Statement of Karen Davis, Ph.D., President,
Commonwealth Fund, New York, New York

Testimony Before the Subcommittee on Health
of the House Committee on Ways and Means

Hearing on the Strengthening Medicare: Modernizing Beneficiary Cost Sharing

May 9, 2001

Thank you, Madam Chairman, Mr. Stark, and members of the committee, for this invitation to testify on Medicare's cost-sharing. Medicare provides health insurance for 40 million elderly and disabled beneficiaries. The program was created in 1965 to provide older Americans with financial protection against the cost of medical expenses and to ensure access to quality health care. At the time, half of the elderly were uninsured, since few had retiree coverage through work or could afford private coverage on their own. Today, nearly all of the elderly have basic coverage through Medicare.

However, Medicare's cost-sharing has risen more rapidly than inflation and the incomes of beneficiaries, eroding the protection Medicare was designed to provide. In 2000, the average elderly Medicare beneficiary spent $3,142 on their own health care expenses, or nearly 22 percent of income. ⁽¹⁾ By 2025, that will increase to $5,248 (in constant 2000 dollars)--almost 30 percent of income. Financial burdens on beneficiaries need to be reduced, not increased.

Medicare Beneficiaries are Disproportionately Poor and Sick

Some argue that Medicare cost-sharing is necessary to encourage beneficiaries to be cost-conscious when making choices about their health care. Any discussion of restructuring Medicare cost-sharing should be firmly rooted in an understanding of the characteristics of beneficiaries, their financial contributions to their care, and the difficulties they have obtaining access to care and paying medical bills.

Two of three Medicare beneficiaries are either sick or poor. ⁽²⁾ Of all groups in society, they are perhaps the least able to "help the market work" by making cost-conscious choices. Eleven million beneficiaries have less than a high school education. One-third of Medicare beneficiaries are cognitively impaired or have serious physical limitations; ⁽³⁾ these beneficiaries account for 60 percent of all Medicare outlays. Included in this figure are over 9 million beneficiaries who are cognitively impaired, accounting for 42 percent of Medicare outlays. One and a half million Medicare beneficiaries are in nursing homes. ⁽⁴⁾ Terminal illness strikes 2.4 million beneficiaries each year. The majority of beneficiaries suffer from a chronic condition such as diabetes, arthritis, heart disease, cancer, or recurrent stroke. Three-fourths must regularly take prescription drugs. ⁽⁵⁾

Beneficiaries with the lowest incomes are also the sickest. Over half of those with incomes below the poverty level ($8,259 for a single elderly person in 2000, $10,409 for a couple) are in fair or poor health. One-fourth of the poor need assistance with at least one activity of daily living, such as eating or bathing.

Medicare Beneficiary Cost-Sharing is High

When Medicare began in 1966, the major expenses for which beneficiaries were responsible were the average cost of the first day of hospital care under Part A, a deductible for Part B physician and other ambulatory services, 20 percent coinsurance for Part B services (plus any physician charges over the allowed fees), and a Part B premium. Even adjusting for inflation, today's Part A hospital deductible and Part B premium are three to four times higher than they were in 1966. The rapid growth in the Part A deductible reflects changes in health care technology that have led to shorter but more intensive hospital stays, driving up the average daily cost. Only the Part B deductible is lower today in real terms than it was in 1966. If these cost-sharing amounts had remained constant, adjusted for inflation, today's Part A deductible would be $218, not $792; the Part B deductible would be $272, not $100; and the Part B annual premium would be $196 ($16 a month), not $600. ⁽⁶⁾

These cost-sharing amounts or the supplemental insurance premiums required to cover them represent significant financial burdens on Medicare beneficiaries. In 2000, elderly Medicare beneficiaries spent, on average, $3,142 out-of-pocket on health care. About half of this amount came from cost-sharing for covered services or private supplemental insurance premiums to pick up costs not covered by Medicare. About one-fifth is Part B premiums, and the remaining 30 percent is for services not covered by Medicare, primarily prescription drugs.

