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Restructuring Medicare: Impacts on Beneficiaries

As the nation considers how it will cope with the future health care needs of retiring baby boomers, Marilyn Moon of the Urban Institute analyzes two of the more prominent approaches that have been advanced-premium support and defined contribution-and projects their impact on future beneficiaries.

In Restructuring Medicare: Impacts on Beneficiaries, Moon cautions that under Medicare restructuring that would save federal budget outlays, beneficiaries would face increased liabilities for the costs of their health care. The burden, she notes, could be especially severe for those who are older, sicker, and less financially secure.

Under a premium-support plan, the government would pay a fixed percentage of the premium of the median-priced private managed care or insurance plan participating in Medicare. According to Moon's model, if the government pays 85 percent of the premium of the median-priced plan, beneficiary out-of-pocket costs would be almost twice as high in 2025 as in 1998. Greater federal budget savings could be achieved by setting the premium support at 80 percent of Medicare outlays, but costs to beneficiaries would also be considerably higher.

Savings in federal budget outlays could come from shifting costs to beneficiaries, beneficiaries moving into lower-cost plans, or competition among private plans, which would slow the growth in premiums over time. However, since projected increases in real Medicare per capita growth rates are already at historical lows, achieving even lower rates of growth would be difficult.

Under the defined contribution approach, the government would provide each beneficiary with vouchers to buy health insurance in the private market, shifting full responsibility for purchasing a plan to them, along with paying an increased share of costs. Increases in the vouchers would be tied to increases in a measure such as the gross domestic product (GDP). According to Moon's projections, beneficiaries in this system would pay up to 40 percent of their income for acute care expenses.

Although either of these options could mitigate the financial impact of the baby boomers on the federal budget, the effects on beneficiaries must be closely evaluated. Moon points out that while savings would be obtained by shifting costs to beneficiaries, no one can predict beneficiaries' behavior or the mechanisms of the marketplace.

Facts and Figures

  • If premium support were set at 85 percent, beneficiary out-of-pocket expenses would average $4,992 per person in 2025, nearly twice the $2,508 spent by beneficiaries in 1998. Under current law, beneficiaries can expect to spend $4,855 in 2025.

  • Health care costs would comprise an average of 30 percent of beneficiaries' incomes under an 85 percent premium support option and 33 percent of income with 80 percent premium support in 2025-up from 19 percent in 1998.

  • Under a defined contribution plan, acute care expenses would consume 34 percent of Medicare beneficiaries' income by 2025 if vouchers were linked to aggregate growth in GDP, and 40 percent if they were linked to GDP per capita growth.

Publication Details



Restructuring Medicare: Impacts on Beneficiaries, Marilyn Moon, The Urban Institute, The Commonwealth Fund, May 1999