrophic  medical expenses, a focus group of current and future Medicare  beneficiaries convened by MedPAC indicated that an annual cap is the  cost-sharing design feature they were most interested in seeing added to  the Medicare benefit. Annual caps are a common design feature of  private plans, as most are required to have an annual cap, including  those participating in MA.  Specifically, since 2011, CMS has required  most MA plans to have an annual cap of $6,700 or less and grants them  additional flexibility in their cost-sharing design if they voluntarily set their  cap at or below $3,400. The mandatory and voluntary caps for certain MA plans that provide both in- and out-of-network coverage are the same  ($6,700 and $3,400) for in-network services, and 1.5 times higher  ($10,000 and $5,100) for combined in- and out-of-network services. In addition to these implications of the cost-sharing design itself, the  American Academy of Actuaries and others have noted that the  complexity and the possibility of unlimited responsibilities increases  demand for supplemental insurance, which can lead to added costs for  beneficiaries and the Medicare program. It is uncommon for beneficiaries  enrolled in private health insurance to have supplemental coverage. By  insulating beneficiaries from some or all cost-sharing responsibilities (and  not just catastrophic costs), supplemental insurance further reduces the  incentives for beneficiaries to evaluate the need for discretionary care. In  part because of these reduced incentives, we previously estimated that  both beneficiaries’ average total out-of-pocket costs and average  Medicare program spending were higher for Medicare FFS beneficiaries  with Medigap than those with FFS only. Modernizing Medicare  FFS Cost-sharing Could  Address Concerns, but  Would Involve Design  Trade-offs Modernizing Medicare FFS cost-sharing could address these concerns,  but would involve design trade-offs. Specifically, as proposed by various  groups, revising Medicare’s cost-sharing design to include a single  deductible, modified cost-sharing requirements, and an annual cost- sharing cap could address concerns with the current cost-sharing design.  However, there are multiple options for revising within this broad  framework, including two key design trade-offs that would affect the  extent to which a modernized structure would address concerns about the  current design (and possibly also raise new concerns). One trade-off centers on how to modify the existing complicated set of  cost-sharing requirements for different services. While the reform  proposals have generally suggested moving to a single deductible, they  have varied in how to modify the subsequent per-service payments.  Some proposals have emphasized the value of simplicity and suggested  replacing the complex set of per-service payments above the deductible  with a uniform coinsurance. A uniform coinsurance would simplify the  cost-sharing design, provide beneficiaries insight into the total cost of  each service, and introduce cost-sharing for certain potentially  discretionary services, such as home health services. However, as noted  by the Medicare Payment Advisory Commission and Congressional  Budget Office, uniform coinsurance also has drawbacks, such as a fixed  percentage of an unknown bill being harder for beneficiaries to  understand and predict than copayments. Other proposals have  emphasized the need to set cost-sharing based on the value of services,  and have suggested moving Medicare toward a value-based insurance  design in which per-service cost-sharing would vary based on the clinical  value of the service to an individual beneficiary. While a value-based  design would specifically target cost-sharing to promote prudent use of  health care services, implementing it is challenging in practice and would  be more complicated for beneficiaries to understand and for CMS to  administer, though CMS is testing the feasibility of value-based insurance  design in MA. A second design trade-off centers on how to set the level of the  deductible and the annual cap. As shown in the four illustrative cost- sharing designs we evaluated, the lower the cap, the higher the  deductible (or other cost-sharing requirements) would need to be to  maintain Medicare’s and beneficiaries’ aggregate share of costs similar to  that of the current design. For example, holding utilization and  enrollment constant, we found that even without any deductible, a uniform  coinsurance of 18 percent (a level below the existing 20 percent  coinsurance for most Part B services) would be sufficient to add a cap  near $10,000 (the mandatory cap for certain MA plans that allow  beneficiaries to see any provider). In contrast, it would take a deductible  near $1,225 (a level similar to the existing Part A deductible for each  inpatient episode) and a uniform coinsurance of 20 percent to establish a  cap of $3,400 (the voluntary cap for most MA plans). (See table 3.) Different levels of the deductible and cap would address certain concerns  of the current design raised by GAO and others but also could create new  ones. For example, as our analysis of four illustrative cost-sharing  designs shows, designs with relatively high caps would provide some  additional protection from catastrophic costs while maintaining a  deductible and coinsurance near or below the current levels for Part B  services. However, per an analysis conducted by Kaiser Family  Foundation and the Urban Institute, half of Medicare beneficiaries in 2016  were living on less than $26,200 in income; thus, caps of $6,700 or  higher may still leave some beneficiaries vulnerable to costs that are  catastrophic for them and may not significantly decrease the associated  demand for supplemental insurance. In contrast, designs with relatively  low caps would provide greater protection from catastrophic costs.  