Despite Medicaid and other programs to subsidize Medicare cost-sharing and premiums for low-income beneficiaries, burdens on low-income beneficiaries are particularly heavy. The poorest beneficiaries spend 30 percent of income on health care. Only 40 percent of low-income beneficiaries eligible for Medicaid and other programs (Qualified Medicare Beneficiaries (QMB), Supplemental Low Income Medicare Beneficiaries (SLMB), Qualified Individuals) participate. ⁽⁷⁾ Outreach efforts to inform and enroll eligible beneficiaries have been limited.

A study by Marilyn Moon and colleagues at the Urban Institute supported by The Commonwealth Fund modeled average out-of-pocket costs for six cohorts of beneficiaries to illustrate how widely costs vary depending on health and income. For each group, the estimates provide averages given the groups' likely health expenses. The six groups include:

• All elderly

• Elderly with physical or cognitive health problems with no supplemental coverage

• Disabled beneficiaries ages 45 to 64

• Beneficiaries ages 65 to 74 with incomes above $50,000 and employer-sponsored supplemental coverage

• Women with QMB coverage

• Women age 85 and older with physical or cognitive health problems and incomes between $5,000 and $20,000. ⁽⁸⁾

Out-of-pocket spending as a percent of income ranges from 6 percent for younger, higher-income beneficiaries with employer supplemental coverage to 52 percent for older women in poor health with limited incomes. It averages 22 percent for all elderly, and 29 percent for disabled ages 45 to 64. On a per capita basis, expenses average $3,142 for all elderly beneficiaries, and $3,870 for disabled beneficiaries ages 45 to 64. They reach as high as $4,815 for those elderly in poor health with no supplemental coverage, and $5,969 for older, low-income women in poor health. These are staggering amounts for a retired population with little income and limited savings.

Medicare Cost-Sharing Contributes to Beneficiary Access and Bill Problems

Not surprisingly, Medicare's cost-sharing affects access to care. This is particularly true for lower-income beneficiaries and for those with serious health problems. The Kaiser/Commonwealth 1997 Survey of Medicare Beneficiaries found that about 15 percent of Medicare beneficiaries experience difficulty obtaining needed care. ⁽⁹⁾ Almost one-fourth of those with incomes below the poverty level have access problems, as do one-third of the disabled under age 65. Problems paying medical bills were reported by 14 percent of all beneficiaries, by one-fourth of those below poverty, and by nearly one-third of the disabled under age 65.

About two of five of the most at-risk beneficiaries reported either difficulties obtaining needed services or problems paying medical bills. This includes 41 percent of those with incomes below the poverty level, 39 percent of those in fair or poor health, 47 percent of the disabled under age 65, and 40 percent of those needing help with one or more activities of daily living.

Financial barriers to health care particularly affect use of preventive care. A 1995 study supported by The Commonwealth Fund found that elderly women were less likely to receive a mammogram if they did not have supplemental health insurance coverage. ⁽¹⁰⁾ Medicare has since covered mammograms without subjecting services to the Part B deductible.

The absence of coverage for prescription drugs, however, continues to lead to underutilization of services and inadequate maintenance of chronic conditions. A 2000 study supported by The Commonwealth Fund found that absence of supplemental coverage for prescription drugs was a major reason why many Medicare beneficiaries with hypertension fail to receive appropriate medication. ⁽¹¹⁾

Rates of hospital admissions that could have been prevented with better preventive or primary care are particularly high for poor and minority elderly--indicating inadequate access to primary care. In sum, poor and near-poor elderly are more likely to experience health problems that require medical services than elderly people who are economically better off. Yet they are less able to afford needed care because of their lower incomes.

Medicare Cost-Sharing is Higher than Typical Employer Plans

Nonelderly Americans spend about 9 percent of their income on health care--much less than what the elderly spend. ⁽¹²⁾ In large part, this reflects extensive employer-sponsored health insurance with lower cost-sharing, and better benefits. Most employer plans include a ceiling on out-of-pocket expenses; Medicare does not. In the generosity of its benefit package, Medicare ranks in the bottom decile of insurance plans.

