Should traditional Medicare emulate Medicare Advantage by capping patients’ out-of-pocket maximums?

Answer to the headline above: Only if traditional Medicare (TM) beneficiaries for Parts A and B would be OK with $10,000 as the cap and taxpayers don’t mind footing a bigger bill for Medicare. 

That’s the conclusion of health-policy researchers at Brown University who analyzed the economics of such a change using a sophisticated simulation model to predict enrollment, spending and financial outcomes for both enrollees and the Centers for Medicare and Medicaid Services (CMS).

Andrew Ryan, PhD, and colleagues had their findings published Oct. 2 in JAMA Health Forum.

Projecting the effects of TM spending caps of various amounts over an 18-year period—2016 to 2034—the researchers came back with three key findings, as follows. 

1. TM out-of-pocket caps would push Medicare Advantage beneficiaries to switch to traditional Medicare. This effect would be particularly pronounced if the caps were set in the lower, “more generous” range of $3,000 to $5,000. 
    
2. Beneficiary savings from traditional Medicare out-of-pocket caps would be considerable. “Savings would accrue to all TM beneficiaries (and their employers) who purchase supplemental coverage and also to those whose out-of-pocket spending exceeded the cap,” Ryan and colleagues report. “For instance, approximately 11% of TM beneficiaries would be expected to hit a $5,000 out-of-pocket cap in a given year.”
    
3. Out-of-pocket caps would be expensive. They would lead to mean annual increases in CMS expenditures under the base scenario of $96 billion for a $3,000 cap and $39 billion for a $10,000 cap. “The projected implications of out-of-pocket spending caps on CMS expenditures were most sensitive to assumptions about elasticity of demand for medical care,” the researchers write. 

Urban Institute study underscored 

Ryan and co-authors note their research builds on and updates prior economic projections involving out-of-pocket caps in Medicare. 

They cite a 2022 Urban Institute report analyzing the impact of a $5,000 cap on Parts A, B, and D spending showing such a change would escalate CMS expenditures by $39 billion in 2023. 

“Although the Urban Institute analysis differs from ours because it includes a Part D spending cap and does not model enrollment shifts or increases in MA spending, the direction and magnitude of the findings are consistent,” Ryan et al. write. “In both the Urban Institute and our analysis, out-of-pocket caps increase federal spending while reducing beneficiary liability and exerting downward pressure on Medigap premiums.”

CBO study saw much the same 

The researchers also note consistency in conclusions between their work and that of the Congressional Budget Office (CBO), which in 2022 projected higher federal spending as beneficiary financial liability was reduced through the introduction of an annual out-of-pocket cap.

“While a separate analysis by the CBO examined the impact of an out-of-pocket cap for Part A and B as part of broader Medicare reforms, their approach did not identify the independent effect of an out-of-pocket cap,” Ryan and colleagues observe. “To put the magnitude to our estimates of the impacts of an out-of-pocket cap in CMS expenditures, they are relatively close to the costs of adding dental, vision and hearing care to TM, which the CBO estimated would average $35.8 billion per year from 2020 to 2029.”

Cautionary conclusions for policymakers  

Ryan et al. suggest legislators carefully weigh benefits against costs if and when they take up the question of whether or not to cap out-of-pocket costs for traditional Medicare.

Sure, such caps would save money for Medicare beneficiaries. However, the caps would be “quite costly and would face an uphill battle legislatively, as seen through other recently proposed benefit enhancements in Medicare,” the authors point out. 

Under statutory pay-as-you-go rules, increases in mandatory Medicare spending are generally required to be fully offset over both 5- and 10-year budget windows, they add.

“As a result, [adopting new] out-of-pocket caps would likely require substantial offsets or accompanying benefit or financing reforms to satisfy budget neutrality,” the researchers write. 

On the other hand, that scenario could offer a reasonable tradeoff, they suggest. 

“Spending offsets to support an out-of-pocket payment cap,” the authors write, “could come through site-neutral payment reform, targeted reductions in overpayments to MA plans, estimated to be over $84 billion a year, or other strategies.” 

What about clinicians and hospitals? 

The authors further note that, along with financially helping Medicare beneficiaries, out-of-pocket caps in traditional Medicare would substantially benefit healthcare workers and hospitals. 

“A large share of high out-of-pocket costs is never paid to clinicians and hospitals and turns into uncollected liability,” Ryan and colleagues remind. 

“While CMS pays for a portion of this bad debt, out-of-pocket caps would reduce clinicians and hospitals’ administrative burden when seeking payment from beneficiaries and reduce an important part of payment uncertainty.”

The study is posted in full for free.