However, as noted by the Congressional Budget Office, beneficiaries who  reached the cap would have less incentive to use services prudently. In  addition, the higher deductible needed to offset a lower cap while  maintaining Medicare’s share of costs could present a financial barrier for  some beneficiaries to obtain necessary care. Direct Effect of  Modernizing  Medicare FFS Cost- sharing Design Would  Depend on Specific  Revisions and Time  Horizon The direct effect of modernizing the Medicare FFS cost-sharing design  (i.e., the effect when holding utilization and enrollment constant) on  beneficiaries’ cost-sharing responsibilities would depend on the specific  revisions and the time horizon examined. As we noted above,  modernizing the FFS cost-sharing design while maintaining Medicare’s  aggregate share of costs similar to the current design requires a trade-off  between the level of the deductible and cap. At the beneficiary level, this  design trade-off affects beneficiaries’ annual cost-sharing and the degree  to which beneficiaries would be protected from catastrophic costs. One  way of viewing how the design trade-off affects beneficiaries is to  compare across different designs the median annual cost-sharing  responsibility with the level of the cap (see fig. 2). In examining the direct  effect of the four illustrative modernized designs we analyzed, we found  the following: During year 1, cost-sharing designs that feature relatively low  deductibles and relatively high caps would result in a median annual  beneficiary cost-sharing responsibility close to or below that of the  current design. In contrast, designs with relatively low caps—and  therefore greater beneficiary protection from catastrophic costs— would result in a median annual beneficiary cost-sharing responsibility  above that of the current design. For example, during year 1 of a  design with no deductible, 18 percent coinsurance, and a cap near  $10,000, we found that the median annual cost-sharing responsibility  would be $479, which is below that of the current design ($621),  despite the addition of a cap. In contrast, during year 1 of a design  with a $1,225 deductible, 20 percent coinsurance, and a cap near  $3,400, the median annual cost-sharing responsibility would be  $1,486, which is 2.4 times higher than that of the current design.  However, in exchange for this higher median annual cost-sharing  responsibility, beneficiaries would have much greater protection from  catastrophic costs, as their annual cost-sharing responsibilities would  be capped near $3,400. By the end of 8 years, there would still be differences in the median  annual beneficiary cost-sharing responsibility across different designs,  but they would become less pronounced—despite the significantly  different levels of catastrophic protection. As beneficiaries age and  become more likely to have catastrophic costs in at least one year,  the median annual cost-sharing responsibility would increase,  regardless of the cost-sharing design. However, by the end of 8 years  the differences in the median annual cost-sharing responsibility  across different designs would become less pronounced. For  example, the median annual cost-sharing responsibility under the  design with a cap near $10,000 would increase from below that of the  current design in year 1 to 1.1 times higher than the current design by  the end of 8 years. In contrast, the median annual cost-sharing  responsibility under the design with the cap near $3,400 would  decrease from 2.4 times higher than the current design in year 1 to  only 1.6 times higher by the end of 8 years. (See app. I table 4 for  more details, including results on our other two illustrative designs and  results over 4 years.) The same patterns held when looking at how the design trade-off affects  beneficiaries in another way: the percentage of beneficiaries with cost- sharing responsibilities lower and higher than under the current design  (see fig. 3). In examining the direct effect of our four illustrative designs,  we found the following: During year 1, designs that feature relatively low deductibles and  relatively high caps would result in a minority of beneficiaries having  cost-sharing responsibilities that are at least $100 higher than under  the current design. In contrast, designs with relatively high deductibles  and relatively low caps would result in the majority of beneficiaries  having cost-sharing responsibilities that are higher than under the  current design. For example, during year 1 of a design with no  deductible, 18 percent coinsurance, and a cap near $10,000, 16  percent of beneficiaries would have cost-sharing responsibilities at  least $100 higher than their responsibilities under the current design.  In contrast, during year 1 of a design with a $1,225 deductible, 20  percent coinsurance, and a cap near $3,400, 69 percent of  beneficiaries would have cost-sharing responsibilities at least $100  higher than their responsibilities under the current design. By the end of 8 years, there would still be differences across the  designs, but they would become less pronounced—despite levels of  catastrophic protection that vary significantly. Over a longer time  horizon, a larger percentage of beneficiaries would reach the cap at  least once, regardless of the cost-sharing design (ranging from 23  percent reaching the cap at least once over 8 years under the design  with a cap near $10,000 to 66 percent under the design with a cap  near $3,400). However, the subset of these beneficiaries who  nonetheless had annual cost-sharing responsibilities at least $100  higher would also increase. Whether this increase would be  augmented or offset by the changes over time in the percentage of  beneficiaries who never reached the cap and had higher cost-sharing  responsibilities would depend on the specific design. For example, the  percentage of beneficiaries with annual