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Modernizing Medicare Cost-Sharing: Policy Options and Impacts on Beneficiary and Program Expenditures

Recognizing that prospects for a major overhaul of the Medicare program are limited in the near future, Stephanie Maxwell and Urban Institute colleagues Marilyn Moon and Matthew Storeygard set out to identify possible ways to modernize the Medicare benefit package's cost-sharing structure without incurring significant new federal spending. In the Commonwealth Fund report Modernizing Medicare Cost-Sharing: Policy Options and Impacts on Beneficiary and Program Expenditures, the authors propose a range of modest policy options that would enable Medicare to reduce financial burdens on the sickest beneficiaries while offering a sounder insurance package.

By reviewing trends in the stop-loss levels (ceilings on beneficiaries' annual cost-sharing contributions) and deductible requirements of private sector benefit packages, the authors developed several possible changes to Medicare cost-sharing and simulated their impact on beneficiaries' out-of-pocket spending and overall program expenditures. The study discusses 12 policy options involving various combinations of the following features:

  • annual stop-loss levels of $3,000, $4,000, and $5,000;

  • a decrease in the Part A deductible (for hospital services) from $812 per inpatient spell, which ends 60 days after a hospital or skilled nursing facility's discharge, to $500 annually;

  • an increase in the Part B deductible (for ambulatory care and related services) from $100 per year to $300 per year;

  • elimination of hospital inpatient coinsurance requirements; and

  • elimination of the Part A and Part B deductibles and introduction of combined Part A and Part B deductibles set at $300, $400, and $500 annually.

The authors note that all the key features simulated in the study--stop-losses, higher ambulatory care deductibles, and lower inpatient cost-sharing requirements--are common features of private health plans. Medicare's present cost-sharing requirements are outmoded: not only do they lack a stop-loss limit, but cost-sharing is skewed toward inpatient medical services rather than the more discretionary ambulatory services.

Among the 12 policy options simulated, the two with the greatest cost savings from the beneficiary perspective are the $3,000 stop-loss option and an option that reduces the Part A deductible to $500 per year and eliminates hospital inpatient coinsurance. The former option would help 5.4 percent of beneficiaries, while the latter option would help 18 percent of beneficiaries. Both options would require comparable increases in aggregate additional federal funds ($4.6 billion and $3.8 billion, respectively).

Facts and Figures

  • The elderly will spend on average $3,757 out-of-pocket for Medicare and other health care services in 2002, consuming 22.3 percent of their income.

  • Medicare's inpatient deductible in 2002 is $812 per spell; the annual Part B deductible is $100. When Medicare began in 1965, the two deductibles were nearly equal: $40 per inpatient spell and $50 per year for Part B services.

Publication Details



Modernizing Medicare Cost-Sharing: Policy Options and Impacts on Beneficiary and Program Expenditures, Stephanie Maxwell, Matthew Storeygard, and Marilyn Moon, The Urban Institute, The Commonwealth Fund, November 2002