Modernizing Medicare’s Benefit Design and Low-Income Subsidies to Ensure Access and Affordability

By Cathy Schoen, Karen Davis, Christine Buttorff, and Martin Andersen
The Commonwealth Fund, July 8, 2015


Insurance coverage through the traditional Medicare program is complex, fragmented, and incomplete. Beneficiaries must purchase supplemental private insurance to fill in the gaps. While impoverished beneficiaries may receive supplemental coverage through Medicaid and subsidies for prescription drugs, help is limited for people with incomes above the poverty level. This patchwork quilt leads to confusion for beneficiaries and high administrative costs, while also undermining coverage and care coordination. Most important, Medicare’s benefits fail to limit out-of-pocket costs or ensure adequate financial protection, especially for beneficiaries with low incomes and serious health problems.


There is a pressing need for reform. An estimated 20 million of Medicare’s 52 million beneficiaries live on incomes below 200 percent of the federal poverty level. Nine million beneficiaries have complex care needs with serious functional limitations that hinder their ability to carry out daily activities. Although the poorest are eligible for Medicaid to supplement Medicare, under current policies beneficiaries with low or modest incomes are eligible for only limited help with paying for premiums or medical care expenses.

The absence of a ceiling on out-of-pocket costs can undermine the financial security and exhaust the resources of even higher-income beneficiaries. That’s why most beneficiaries supplement Medicare’s core benefits with coverage sold by private insurers, often purchasing multiple plans. This fragmented coverage is inefficient, generates high administrative costs, and undermines efforts to improve coordination of patient care and prevent avoidable hospitalizations.

Current Medicare Benefits and Low-Income Provisions

Medicare has separate deductibles and cost-sharing provisions for Part A hospital, skilled nursing facility, and home health services and for Part B physician, lab, and diagnostic benefits, with no limit on annual out-of-pocket spending for covered services. Part A includes a $1,216 deductible per hospital episode and substantial cost-sharing for longer-term hospitalization or skilled nursing stays after a hospitalization. Part B has a $104.90 monthly premium ($1,259 per year per person), a separate $147 annual deductible, and open-ended coinsurance of 20 percent for physician services (including surgeons and other hospital inpatient physicians), therapy, durable medical equipment, and outpatient services with no limit on out-of-pocket spending.

For prescription drug coverage, beneficiaries must buy a Part D plan with a separate premium that averages around $440 a year plus a deductible and cost-sharing that varies across private plans. The Affordable Care Act (ACA) is phasing out Medicare’s gap in drug coverage—the “doughnut hole”—but beneficiaries requiring specialty drugs or multiple medications can still face substantial costs.

Supplemental private coverage to fill in Medicare’s deductibles and cost-sharing is costly, with Medigap premiums adding over $2,000 a year, depending on geographic area. It is also inefficient, with 20 percent of the premium, on average, going toward administrative costs.

Some low-income beneficiaries are eligible for assistance paying their Parts A and B cost-sharing and Part B premiums. Medicaid covers Medicare cost-sharing up to 100 percent of the poverty level and provides subsidies for Part B premiums up to 135 percent of poverty for those meeting income and asset tests.6 Personal asset limits for beneficiaries seeking extra help with Medicare premiums or cost-sharing are $7,160 for an individual and $10,750 for a couple (in 2014).

In contrast to Medicare, the ACA eliminates asset tests and provides substantial premium and cost-sharing subsidies up to 200 percent of poverty for the under-65 population and expands Medicaid to 138 percent of poverty for participating states.7 ACA provisions exclude Medicare beneficiaries. As a result, lower-income older adults who age into Medicare will face increased financial burdens for coverage and care.

Underprotected and Underinsured Medicare Beneficiaries

Facing gaps in benefits and premium costs, an estimated 25 percent of all beneficiaries and 40 percent with incomes below twice the poverty level spent 20 percent or more of their income for premiums plus medical care costs in 2014.