cost-sharing responsibilities at  least $100 higher than the current design would increase from 16  percent in year 1 to 38 percent by year 8 under the design with a cap  near $10,000. In contrast, this percentage would decrease from 69  percent in year 1 to 67 percent by year 8 under the design with a cap  near $3,400. (See app. I tables 5 and 6 for more details, including  results on our other two illustrative designs and results over 4 years.) Modernizing  Medicare Cost- sharing Design Would  Affect Costs Indirectly  through Behavioral  Responses Modernizing the Medicare FFS cost-sharing design would affect  beneficiaries’ costs indirectly through beneficiaries’ and supplemental  insurers’ behavioral responses to altered incentives, according to the  studies we reviewed and the experts we spoke to. These studies and  experts identified several types of behavioral responses that would  influence the net effect of a modernized design on beneficiaries’ out-of- pocket costs, including  changes in beneficiaries’ demand for, and insurers’ supply of,  supplemental insurance;  changes in beneficiaries’ utilization of services;  changes in Medicare beneficiaries’ enrollment in FFS versus MA; and  interactions among these and other behavioral responses, including  effects on the price of supplemental insurance. According to studies we reviewed and experts we spoke to, implementing  a modernized cost-sharing design would likely trigger changes in the  demand for and supply of supplemental insurance. For example, a focus  group of current and future Medicare beneficiaries convened by MedPAC  and a report from the American Academy of Actuaries stated that the  addition of an annual cap would reduce the need of some beneficiaries to  purchase supplemental insurance. While beneficiaries who drop their  supplemental insurance would then need to pay all their Medicare cost- sharing responsibilities, those might be less than their annual premium for  supplemental insurance. Additionally, according to the same MedPAC  study and a Congressional Budget Office report, retiree coverage may change under a modernized design. For example, with a cap in place,  there would be less difference between employer-sponsored plans and  Medicare, and employers may choose to alter the supplemental  insurance they offer. CMS officials told us that this would continue the  trend of private employers reducing retiree health coverage. Several studies we reviewed and experts we interviewed indicated that  implementing a modernized design could also trigger changes in  utilization of Medicare services, the extent of which would affect  beneficiaries’ out-of-pocket costs. For example, the RAND Health  Insurance Experiment (HIE), which some experts consider to be the most  comprehensive study on price and utilization, found that patients were  “moderately sensitive to price.” The RAND HIE found that patients  respond to increases in cost-sharing that they need to pay at least partly  out-of-pocket by decreasing their use of some services.  Similarly, CMS  officials told us that they would expect utilization to decrease as  beneficiaries’ out-of-pocket costs increased, while a study in the  American Economic Review found that the addition of a copayment led to  a decline in office visits. The RAND HIE study suggests that a 10  percent increase in cost-sharing would lead to a 1 to 2 percent decline in  patients’ use of services. In the case of the RAND HIE study, cost- sharing affected the number of contacts people initiated with their  physician, which impacted preventive care and diagnostic tests. The  study found that this could potentially affect patients’ use of both effective  and less effective services. According to several studies and interviews with experts, design changes  could trigger other behavioral responses. For example, a study by the  Kaiser Family Foundation and a report by the Congressional Budget  Office both anticipated that a modernized design could change the  proportion of Medicare beneficiaries who decide to enroll in FFS or MA.  Similarly, officials from the American Academy of Actuaries told us that  they would expect a change in demand for MA under a modernized  design. Under the current Medicare design, all MA plans have an annual  cap that protects beneficiaries from catastrophic medical expenses.  Between 2008 and 2017, the percentage of Medicare beneficiaries who  chose to enroll in an MA plan increased from 22 to 33 percent. CMS  officials told us that the increases in MA enrollment may be due in part to  the requirement that MA plans must include an annual cost-sharing cap.  The Kaiser Family Foundation study found that a modernized design,  similar to that of an MA plan, might incentivize some MA beneficiaries to  move back to FFS. According to experts we interviewed and studies we reviewed, different  behavioral responses described above would also likely interact and  affect beneficiaries’ out-of-pocket costs. CMS officials told us that when  all of the factors contributing to out-of-pocket costs are combined, it is  difficult to assess the net effect of a modernized cost-sharing design on  beneficiaries’ out-of-pocket costs. For example, officials with the National  Association of Insurance Commissioners emphasized that as both  demand for supplemental insurance and expected utilization changed,  supplemental premiums would also change, which would change out-of- pocket costs. Similarly, studies by both MedPAC and the Congressional  Budget Office found that changes in beneficiaries’ level of supplemental  insurance might trigger additional changes in utilization, which would also  result in changes to the pricing of supplemental insurance. Specifically,  if a number of relatively healthy beneficiaries dropped their supplemental  insurance, and the beneficiaries left were sicker (that is, more costly),  premiums for supplemental insurance might