The average deductible for all services--including hospital, physician, and other services--is $239 in conventional fee-for-service plans offered by employers. ⁽¹³⁾ Deductibles are even lower in managed care plans including preferred provider option (PPO) plans and point-of-service (POS) plans, and are virtually nonexistent in health maintenance organizations (HMOs). The typical ceiling on out-of-pocket expenses in conventional employer plans is $1,500. Benefits are substantially more comprehensive: 71 percent of firms cover adult physical exams, which Medicare does not; 87 percent cover prescription drugs; and 25 percent cover dental care. Employers pick up, on average, 86 percent of the premium for single coverage for workers, leaving the worker with a monthly premium share of $28. In contrast, a Medicare beneficiary's monthly premium share is $50 (on top of Medigap premiums that average over $100 a month).

Over an individual's lifetime, health care expenses are greatest after reaching retirement, when incomes are lower and savings are being drawn down. Improving Medicare benefits--even if financed by greater contributions during the working years--would smooth lifetime health spending patterns and afford greater economic security in older age.

Despite the fact that Medicare's benefits do not compare favorably with employer coverage, it is noteworthy that Medicare beneficiaries report higher satisfaction with Medicare than do working families with their own coverage. Fifty-seven percent of Medicare beneficiaries say they are very satisfied with Medicare, compared with 46 percent of working families covered by employer health insurance. ⁽¹⁴⁾

A Commonwealth Fund survey of 50-to-70-year-old adults finds strong support for Medicare. ⁽¹⁵⁾ Older adults trust Medicare and value its reliability. Nearly two-thirds of all adults 50 to 64 would like the option of buying into Medicare early, while 86 percent of uninsured older adults would like that option. Preference for Medicare may reflect the predominance of the program's fee-for-service option; most employer plans are limited to one or more managed care plans. But it may also reflect an appreciation for the fact that Medicare will be there for them over time, as well as a concern that private coverage may be unavailable or unaffordable when serious illness or disability strikes or when older adults are no longer able to work.

Supplemental Coverage Needed by Medicare Beneficiaries

While workers with employer health insurance rarely purchase supplemental coverage, nine of 10 Medicare beneficiaries obtain supplemental coverage to augment Medicare's benefits. About 38 percent of Medicare beneficiaries have supplemental coverage from a current or former employer. ⁽¹⁶⁾ About 23 percent are covered by individually purchased private supplemental insurance (Medigap), 15 percent are enrolled in Medicare+Choice plans, and 13 percent are covered in part or in full by Medicaid. About one of 10 Medicare beneficiaries are covered by traditional Medicare only. The ability of Medicare beneficiaries to supplement Medicare's benefit with additional coverage is undoubtedly a factor in the high satisfaction with Medicare reported by beneficiaries. On the other hand, the widespread need for supplemental coverage attests to the perceived inadequacy of the Medicare benefit package.

Not all Medicare beneficiaries are able to afford supplemental coverage, nor is coverage with prescription drug benefits available to those with serious health problems. A recent study by a team of investigators at the University of California, Los Angeles, that was supported by The Commonwealth Fund reported that 17 percent of beneficiaries with incomes below $10,000 had no supplemental coverage, compared with 5 percent of those with incomes above $25,000. ⁽¹⁷⁾ Similarly, employer-sponsored supplemental coverage is much lower as is Medigap coverage for lower-income beneficiaries.

Nor does supplemental coverage always include prescription drug benefits. Only half of Medicare beneficiaries have year-long supplemental prescription drug coverage. ⁽¹⁸⁾ Prescription drug coverage is quite expensive, and Medigap plans that cover drugs (Plans H-J) are subject to underwriting and exclude beneficiaries who are deemed poor health risks. In 2000, Medigap annual premiums for Plan J, including prescription drugs, averaged $3,252 for a 65-year-old woman. ⁽¹⁹⁾ Even Plan E plans that exclude prescription drugs average annual premiums of $1,320 ($110 a month)--an amount on top of Medicare Part B premiums that are now $600 a year. While standardization of Medigap policies has reduced confusion, not all plans are in compliance with federal standards on the ratio of benefits to premiums and many plans offer poor value at high cost. ⁽²⁰⁾

Most disturbing is the trend in future coverage. Eighty-one percent of employers report that they are planning to increase retiree health premiums and/or cost-sharing in the future, and 40 percent are cutting back on prescription drugs. ⁽²¹⁾ Thirty percent are planning to terminate coverage for future retirees.

