As policymakers in Washington continue to debate ongoing budget issues involving federal spending and the deficit, proposals that affect Medicare beneficiaries remain on the table as targets for federal savings. However, the details and repercussions of proposals for people who rely on Medicare, Social Security, and Medicaid for health and economic security remain unknown for most people outside Washington.
In his State of the Union address this week, President Obama defended the Medicare program against deep spending cuts as a means to balance the rest of the federal budget, and called for an end to taxpayer subsidies to pharmaceutical companies as a means for achieving significant savings – a reform we strongly support as one of our solutions to strengthening Medicare. (See http://cma.benfredaconsulting.com/hidden/so-what-would-you-do-real-solutions-for-medicare-solvency-and-reducing-the-deficit/.) However, the President also referenced "modest reforms" to Medicare to bolster the "promise of a secure retirement for future generations". Here, we outline some of the "modest reforms" currently under discussion by policymakers in Washington and describe the potential consequences for individuals who depend on Medicare.
The Proposal: Asking Wealthier Seniors to Pay More for Medicare
Other Ways the Proposal Is Described: "Income-relating premiums"; "Means-testing Medicare"
What It Means: In addition to cost-sharing for certain services, most people with Medicare pay about 25% of the overall costs of Part B services in the form of a monthly Part B premium ($104.90 in 2013), usually taken out of their monthly Social Security checks . They also pay about 25.5% of overall Part D prescription drug expenses in the form of monthly Part D premiums (amounts vary, but the national monthly average premium in 2013 is approximately $40).
The Medicare Modernization Act and the Affordable Care Act already require higher-income beneficiaries to pay more for their Part B and D premiums (individuals with income of $85,000 or more, $170,000 for a couple). Further, people with higher incomes also pay more Medicare employee taxes which, unlike Social Security payroll taxes, are not capped. Thus, proposals to "means-test" Medicare would further increase already-existing income-based charges.
How it Would Affect Beneficiaries: Today, income-related Part B premiums apply to approximately 5% of Medicare beneficiaries. The Affordable Care Act froze the income levels through 2019, when it is estimated that roughly 10% of Medicare beneficiaries will be subject to these higher premiums (in other words, as income gradually rises, more people will meet the $85,000/$170,000 threshold). Some proposals for further means-testing Medicare call not only for raising the rates that higher-income individuals pay but also for freezing the income levels, until 25% of beneficiaries are subject to higher premiums. According to the Kaiser Family Foundation, if such proposals were implemented today, means-testing would apply to individuals with incomes equivalent to $47,000 per person and $94,000 for a couple (nearly half the current income threshold of $85,000).
The Bottom Line: Further means-testing Medicare would increasingly apply to middle-class beneficiaries who already face high health costs and cannot afford to pay more. In addition, further means-testing would undermine the integrity and universality of the Medicare program.
The Proposal: Adding Costs for People with Medigap Policies
Other Ways the Proposal is Described: "Ending First-Dollar Coverage"; "Discouraging Overutilization in Medigap"
What it Means: To help pay for Medicare's significant out-of-pocket costs, most people with traditional Medicare have some form of supplemental or additional coverage, often in the form of Medigap policies. Nearly one in four Medicare beneficiaries rely on Medigap policies to provide financial security and protection from high, unexpected out-of-pocket costs due to unforeseen medical care. Many beneficiaries with Medigap plans have no access to other forms of supplemental coverage, like retiree benefits or Medicaid. Proposals to change Medigap to achieve savings in the Medicare program would require beneficiaries to pay more , either by 1) requiring a "surcharge" or extra tax on Medigap policies that offer "first dollar" or "near first dollar" coverage (in other words, policies that pay after Medicare pays its portion of costs for a given service instead of requiring a deductible or only paying part of any remaining cost-sharing); or 2) adding a deductible and/or limiting the amount the policy will cover (for example, adding a deductible of $500 and covering only 50% of the next $5000 in expenses). These Medigap proposals are based on the misguided assumption that charging beneficiaries more in upfront out-of-pocket costs will deter them from using "unnecessary" medical care.
How it Would Affect Beneficiaries: If faced with higher cost-sharing requirements for Medigap, many beneficiaries will simply go without care. Studies show that as cost-sharing goes up, utilization of services, both necessary and unnecessary, goes down. In other words, increased cost-sharing often serves as an impediment to accessing needed health care. And, for Medicare beneficiaries seeking Medigap payment, Medicare has already determined the care is medically necessary.
