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Medicare Budgetary Savings: Implications for Beneficiaries

Karen Davis, President of The Commonwealth Fund, gave invited testimony today before the House Ways and Means Committee and raised concerns that proposed Medicare budgetary savings could place beneficiaries at risk.

Ms. Davis, an economist who has written extensively about Medicare policy, warned about the financial burden that greater beneficiary payments could cause. She pointed out that Medicare beneficiaries already spend, on average, more than $2,000 annually on premiums and out-of-pocket health care costs and have quite modest incomes.

Davis noted that proposed changes to Medicare and Medicaid could increase this burden further. Increasing Medicare Part B premiums would affect Social Security checks-from which Medicare premiums are automatically deducted. At the same time that premiums are being increased, Medicaid block grants would remove the guarantee that Medicaid will pick up Medicare premiums and cost-sharing for 4 million poor beneficiaries.

She raised serious questions about the medical savings account feature in the Medicare proposal. Annual deductibles of $3,000 or more in a catastrophic plan are unlikely to be affordable for those in poor health and with modest incomes. They are likely to attract only the healthiest and better-off Medicare beneficiaries, and could well cost the Medicare program if the voucher is set at an average level, as proposed. Direct marketing to Medicare beneficiaries could cause confusion, with some beneficiaries failing to understand their sizable financial risks under the plan.

Expansion of Medicare managed care options needs to be carefully designed. Davis cautioned that such expansions should occur slowly until experience is gained with setting and enforcing quality standards. Information for beneficiaries to make informed choices will be key. Improvements are also needed in Medicare's method of paying managed care plans-to avoid overpayments that now cost the program.

Davis also questioned the effect of tighter provider payments on the financial stability of hospitals and the willingness of providers to take Medicare beneficiaries. The proposal sets unrealistic targets for future growth in Medicare spending, she said.

Davis concluded that too little is known about the unintended consequences of the dramatic changes proposed for a program that now is essential to providing health and economic security to 37 million elderly and disabled beneficiaries. Before acting on such a major change in the nature and shape of the Medicare program, Davis said that more information on its cost and potential impact on beneficiaries, health care providers, and taxpayers is needed. Rather than risk undermining the quality of a program that has served its beneficiaries well, greater attention should be given to improving its benefits, expanding the choices of quality health maintenance organizations, and informing beneficiaries on the performance of managed care plans and their responsiveness to patient concerns.

  • 83% of Medicare's outlays go to beneficiaries with incomes of $25,000 or less. Just 3% of Medicare spending is for people with annual incomes above $50,000.
  • Costs for the sickest 10% of Medicare enrollees averaged $28,120, compared with $1,340 for the healthiest 90% in 1993.
  • Poor elderly households spend 34% of their annual incomes on health care, compared with 21% for all elderly households, and 8% for non-elderly.
  • A voluntary voucher program is likely to attract relatively healthier beneficiaries and result in additional substantial costs. If 18 million beneficiaries collected vouchers of $5,000, the cost would be $90 billion—yet these beneficiaries currently cost the program virtually nothing.

Publication Details



Medicare Budgetary Savings: Implications for Beneficiaries, Testimony before the Commitee on Ways and Means, Karen Davis, Ph.D., The Commonwealth Fund, September 1995