Medicare+Choice plans have enrolled about 6 million beneficiaries. Better benefits and lower cost-sharing are major reasons why beneficiaries choose managed care plans. But instability in the managed care market and the withdrawal of plans either nationally or from selected geographic areas raise questions about the long-term future of this option. Medicare+Choice plans are increasing monthly premiums and reducing benefits, especially prescription drug benefits. ⁽²²⁾ As a result, the number of beneficiaries enrolled in Medicare+Choice peaked in 1999 at 6.3 million; such plans now cover 5.6 million people.

If private market trends continue, Medicare beneficiaries will be increasingly reliant on the individual, Medigap market to supplement Medicare's basic benefits. There are now signs that premiums in this market--where costs cannot be pooled through employer groups or managed care health plans--are beginning to spiral upward for policies that include prescription drug coverage (and that already feature high administrative costs). Further increases may well expand the proportion of beneficiaries who can afford only basic Medicare benefits.

Options to Improve Medicare Benefits and Reduce Cost-Sharing

Given the increasing unreliability of supplemental coverage and the serious financial burdens and barriers to needed care that Medicare beneficiaries face, consideration should be given to improving Medicare's benefits. In a Commonwealth Fund-supported study by Marilyn Moon and colleagues at the Urban Institute being released today, ⁽²³⁾ four options for improving Medicare's benefit package are simulated:

• Option 1 combines Part A and Part B, replaces the current deductibles with a single combined annual deductible of $400, and introduces a $3,000 annual beneficiary limit on cost-sharing and deductible expenses. It would increase Medicare outlays by an estimated $3.2 billion in 2000.

• Option 2 reduces the Part A deductible to $200 per spell of illness and increases the Part B deductible to $200. Part B coinsurance is reduced to 10 percent, a new 10 percent coinsurance on home health services is introduced, and all cost-sharing and deductible expenses are subject to a $2,000 annual beneficiary limit. This option would increase Medicare outlays by an estimated $16.4 billion in 2000.

• Option 3 eliminates the Part A deductible and all Part A cost-sharing. While increasing the Part B deductible to $200, it eliminates Part B coinsurance. This improved coverage is financed by increasing the Part B premium to $105 per month, achieving virtual budget-neutrality.

• Option 4 adds a prescription drug benefit with 50 percent coinsurance, a $2,500 limit on beneficiary cost-sharing, and a $26 monthly premium. This option would increase Medicare spending by $13.9 billion in 2000.

The first three options reduce out-of-pocket spending by improving covered Medicare benefits and/or reducing or eliminating the need to purchase costly Medigap coverage. The fourth option introduces coverage for a currently uncovered benefit, prescription drugs, and could be combined with any one of the first three options.

Under all four options, both the elderly and the disabled would experience a reduction in total out-of-pocket expenses, including private insurance premiums, cost-sharing for covered services, and expenses of noncovered services. The elderly would save $27 per capita under Option 1, $240 under Option 2, and $763 under Option 3. Disabled beneficiaries ages 45 to 64 would save $103, $280, and $408, respectively, under Options 1, 2, and 3. The disabled would particularly benefit from a prescription drug benefit: Option 4 would save the elderly $181 per person, while the disabled ages 45 to 64 would save $824 per person.

Savings would be greater for beneficiaries with serious health problems. The Urban Institute team estimates that elderly beneficiaries in poor health without supplemental coverage would save $285, $587, and $1,591 per person, respectively, under Options 1, 2, and 3. For low-income women over age 85 and in poor health, savings would be even greater--$495, $753, and $2,092.