The Bottom Line: Two-thirds of people with Medigap policies have incomes below $40,000 per year and one-third have incomes below $20,000. Increasing cost-sharing for or adding surcharges to Medigap plans would harm those who can least afford it, including those who are sick or chronically ill and those with low and moderate incomes. Adding further upfront costs would discourage use of preventive and needed services and may lead to increased emergency room visits, hospitalizations, and long-term care — outcomes that would result in greater costs for Medicare in the long-run.
Other Ways the Proposal is Described: "Chained-CPI"; "Adjusting the Price Calculation"; "Reforming How Benefits are Calculated"
What it Means: Currently, Social Security, Supplemental Security Income, military and federal civilian retirement and veterans' benefits are calculated and adjusted for inflation based upon the Consumer Price Index (CPI). One prominent proposal to achieve federal savings is to change the way these benefits' cost-of-living adjustments (COLA) are calculated using a "chained" Consumer-Price-Index that purportedly takes into account changes average consumers make in their purchases in response to changes in prices. However, the reality is that the formula for calculating COLA's does not accurately reflect the spending patterns of those who rely on Social Security and other critical programs, who are already stretching every dollar on mandatory costs including rent, utilities, and health care.
How it Would Affect Beneficiaries: Most all beneficiaries would feel the impact of the chained-CPI, in the amount of Social Security they receive, but the effect would be greatest on those who draw benefits at earlier ages, including military and civilian disabled beneficiaries, as they are more likely to receive benefits the longest. Over time, the effect would be a substantial cut in benefits for beneficiaries who rely on critical programs they have paid into, including Social Security which Medicare beneficiaries depend on to help pay their premiums and cost-sharing.
A typical 65-year old would see a decrease of about $130 per year in their Social Security benefits as a result of a lower COLA calculated using the chained-CPI. By the time that person reaches age 95, the annual benefit cut would be nearly $1,400 – a nearly 10% reduction from currently-scheduled benefits. In effect, the brunt of the reductions calculated with chained-CPI will be felt hardest by America's oldest people, people with disabilities, and veterans. People who rely on Medicare would have fewer resources to cover their rising health care costs, and many would be forced to choose between health care and other living costs including groceries or housing.
The Bottom Line: Almost half of the nation's workers have less than $10,000 in savings and 30% have less than $1,000. In addition, nearly 1/3 of Social Security benefits are used to pay for Medicare's premiums and cost-sharing requirements. The Chained-CPI would weaken inflation protection for current and future beneficiaries and would have a devastating impact on older and disabled persons who live on fixed incomes.
Over the last few years, there have been many proposals to alter Medicare, Medicaid and Social Security to achieve federal savings. Some proposals have been dramatic, such as turning Medicare into a voucher program ("premium support"), and raising the age of Medicare eligibility. Other proposals, like those outlined above, have been described by some as "modest" or more reasonable ways to achieve savings. These "modest" proposals, however, would have significant negative consequences for people with Medicare. They would reduce benefits and shift costs to beneficiaries. They would not address any of the underlying causes of increasing health care costs. At a time when Medicare spending is slowing, and changes in health care delivery show promise of achieving more savings, policymakers should reject proposals that permanently harm older people, people with disabilities, and their families.
 Medicare.gov, http://medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html.
 Kaiser Family Foundation, "Medicare Part D: A First Look at 2013 Part D Plan Offerings" (November 2012), available at http://www.kff.org/medicare/upload/8375.pdf
 Leadership Council of Aging Organizations (LCAO) Issue Brief, "Further Income-Relating (Means-Testing) Medicare Premiums Would Shift More Costs Onto the Middle Class," (January 2013) available at http://www.lcao.org.
 Kaiser Family Foundation, Income-Relating Medicare Part B and Part D Premiums Under Current Law and Recent Proposals: What Are the Implications for Beneficiaries? (February 2013) available at http://www.kff.org/medicare/8276.cfm.
 Kaiser Family Foundation, "Medigap: Spotlight on Enrollment, Premiums, and Recent Trends" (February 2013), available at: http://www.kff.org/medicare/upload/8412.pdf.
 Leadership Council of Aging Organizations (LCAO) Issue Brief, “Reforming Medigap Plans by Shifting Costs Onto Beneficiaries: A Flawed Approach to Achieve Medicare Savings” (December 2012) available at http://www.lcao.org.
 National Association of Insurance Commissioners (NAIC), Letter to Secretary Sebelius (December 19, 2012), available at http://www.naic.org/documents/committees_b_sitf_medigap_ppaca_sg_121219_sebelius_
 LCAO, "Reforming Medigap" Issue Brief.
 Leadership Council of Aging Organizations (LCAO), Letter to Speaker Boehner, Representative Pelosi, Leader Reid, and Senator McConnell opposing chained-CPI (December 27,2012) available at www.lcao.org