Medicare Benefit Redesign: Enhancing Affordability for Beneficiaries While Promoting Choice and Competition

Out-of-pocket expenses are capped for enrollees in Medicare Advantage (MA) plans but not for beneficiaries in traditional Medicare, which also requires a high deductible for hospital care. The need for supplemental Medigap coverage adds to traditional Medicare’s complexity and administrative costs. Shortfalls in financial protection also make it difficult to offer traditional Medicare as a choice for people under age 65, as some have proposed.

Describe alternative benefit designs that would limit out-of-pocket costs for traditional Medicare’s core services, assess their cost, and illustrate financing mechanisms.

Analysis of a $3,500 ceiling on annual out-of-pocket expenses for Parts A and B benefits and options for replacing Part A hospital cost-sharing with a $350 or $100 copayment per admission.

Estimates of the costs of the reforms are $36–$44 per beneficiary per month, assuming no behavioral or supplemental coverage changes. This could be financed by a $9–$11 increase in premiums combined with a 0.3-to-0.4-percentage-point increase in the Medicare payroll tax (split between employer and employees). Medicaid costs would decrease, while employers, retirees, and Medigap enrollees would see reduced premiums.

The reforms would improve affordability and put traditional Medicare on a more equal footing with MA plans. They would also make it easier to open traditional Medicare to people under age 65.