How Medicare Out-of-Pocket Healthcare Spending Cap May Impact Beneficiaries

By implementing a $5,000 spending cap in traditional Medicare, policymakers might be able to halve out-of-pocket healthcare spending for high-spending Medicare beneficiaries, but they risk an increase in overall Medicare spending, a study from Urban Institute found.

The researchers leveraged MCARE-SIM, the Urban Institute’s simulation model based on the 2015–18 Medicare Current Beneficiary Survey (MCBS) data.

In traditional Medicare, most beneficiaries’ spending does not exceed $5,000, but 4.5 million people spend over $5,000 per year out-of-pocket and 1.6 million beneficiaries spend $10,000 or more annually.

Individuals who have cost-sharing above $5,000 also tend to have higher Medicare spending and cost-sharing. Total spending for those who exceed $5,000 in out-of-pocket healthcare spending is around $76,900 on average. Medicare covered $66,400 and average cost-sharing totaled around $10,500, with beneficiaries paying about $2,500 out-of-pocket.

Cost-sharing was split between the beneficiary, employer-sponsored or Medigap supplemental insurance, and Medicaid for dual eligible beneficiaries. Supplemental insurance was the cost-sharing entity that covered the highest amount of the bill, spending around $5,300 per beneficiary.

In contrast, total spending equals $7,400 for beneficiaries who spend less than $5,000 in out-of-pocket spending. Medicare covers $6,100 of that cost, leaving the beneficiary, supplemental plan, and Medicaid to cover $400, $700, and $200 respectively of the cost-sharing bill.

The study considered the impacts of implementing a $5,000 spending cap or a $2,000 Part D out-of-pocket healthcare spending cap along with the $5,000 traditional Medicare cap or capping all traditional Medicare cost-sharing at the Medicare in-network, out-of-pocket healthcare spending cap.

A $5,000 cap on spending would spur a 7.8 percent ($1,000) increase in spending across all beneficiaries accompanied by a 27.6 percent decrease in cost-sharing ($700). 

Spending overall for traditional Medicare beneficiaries under a $5,000 traditional Medicare cap would bump up to $74,900, which would be partially offset by a decline in cost-sharing payments.

Under a $5,000 spending cap, out-of-pocket spending would be more than halved for beneficiaries, supplemental plans, and Medicaid, the researchers found. Beneficiaries would save approximately $1,300 per individual. Medicaid spending and supplemental plan spending would drop by 57.6 percent and 50.8 percent, respectively.

Under a $5,000 traditional Medicare spending cap with a $2,000 Medicare Part D spending cap, more enrollees would be affected because it would encompass individuals who had surpassed the benchmark in overall cost-sharing, Medicare Part D spending, or both. 

Spending would increase by $16 billion total spending would grow by $3,400 and Medicare spending per capita would rise by $8,800, following similar trends as the $5,000 cap policy option.

If policymakers capped traditional Medicare spending at the Medicare Advantage benchmark—which is currently $7,550—, overall spending would be $8 billion. Out-of-pocket healthcare spending would drop by $4 billion, supplemental plan spending would decline by $8 billion, and Medicaid spending would drop by $5 billion. 

Only 2 million beneficiaries have spending that exceeds $7,550, so the pool of beneficiaries impacted by the policy would be substantially smaller.

However, traditional Medicare beneficiaries will use more services since their cost-sharing will decrease, which could mean a total spending increase of 3.9 percent.

The researchers projected that a $5,000 spending cap in traditional Medicare would not impact beneficiaries whose costs were at or less than $5,000.

The researchers acknowledged that certain factors were not covered in the study, including shifts in Medicare Advantage and Medigap enrollment, changes in Medicare Advantage spending if the traditional Medicare spending benchmark increases, and adjustments in Medicare Advantage plans’ out-of-pocket spending caps in order to compete with Medicare.

CMS has projected that Medicare spending will see the biggest increase in healthcare spending between 2021 and 2030, surpassing $1 trillion in 2023. The Medicare spending boost fits within a healthcare spending trend that has been slowly increasing in recent decades.

Medicare Part B premiums jumped higher in 2022, rising 14.5 percent. But CMS is considering putting savings from the lower Aduhelm price to offset 2023 Medicare Part B premiums.