For Medicare Beneficiaries, a Simpler Alternative

The Medicare Modernization Act entails the largest expansion of benefits in the program's history. But in adding outpatient prescription drug coverage to Medicare's benefit package, the law also fragmented coverage for many beneficiaries. Now, seniors wishing to remain in the traditional fee-for-service program require three separate plans to secure comprehensive coverage: Medicare for basic hospital and physician services, a private prescription drug plan, and supplemental Medigap private insurance to help pay high out-of-pocket expenses and protect against catastrophic costs.

One possible solution, one group of experts proposes, is to offer a comprehensive benefit option. In a Health Affairs Web Exclusive (Oct. 4, 2005), Karen Davis and coauthors Marilyn Moon, Barbara S. Cooper, and Cathy Schoen explain how a new Medicare Part E—which they dub "Medicare Extra"—might alleviate the confusion surrounding the new Part D drug benefit, reduce beneficiary expenses, and lower barriers to essential care.

In addition, the authors say, a comprehensive Medicare benefit could add value and efficiency to the program.

Under the proposed Part E, covered benefits would be the same as those currently covered by Medicare, but the cost-sharing structure would be different. A single $250 deductible per person would replace the current Part A deductible of $912 and Part B deductible of $110.

Part E would, however, have somewhat higher deductibles for hospital and physician coverage than Medigap plans. By imposing a $250 overall deductible and a 10 percent coinsurance on physician services, beneficiaries who elect Part E and drop Medigap would experience somewhat greater cost-sharing for these services, but lower premiums.

Davis and her colleagues propose financing Part E primarily through beneficiary premiums—$92 per month in 2004, compared with over $115 for supplemental Medigap coverage. Thus, there would be no additional costs to the federal budget.

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. In addition, simplified drug coverage would eliminate the "doughnut hole" in the new drug benefit—the interruption in coverage for prescription expenses that fall between $2,250 and $5,100 (for the year 2006).

"Medicare Extra would create greater simplicity, efficiency, and value for beneficiaries and for Medicare," says Davis. "With more affordable cost-sharing, Part E has the potential to reduce barriers to essential care for beneficiaries. Administrative costs can be lowered because Medicare's administrative costs are just 2 percent—much lower than administrative costs for Medigap policies, which average at least 20 percent."

In surveys, Medicare beneficiaries have expressed consistently higher satisfaction with their coverage than have individuals in employer health plans. They are confident in their ability to access needed care, less likely to report negative experiences, and less likely to have problems paying medical bills. A comprehensive benefit, say the authors, would build on this record and help beneficiaries get the benefits they want at a lower cost, with less confusion and complexity.