increase. Officials from the  Congressional Budget Office told us that, conversely, if the more costly  beneficiaries dropped their supplemental insurance, premiums might be  lower. Agency Comments We provided a draft of this report to the Department of Health and Human  Services for comment. The Department provided technical comments,  which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to appropriate congressional  committees, the Secretary of Health and Human Services, and other  interested parties. In addition, the report will be available at no charge on  the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact  me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix II. Appendix I: Direct Effect on Medicare  Beneficiaries’ Cost-sharing Responsibilities  under Four Illustrative Cost-sharing Designs The direct effect of modernizing the Medicare fee-for-service (FFS) cost- sharing design (i.e., the effect when holding utilization and enrollment  constant) on beneficiaries’ cost-sharing responsibilities would depend on  the specific revisions and the time horizon examined. Tables 4, 5, and 6  present the direct effect of modernizing the Medicare FFS cost-sharing  design on beneficiaries’ cost-sharing responsibilities under four illustrative  designs. Each table presents the direct effect of each illustrative design  over 1-, 4-, and 8-year time horizons. Appendix II: GAO Contact and Staff  Acknowledgments GAO Contact Staff  Acknowledgments In addition to the contact named above, Greg Giusto (Assistant Director),  Alison Binkowski, George Bogart, Reed Meyer, Beth Morrison, Brandon  Nakawaki, and Brian O’Donnell made key contributions to this report.  Also contributing were Todd Anderson, Emei Li, Yesook Merrill, Vikki  Porter, and Frank Todisco.
To address concerns with the current Medicare FFS cost-sharing design, various groups have proposed modernizing the design to make it simpler and include features found in private plans. These proposals have generally included a single deductible, modified cost-sharing requirements (e.g., a uniform coinsurance), and the addition of a cap on beneficiaries' annual cost-sharing responsibilities. GAO was asked to review how modernized cost-sharing designs would affect beneficiaries' costs over multiple years. This report describes implications of the current cost-sharing design; options for modernizing; and how modernized cost-sharing designs could directly and indirectly affect beneficiaries' costs. GAO reviewed studies related to modernizing Medicare's cost-sharing design and interviewed authors of those studies and other experts. GAO also used summarized Medicare claims data from 2007 to 2014 (the most recent data available) to develop four illustrative modernized designs, each including a single deductible, uniform coinsurance, and an annual cap while maintaining Medicare program spending similar to the current design. For each design, GAO calculated how beneficiaries' annual cost-sharing responsibilities compared with the current design over a 1-, 4-, and 8-year time horizon. The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate. GAO and others have raised concerns about the design of Medicare fee-for-service (FFS) cost-sharing—the portion of costs beneficiaries are responsible for when they receive care. The current cost-sharing design has been largely unchanged since Medicare's enactment in 1965, can be confusing for beneficiaries, and can contribute to overuse of services. Additionally, the design leaves some beneficiaries exposed to catastrophic costs that can exceed tens of thousands of dollars annually. The complexity of the design and lack of an annual cap on cost-sharing responsibilities also increases demand for supplemental insurance, which can cost beneficiaries thousands annually and further contribute to overuse of services. Modernizing Medicare FFS's cost-sharing design to include features found in private plans could help address these concerns, but would involve design trade-offs. For example, adding an annual cap on cost-sharing responsibilities while maintaining Medicare's aggregate share of costs similar to the current design would involve a trade-off between the level of the cap and other cost-sharing requirements. In analyzing four illustrative FFS cost-sharing designs, GAO found that the direct effect of modernizing the design on beneficiaries' cost-sharing responsibilities—that is, the effect when holding utilization and enrollment constant—would depend on the specific revisions and the time horizon examined. For example, GAO found that During year 1, cost-sharing designs that feature relatively low deductibles (costs a beneficiary is responsible for before Medicare starts to pay) and relatively high caps would result in a median annual beneficiary cost-sharing responsibility close to or below that of the current design. In contrast, designs with relatively low caps—and therefore greater beneficiary protection from catastrophic costs—would result in a median annual cost-sharing responsibility above that of the current design. By the end of 8 years, there would still be differences in the median annual beneficiary cost-sharing responsibility across different designs, but they would become less pronounced. Modernizing the Medicare FFS cost-sharing design would also affect beneficiaries' costs indirectly through altered incentives. The studies GAO reviewed and experts GAO interviewed identified several types of behavioral responses that would influence the net effect of a modernized design on beneficiaries' out-of-pocket costs, including changes in beneficiaries' demand for and insurers' supply of supplemental insurance; changes in beneficiaries' use of services; changes in Medicare beneficiaries' enrollment in FFS versus Medicare's private plan alternative; and interactions among these and other behavioral responses, including effects on the price of supplemental insurance.