An estimated one of five beneficiaries—11 million people—spent at least 10 percent of their income on medical care alone in 2014, not including premiums. Despite having Medicare, they were underinsured, spending a high share of their income on medical care. The risk of being underinsured was highest for low-income beneficiaries: an estimated one-third of those with incomes up to 150 percent of poverty, and 30 percent of those with incomes between 150 percent and 200 percent of poverty were underinsured.

Such high financial burdens undermine access to care, deplete incomes, and drain resources. Notably, a recent study found that the elderly in the United States are far more likely to go without care because of the cost and face problems paying medical bills than their counterparts in 10 other high-income countries. Beneficiaries with complex care needs are particularly at risk.

Policy Options to Modernize Benefits and Improve Low-Income Protections

To modernize Medicare’s core benefits and update policies related to low-income beneficiaries, the brief discusses two complementary options. The first would offer a new Medicare-sponsored plan choice. Available for an extra premium, it would provide an integrated design with prescription coverage, more-affordable cost-sharing, and a limit on out-of-pocket costs—making supplemental coverage unnecessary. The second option would expand subsidies for Medicare’s premiums and reduce cost-sharing for beneficiaries with incomes up to 200 percent of the federal poverty level in ways that align with the Affordable Care Act’s policies for the under-65 population.…

At the 50th anniversary of Medicare we can be thankful for the assistance it has provided to our seniors and those with long term disabilities in improving access to care and in making health care more affordable for them. However, Medicare does have significant deficiencies and this is a good time to look at them and see what we can do to improve the program.

Probably the most glaring defect is that the coverage is inadequate, especially for those with modest incomes. Premiums for Parts B and D, deductibles for Parts A, B and D, 20% coinsurance for Part B, other forms of cost sharing, and the lack of a ceiling on out-of-pocket costs all combined can create severe financial hardships for far too many. Medicare should be structured to ensure health security without threatening exposure to financial insecurity.

To cover these high out-of-pocket costs, some purchase Medigap plans. But these plans are overpriced, partly because they consume 20% of the premiums for administration. Plus they add administrative complexity for the providers because of having to interact with two payers – Medicare plus the Medigap plan. Employer-sponsored retiree health plans may provide wraparound coverage for Medicare, but this is administratively inefficient as well. More comprehensive coverage by Medicare would relieve employers of their responsibilities for their retiree health plans for the Medicare-eligible population, plus it would free up funds that could be added to retiree pensions. Very low income individuals may qualify for Medicaid coverage, though these dual-eligible individuals, to their dismay, are now often being forced into managed care plans designed for the welfare population. Others select private Medicare Advantage plans, but the government unfairly pays the private plans more – two-thirds of which is kept by the insurers instead of going toward patient benefits. Although Medicare Advantage plans reduce spending for the beneficiaries, they do so by wasting an inordinate amount of taxpayer dollars on non-medical administrative excesses and insurer profits.

The authors of this brief do recommend creating a new Medicare option – “Medicare Essential” – available for an extra premium, which would integrate more benefits and place a ceiling on out-of-pocket costs, obviating the need for supplemental coverage. They would also protect low-income individuals by adding premium subsidies and cost sharing reductions, based on income, much like the subsidies for the plans in the ACA exchanges. These changes would certainly reduce the financial burden that Medicare beneficiaries face, but their analysis of the impact of these two policies shows that 15 percent of Medicare beneficiaries would still be paying over 20 percent of their income on care and premiums.

A better solution would be to go ahead and roll the benefits of these various supplemental or complementary programs into the traditional Medicare program so that it could be administered as one single program, but to also achieve greater efficiency by eliminating all of the premiums, deductibles, coinsurance and other cost sharing, and instead funding all care through a single, equitably-funded Medicare risk pool. Carrying that one step further, the maximum efficiency would be attained by expanding that risk pool to cover absolutely everyone so that we would all have prepaid health care whenever we needed it.

After 50 years, it is clear that Medicare needs improvement, though it still has strong support of the public. The time is ripe for not only improving it, but also expanding it to cover everyone. Let us hope that we do not have to wait another 50 years to get it right.