On average, out-of-pocket spending for elderly beneficiaries would decline from the current rate of 21.7 percent of income to 21.5 percent under Option 1, 20.0 percent under Option 2, and 16.4 percent under Option 3. Option 4, if enacted alone, would reduce spending to 20.4 percent of income.

Option 3, by eliminating the need for private supplemental insurance, represents an important way to improve efficiency in coverage for Medicare beneficiaries. Consolidating coverage under Medicare produces savings through reduced administrative costs by eliminating the need to coordinate two sources of coverage. Medicare administrative costs are also lower than private insurance plans. Medicare does not need to maintain reserves to protect against adverse risk selection, nor are marketing or sales commissions needed.

Some beneficiaries, however, could face higher costs. About 20 percent of Medicare beneficiaries are hospitalized in a given year. ⁽²⁴⁾ Under Option 1, replacing the current Medicare Part B $100 deductible with a combined A/B deductible of $400 would result in higher costs for the 80 percent of beneficiaries without a hospital episode during the year. For beneficiaries lacking supplemental coverage, the immediate effect would be a substantially higher overall deductible.

Similarly, for retirees with employer-sponsored coverage, much depends on how employers respond to improved Medicare benefits. If employers pick up the higher Part B premiums under Option 3, most beneficiaries with retiree coverage would gain. If any savings to employers were devoted to improving other benefits (such as prescription drugs), beneficiaries would gain further. But employers could use the improvement in Medicare benefits as an opportunity to drop retiree coverage even more rapidly than is currently anticipated.

State Medicaid programs would also be expected to benefit from an improvement in Medicare benefits. This is particularly true under Option 4 with the addition of prescription drugs to Medicare, a benefit now covered by most Medicaid programs. But the reduced cost-sharing under Options 1, 2, and 3 would also provide fiscal relief to state governments. Improved Medicare benefits might be coupled with increased state responsibility for coverage of low-income families under Medicaid or the Children's Health Insurance Plan.

Conclusion

For more than 35 years, the Medicare program has assured health and economic security for older and disabled Americans. Understanding the strengths of the program and its contributions to improving health outcomes and access to health services is an important foundation on which to build.

Medicare beneficiaries are heterogeneous. Some fit the stereotype of vigorous and well-to-do seniors. But others are older widows living alone, some are in nursing homes, some are terminally ill, and some live on quite modest incomes. These are the faces of Medicare, and they should be kept foremost in mind as new ideas for modernizing Medicare's benefits are developed and considered. Improving Medicare's benefits--not just looking for savings or shifting costs to beneficiaries--should be an important priority.

Reducing the financial burden beneficiaries already bear, as well as the increasing burden they are expected to face over the next 25 years, should be a priority for use of federal budget outlays. We should remember that a considerable portion of the federal budget surplus was generated by the Balanced Budget Act (BBA). An estimated $1 trillion of the $5.6 trillion 10-year surplus was derived from a slow-down in Medicare outlays, in large part as a result of BBA, and from the slow-down in Medicaid outlays, an unintended consequence of welfare reform. ⁽²⁵⁾

Ten percent of the Medicare BBA savings came from increased beneficiary premiums, as home health services were moved from Part A to Part B and subjected to 25 percent beneficiary premium contributions. ⁽²⁶⁾ For example, the Part B premium in 2006 was raised more than 50 percent by the BBA. As a result of the BBA, over $50 billion of the 10-year budget surplus was from higher premiums charged to Medicare beneficiaries. Returning this contribution to beneficiaries in the form of improved benefits and reduced cost-sharing is worthy of consideration.

Thank you for this opportunity to testify. I would be pleased to answer any questions.

1. Stephanie Maxwell, Marilyn Moon, and Misha Segal, Growth in Medicare and Out-of-Pocket Spending: Impact on Vulnerable Beneficiaries, The Commonwealth Fund, January 2001.

2. Patricia Neuman, Cathy Schoen, Diane Rowland, Karen Davis, Michelle Kitchman, Elaine Puleo, and Drew Altman, "Understanding the Diverse Needs of the Medicare Population: Implications for Medicare Reform," Journal of Aging and Social Policy, 10(4), pp. 25-30, 1999.

