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Reforming Medicare's Benefit Package: Impact on Beneficiary Expenditures

A range of options exists for modernizing Medicare that would reverse spiraling out-of-pocket costs for beneficiaries and reduce or eliminate the need for private supplemental insurance, according to a new Commonwealth Fund report. Three of the options analyzed in the report would restructure Medicare deductible and premium shares to reduce costs to beneficiaries, especially those with large expenses. A fourth option that would add a Medicare prescription drug benefit could be combined with any of the other options.

On average, Medicare beneficiaries now spend more than a fifth of their income- 22 percent-on health care, says the study, Reforming Medicare's Benefit Package: Impact on Beneficiary Expenditures, by Stephanie Maxwell, Marilyn Moon, and Matthew Storeygard of the Urban Institute. Many vulnerable groups spend far more: for poor women age 85 or older, insurance and medical bills can devour over 50 percent of their resources. The report notes that two of three Medicare beneficiaries are sick or poor and one-third have serious physical or cognitive impairments, accounting for 62 percent of Medicare outlays.

One of the options discussed in the report would lower the share of income that elderly beneficiaries would spend out-of-pocket for their health care from 21.7 percent to 16.4 percent. It would eliminate all deductibles and coinsurance, except for a $200 Medicare Part B deductible (for doctors' services and outpatient hospital care). By having additional Medicare premiums substitute for the costly premiums charged by Medigap supplemental policies, this option would offer beneficiaries the greatest average decline in out-of-pocket spending-and do so without raising overall program costs.

Prescription drug benefit coverage could be added to any of the three benefit restructuring options, although at additional cost to Medicare. The Urban Institute drug option features 50 percent coinsurance, a $2,500 limit on beneficiary cost-sharing, and a $26 monthly premium. Such a drug benefit would increase Medicare spending by about 6 percent. Under all the options that were analyzed, beneficiaries who are older, have low incomes, and are in poor health would experience the greatest savings.

The authors point out that the current Medicare benefit is clearly inadequate. About 90 percent of beneficiaries have additional coverage to make up for gaps, but these sources are becoming unstable and more expensive. Employer-sponsored supplemental insurance is declining for current retirees, and many employers plan to eliminate coverage for future retirees. Medigap policies, meanwhile, often offer poor insurance value for increasingly high premiums.

Facts and Figures

  • As many as 90 percent of Medicare beneficiaries have some sort of additional health insurance coverage. o In 2000, elderly beneficiaries spent over $3,100 out-of-pocket for health care.

  • In 2000, elderly beneficiaries spent over $3,100 out-of-pocket for health care.

  • Out-of-pocket health care spending accounted for nearly 22 percent of the elderly's income in 2000. Older, low-income women in poor health spent nearly 52 percent of their income on health care.

Publication Details



Reforming Medicare's Benefit Package: Impact on Beneficiary Expenditures, Stephanie Maxwell, Marilyn Moon, and Matthew Storeygard, The Commonwealth Fund, May 2001