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Managing Medicare's Costs

The post-election outlook for seniors’ healthcare costs (1 of 2)

Last week’s general election set the stage for substantial changes to Medicare. It’s not just that the Affordable Care Act will remain in place, since by itself that may not have much effect on retirement healthcare. Other changes, though, ones on which both political parties more or less agree, have been waiting in the wings until the questions about Health Reform’s future were answered.

While a few of these changes will be beneficial to people over 65 who want to control their healthcare expenses, most of them will transfer costs from the government to individuals and providers.

This is not to minimize what Health Reform does for retirees. For starters, the Part D doughnut hole is being closed. And beginning this year, Medicare covers all of the costs of recommended preventive tests and screenings, a “Welcome to Medicare” physical for new enrollees, and annual wellness visits for every Medicare beneficiary.

These added benefits mean that retirees will have less cost sharing and/or slightly slower premium growth, depending on the type of supplemental plans they have. If Health Reform had been overturned, it would have meant that Medicare would have gone back to paying only 80% of the cost of mammograms, colonoscopies, hepatitis B shots, bone mass measurements, glaucoma tests, pap tests and pelvic exams.

Before the election many legislators who wanted to repeal Health Reform said that they would replace it with a new law that would include popular provisions like the free preventive tests. But if the law had been overturned, those benefits would have been in limbo until a replacement law was eventually passed.

There’s little in Health Reform that is going to cut Medicare’s costs noticeably. Medicare’s version of the fiscal cliff only a few years away, with major structural changes needed to keep the government from spending one-fourth of its revenue for healthcare.

Even though Health Reform’s benefits are valuable to seniors, they may wind up adding to Medicare’s bills. It’s possible of course that the expanded coverage of preventive benefits will trim costs as diseases are detected earlier and treated less expensively. That’s a potential longer-term benefit, but the additional and substantial costs are being paid now.

Preventive benefits as a money-saving benefit is one of several hard-to-quantify cost justifications for the Affordable Care Act. Another is that fee-for-service accountable care organizations and the shared-savings program will save money within a few years, even though participation in the ACO program is voluntary and the financial incentives for most doctors are negligible.

So, Congress knows it’s time to find hard-money savings. Here are some of the the impacts that seniors can expect from legislation that will almost surely be enacted over the next year or two, including some Health Reform provisions that have not yet gone into effect.

Affluent people will pay increasingly higher premiums and affluence will be slowly re-defined downward. Means-testing requires higher-income people to pay heftier Part B and in some cases Part D premiums. It isn’t the solution to Medicare’s fiscal problem, but there is a consensus that as one piece in a large puzzle, higher premiums will need to paid by more than the five percent of beneficiaries who do so today. In part, that’s merely facing the facts, since one-half of Medicare beneficiaries have incomes below $25,000 a year.

Health Reform froze the thresholds for means-testing at their present levels until 2020. By then, some 14% of people over 65 will have incomes that exceed those thresholds, which are $85,000 of adjusted gross income for individuals and $170,000 for married couples.

President Obama’s fiscal year 2013 Budget Proposal recommended an additional 15% levy on means-tested premiums and a prolonged freeze on the current thresholds until 25% of beneficiaries are paying the elevated premiums (projected to be 2035). A Kaiser Family Foundation Issue Brief says that if 25% of beneficiaries were paying the higher premiums today, people with incomes of just $47,000 ($94,000 for married couples) would be required to pay them.

A year ago as a way to fund payroll tax relief, Republicans supported the idea of having millionaires pay the entire cost of their Part B coverage, which is four times the standard premium. And Paul Ryan’s Medicare proposal would means-test premium support payments and give more money to people with modest incomes.

Medigap policyholders will face higher premiums and additional cost-sharing. Fourteen months from now Medigap policies will be the only health insurance that can deny coverage or charge higher premiums to people with pre-existing conditions. That means seniors — the ones most likely to have serious pre-existing conditions — will be the only age cohort who must worry about being declined coverage if they’re in poor health. Many insurance analysts expect Congress to act in the next two years to fix this imbalance, which is already being characterized as discrimination against the elderly.

Medigap premiums will jump about 20% when pre-existing conditions can no longer be considered by insurance companies. But the door will also be opened for people to wait until later retirement to buy a policy without risking a denial of coverage. To conserve healthcare dollars, they may enroll in a Medicare Advantage plan during their 60s and early 70s, and switch to a Medigap policy as they begin to use more medical services. They will also be able to change to a lower-priced insurer at any time without having to answer health questions.

Equally important, comprehensive Medigap plans will at some point require more cost-sharing by policyholders. For the last several years the Medicare Payment Advisory Commission has said that people with comprehensive supplemental plans (including many employer plans) are too insulated from the costs of using more and more medical services, which pushes up Medicare’s costs. Health Reform took an initial stab at this problem with a provision to require unspecified cost sharing in Medigap Plans C and F, the two most comprehensive plans, beginning in 2015.

That provision has a loophole – if it goes into effect insurers will promote the nearly identical Plans D and G. Also, Congress may not have the legal authority to re-design the benefits of existing insurance contracts. The Obama Administration sidestepped the legal question when it proposed that, beginning in 2017, people with Medigap plans that have near first-dollar coverage pay an almost 30% higher Part B premium.

Other proposals would have a similar effect of asking more cost-sharing from some Medigap policy owners. The Bowles-Simpson Commission, whose recommendations have been endorsed by Republicans, put forward the idea of prohibiting Medigap plans from covering the first $500 of cost-sharing and then paying for only 50% of the next $5,000. President Obama requested the Bowles-Simpson Commission, but has not endorsed its proposals.

When additional cost-sharing is required of Medigap policyholders, premiums will drop, although not by as much as out-of-pocket payments will increase. Some changes along this line were considered as part of the Grand Bargain that was almost agreed to during the 2011 debt limit negotiations.

Ideally, when additional cost-sharing is introduced to these policies there will be a way to protect the lower-income policyholders who collectively own almost 20% of Medigap policies. And even after that solution is in place, it will be piecemeal at best, since employer plans, which include an even larger number of policyholders who have comprehensive benefits, will be unchanged. ◊◊

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