3. Marilyn Moon and Matthew Storeygard, One-Third at Risk: The Special Circumstances of Medicare Beneficiaries with Health Problems, The Commonwealth Fund, May 2001.

4. National Center for Health Statistics, Health, United States, 2000, HHS/CDC/NCHS, July 2000.

5. Cathy Schoen, Patricia Neuman, Michelle Kitchman, Karen Davis, and Diane Rowland, Medicare Beneficiaries: A Population at Risk--Findings from the Kaiser/Commonwealth 1997 Survey of Medicare Beneficiaries, Henry J. Kaiser Family Foundation and The Commonwealth Fund, December 1998.

6. Author's calculations based on average inflation rates applied to the original deductibles and premium.

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

8. Stephanie Maxwell, Marilyn Moon, and Misha Segal, Growth in Medicare and Out-of-Pocket Spending: Impact on Vulnerable Beneficiaries, The Commonwealth Fund, January 2001.

9. Cathy Schoen, Patricia Neuman, Michelle Kitchman, Karen Davis, and Diane Rowland, Medicare Beneficiaries: A Population at Risk, The Commonwealth Fund, December 1998.

10  Janice Blustein, "Medicare Coverage, Supplemental Insurance, and the Use of Mammography by Older Women," New England Journal of Medicine 332:1138-1143, April 27, 1995.

11. Jan Blustein, "Drug Coverage and Drug Purchases by Medicare Beneficiaries with Hypertension," Health Affairs 19 (March/April 2000):219-230.

12. Agency for Healthcare Research and Quality, Center for Cost and Financing Studies, Medical Expenditure Panel Survey, 1996.

13. Henry J. Kaiser Family Foundation/Health Research and Educational Trust, Employer Health Benefits, 2000 Annual Survey.

14. Henry J. Kaiser Family Foundation and The Commonwealth Fund, Working Families at Risk: Coverage, Access, Costs, and Worries, Kaiser/Commonwealth 1997 National Survey of Health Insurance, December 1997.

15. Cathy Schoen, Elisabeth Simantov, Lisa Duchon, and Karen Davis, Counting on Medicare: Perspectives and Concerns of Americans Ages 50 to 70, The Commonwealth Fund, July 2000.

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

17. Nadereh Pourat, Thomas Rice, Gerald Kominsky, and Rani E. Synder, "Socioeconomic Differences in Medicare Supplemental Coverage," Health Affairs 19 (September/October 2000).

18. Bruce Stuart, Dennis Shea, and Becky Briesacher, Prescription Drug Costs for Medicare Beneficiaries: Coverage and Health Status Matter, The Commonwealth Fund, January 2000.

19. Quotesmith.com, as cited in Marilyn Moon, Assessing the President's Proposal to Modernize and Strengthen Medicare, The Commonwealth Fund, January 2000.

20. General Accounting Office, Medigap Insurance: Insurers' Compliance with Federal Minimum Loss Ratio Standards, 1988-93, August 12, 1995; and Lutzky, Alecxih, Pankaj, Laud, and Schaab,Restricting Underwriting and Premium Rating Practices in the Medigap Market: The Experience of Three States, AARP Public Policy Institute, January 2001.

21. McArdle, Coppock, Yamamoto, and Zebrak, Retiree Health Coverage: Recent Trends and Employer Perspectives on Future Benefits, Hewitt Associates, October 1999.

22. Marsha Gold and Lori Achman, Trends in Premiums, Cost-Sharing, and Benefits in Medicare+Choice Health Plans, 1999-2001, The Commonwealth Fund, April 2001.

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

24. U.S. House of Representatives, Committee on Ways and Means, 2000 Green Book, October 6, 2000.

25. Karen Davis, Cathy Schoen, and Stephen C. Schoenbaum, "A 2020 Vision for American Health Care," Archives of Internal Medicine, 260, December 11/25, 2000.

26. Marilyn Moon, Barbara Gage, and Alison Evans, An Examination of Key Medicare Provisions in the Balanced Budget Act of 1997, The Commonwealth Fund, September 1997.