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Simplified Medicare Could Save Money, Improve Senior Health

Karen Davis (Johns Hopkins University School of Public Health)

Karen Davis (Johns Hopkins University School of Public Health)

Public health researchers found combining into one program Medicare’s separate hospital, doctor, and drug plans with supplemental insurance could save $180 billion over a decade while improving care for older Americans.  The study, led by Johns Hopkins School of Public Health professor Karen Davis and conducted for the Commonwealth Fund, appears in the May 2013 issue of the journal Health Affairs (paid subscription required).

In the paper Davis, with Commonwealth Fund researchers Cathy Schoen and Stuart Guterman, propose Medicare Essential, a simplified public insurance plan that combines Medicare’s traditional hospital and physician coverage, known as parts A and B, with drug coverage (part D), and supplemental insurance programs called Medigap policies. The proposal also calls for replacing current deductibles under Medicare with a single $250 deductible for hospital and physician services. There would also be no deductible for prescription drugs or preventive care, and total out-of-pocket costs to beneficiaries would be capped.

Medicare Essential, as proposed by the authors, would create incentives for recipients to select higher-quality, but still cost-effective health care services. Beneficiaries would, for example, be encouraged to choose a primary care physician and providers who meet high value standards, and in turn would have lower deductibles and co-pays. Medicare Essential would also encourage participation in high-quality and high-value programs, such as patient-centered medical homes that offer better support for people with multiple chronic conditions, including around-the-clock access to a health care provider and better coordinated services from hospitals and specialists.

Davis and colleagues simulated the potential effects of this redesign of Medicare based on models from Actuarial Research Corporation that compared estimated costs under current Medicare plus supplemental insurance to the Medicare Essential option over 10 years, starting in 2014.  The estimates assume those currently in Medicare Advantage plans (Medicare part C), continue their enrollment.

The results show Medicare recipients could save some $63 billion from 2014 through 2023, from savings in premiums and out-of-pocket costs ranging from 17 to 40 percent compared to current costs. Savings from simplifying Medicare’s administrative costs and rewarding delivery of high-quality, high-value care would benefit payers as well. The findings indicate private employers would save $90 billion in retiree health plans, and state and local governments would save some $27 billion over this period.

“This plan builds on traditional Medicare, which beneficiaries are more satisfied with than private coverage,” says Davis. “But Medicare is overly complex, and it fails to protect beneficiaries against high costs unless they buy supplemental coverage. Medicare Essential would simplify and modernize Medicare for beneficiaries and help keep premiums and out-of-pocket costs reasonable.”

Many of the savings would come from reduced administrative costs. Current Medigap supplemental plans have administrative costs averaging 20 percent, while Medicare has administrative costs of 2 to 3 percent. Other savings would come from patient-centered medical homes, bundled payments for acute care improvement, and payments by accountable care organizations that share savings and risks and reduce avoidable hospitalization and emergency room use.

The authors add that Medicare Essential would not add to the Federal budget deficit, because its enhanced benefits are financed by premiums, which would be substantially lower than current premiums for Medigap and drug coverage. “Improvements we can make to Medicare now to pay for value, simplify and enhance benefits for consumers, and reduce administrative waste,” says Commonwealth Fund president David Blumenthal, “will protect Medicare and its beneficiaries far into the future.”

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