Statement of Jennifer O'Sullivan, Specialist in Social Legislation,
Congressional Research Service, Library of Congress

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

Madam Chairman and Members of the Subcommittee. My name is Jennifer O'Sullivan. I am a Specialist in Social Legislation at the Congressional Research Service. Today you have asked me to outline Medicare's cost-sharing structure -specifically what out-of-pocket expenses beneficiaries are liable for when they use covered services. I will briefly summarize Medicare's requirements under the traditional fee-for-service program; more details are provided in the table included as part of my written testimony. My testimony will highlight three points:

• First, Medicare's cost-sharing requirements are complex;

• Second, the cost-sharing requirements differ in significant ways from those applicable in the private market;

• Third, Medicare's requirements have remained relatively unchanged from 1966.

There are significant differences between the cost sharing requirements for Medicare Part A and Medicare Part B. Part A uses the "spell of illness" concept. A spell of illness, also known as a "benefit period" starts when a person enters a hospital and ends when he or she has not been in a hospital or skilled nursing facility for 60 days. In each benefit period, the beneficiary pays a $792 (in 2001) deductible for hospital stays of 1 - 60 days. Hospital stays beyond 60 days are subject to coinsurance charges. Days 60 - 90 are subject to a daily charge of $198 (in 2001). Persons in the hospital over 90 days may draw on 60 lifetime reserve days subject to a daily coinsurance charge of $396 (in 2001). Hospital stays in excess of 150 days in a benefit period are not covered.

The spell of illness concept gets even more complex when you consider that an individual can have more than one benefit period in a year and therefore have to pay more than one deductible in a year. Potentially, an individual could even have to pay coinsurance charges for more than one inpatient stay.

A person requiring post-hospital skilled nursing facility (SNF) services may get up to 100 days of care in a benefit period. There is a daily coinsurance charge for days 21 - 100 ($99 in 2001). There is no cost sharing for home health services and nominal cost-sharing for hospice care.

In general, cost-sharing under Medicare Part B is somewhat simpler. In each calendar year, beneficiaries must first meet the $100 Part B deductible before the program will begin making payments. Beneficiaries are then subject to coinsurance which equals 20% of Medicare's approved amount. Certain Part B services, such as home health care and some preventive services, are exempt from the deductible and/or coinsurance requirements. On the other hand, mental health services are subject to 50% cost sharing. Beneficiaries using hospital outpatient services pay a fixed amount which varies by service category; this fixed amount is often substantially more than 20% of the approved payment for the service under the new outpatient prospective payment system.

There are a number of differences between Medicare's cost-sharing structure and that available to the under-65 population under private employer-based plans. Perhaps the most significant difference is that private plans typically have an annual limit on out-of-pocket expenses - sometimes referred to as a catastrophic cap. In contrast, Medicare has no upper limit on cost-sharing charges.

Another key feature of the private insurance market is that over 90% of the under 65 population is enrolled in a managed care arrangement compared to only 15% of the Medicare population. These managed care arrangements typically have simpler cost-sharing structures. Many of the under-65 population are enrolled in preferred provider plans. Individuals in these plans have lower cost-sharing charges when they use specific network providers and higher cost-sharing when they use out-of-network providers. These preferred provider arrangements are not available to the fee-for-service Medicare population.

Several other observations can be made about Medicare's cost-sharing. While the dollar amounts have changed, the structure is virtually unchanged from that in effect when the program went into effect in 1966. For example, the concept of a spell of illness was part of the original legislation. The Congress did enact legislation in 1988, the Medicare Catastrophic Coverage Act, which would have significantly modified current requirements. One of the key features of that legislation was the addition of an annual limit on Part B out-of-pocket spending. However, as you know, this legislation was repealed the following year.

Medicare Part B cost-sharing applies to a broader range of services than when the program first went into effect. This is true for two reasons. Medicare Part B now covers a number of additional services. It also pays directly for some practitioner services previously covered indirectly under other service categories.

I should note that the preceding discussion has focused on beneficiary liability in connection with their use of Medicare services. Unlike the under-age 65 population, most Medicare beneficiaries have a second source of health insurance coverage. This supplementary coverage typically covers some or all of Medicare's cost sharing charges, thus further complicating the picture. As a result of supplementary insurance, beneficiaries may not actually incur out-of-pocket costs at the time they use covered services.

I should also note that this discussion only focuses on cost-sharing charges for Medicare-covered services. It does not address expenses beneficiaries may have for non-covered services. As you know Medicare does not cover certain items such as hearing aids and dentures. It also provides very limited coverage for some other services such as outpatient prescription drugs and long-term care. As a result, Medicare covers only about half of a beneficiary's health care bill.