Editorial: Medicare’s High Out of Pocket Costs

Medicare’s $1,068 deductible for a hospital stay and the 20 percent coinsurance charged for doctor visits and outpatient services like chemotherapy can become an overwhelming burden for older adults and people with disabilities. With no annual cap on out-of-pocket spending, the Medicare benefit does not provide enough protection against the high costs of treating a serious illness unless it is combined with supplemental insurance.

But the cost of supplemental “Medigap” coverage is increasingly out of reach for people on fixed incomes. Average costs are projected to reach $2,329 in 2011, and in 2021 the average cost will be close to $4,000. The private insurers offering Medigap plans spend only 72 percent of their members’ premiums on medical claims; more than one dollar in four goes to marketing and administrative costs or profit. The rules in most states allow Medigap insurers to discriminate against people who have Medicare because of a disability, to charge higher premiums to older enrollees and, in certain circumstances, to enrollees with a history of illness.

One third of people with Medicare have retiree coverage through a former employer. But with each passing year, fewer employers are offering such coverage to their former employees. Between 1988 and 2006, the share of employers with 200 employees or more offering retiree health benefit packages decreased from 66% to 35%.

In addition, more than half of the people enrolled in Medicare private health plans are in plans with no out-of-pocket maximum. Other plans offer very high limits or limits riddled with loopholes: doctor visits or chemotherapy or other essential services don’t count toward the limit. Medicare private health plans are also an inefficient way to deliver extra benefits. It costs the government $1.30 for every $1.00 in extra benefits provided through Medicare private health plans.

What is the answer?

The best solution is to allow people with Medicare to pay a surcharge on their Part B premium for supplemental Medicare coverage that lowers co-pays for medical services, provides an integrated drug benefit under Original Medicare, and caps annual out-of-pocket spending for both medical services and prescription drugs. One such proposal, entitled Medicare Extra, would allow older adults and people with disabilities to get all their medical and drug coverage from the most trusted and efficient source—Original Medicare—without paying the added costs of insurance middlemen.

In the meantime, Congress should strengthen protections for people who choose a private insurer for supplemental Medigap coverage, and prevent insurers from charging high premiums to the sickest and most vulnerable older adults and completely excluding people with disabilities. Guaranteed issue rules should be expanded to include people with disabilities, people who quit their Medicare private health plan and people who want to switch to a lower cost Medigap plan.

Notes & Further Information

“Beneficiaries currently enrolled in Medigap plans would save a total of $357 per year by enrolling in Part E. On average, supplemental premiums would drop from an estimated $1,400 per year under Medigap to $1,103 under Part E; typical out-of-pocket costs would drop from $933 to $873 per year. To provide equitable access for beneficiaries with low incomes, Part E premiums could be subsidized under the Medicare Savings Programs or through federal premium assistance, the authors say.” ( Medicare Extra: A Comprehensive Benefit Option for Medicare Beneficiaries, Commonwealth Fund, October 2005)

“As of August 2007, about 48 percent of beneficiaries were enrolled in plans that had an out-of-pocket maximum. However, some plans excluded certain services from the out-of-pocket maximum. Services that were typically excluded were Part B drugs obtained from a pharmacy, outpatient substance abuse and mental health services, home health services, and durable medical equipment.”( Medicare Advantage: Higher Spending Relative to Medicare Fee-for-Service May Not Ensure Lower Out-of-Pocket Costs for Beneficiaries, Government Accountability Office, February 2008)

-Adapted from: “ Medicare's High Costs”, Asclepios, Your Weekly Medicare Consumer Advocacy Update, Medicare Rights Center, May 7, 2009 • Volume 9, Issue 18.

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