Medicare
Even with Medicare coverage, you can still end up spending a lot of cash out of your wallet. Image source: Medicare.gov.

Tens of millions of Americans 65 and older count on Medicare coverage to pay for the bulk of their healthcare costs. Yet even though Medicare is a fairly comprehensive healthcare program that provides benefits for a wide range of expenses, it is far from perfect. Traditional Medicare's biggest flaw in many people's eyes is the fact that it has no maximum limit on out-of-pocket expenses, leaving beneficiaries vulnerable to catastrophic health conditions that can wipe out their entire life savings. Some policymakers have looked at ways to solve this problem without boosting the program's costs, and they're convinced that Medicare could support a maximum annual limit on out-of-pocket spending without budgetary pain. Let's look more closely at this Medicare flaw and some proposed solutions to fix it.

Catastrophic coverage and Medicare
The biggest financial threat that every health insurance plan has to protect against is the possibility of a catastrophic illness or injury that can cost hundreds of thousands or even millions of dollars to resolve. Given the skyrocketing cost of certain drug treatments and medical procedures, cost containment can be difficult for extreme cases. Even when a health insurance policy covers the vast majority of expenses, even being on the hook for paying just 10% to 20% of the total cost can quickly wipe out a person's life savings.

The Patient Protection and Affordable Care Act resolved this potential problem for private health-insurance policies. It requires that all plans have out-of-pocket maximums and that deductibles, copayments, coinsurance amounts, and other actual expenses get credited against those out-of-pocket limits. Plans offered on health insurance marketplaces have to have maximum out-of-pocket costs of $6,600 for individuals and $13,200 for families in 2015.

In addition, Medicare Advantage plans under Medicare Part C are also required to provide out-of-pocket maximums. Plans have to set an out-of-pocket cost limit that's no higher than $6,700 in 2015, and some plans offer even lower out-of-pocket maximums.

By contrast, traditional Medicare offers no out-of-pocket maximum. That can create substantial problems. For instance, under Part A hospital coverage, Medicare pays all expenses beyond a $1,260 deductible for the first 60 days of hospitalization during a coverage period, and then charges $315 per day between days 61 and 90 and $630 per day after day 90 for up to 60 days throughout your lifetime. After that coverage runs out, though, Medicare covers nothing, leaving you bearing all costs.

In order to protect themselves against catastrophic expenses, some senior citizens choose to get supplemental Medigap policies. These policies fill in some of the gaps in traditional Medicare coverage, but not all Medigap policies add an out-of-pocket maximum. Those that do can be fairly costly.

Adding catastrophic coverage to traditional Medicare
Expanding traditional Medicare to include an out-of-pocket maximum would transfer the costs of catastrophic healthcare expenses to the government, and some opponents of the measure point to the added burden on already-stretched budgets as making Medicare reform impractical. Yet proponents point to studies that have looked more closely at the issue and proposed compromises that would make reform revenue-neutral from the government's standpoint.

Last year, the Kaiser Family Foundation released an issue brief discussing potential moves to restructure Medicare benefits. Among them was a proposal that the Congressional Budget Office had examined that would have adopted a $550 joint deductible for Part A and Part B, uniform cost-sharing at 80%/20% above the deductible, and a brand-new annual out-of-pocket spending cap of $5,500. Under the CBO's budget analysis, this proposal would actually have resulted in a reduction of federal spending by $52 billion between 2015 and 2023, as the marginally higher costs from the deductible and cost-sharing changes would have more than paid for the catastrophic coverage. Slight adjustments to the proposal could produce varying degrees of cost savings, giving lawmakers room to compromise on specific dollar figures without jeopardizing the fundamental purpose of the proposal.

Another wrinkle to consider is whether to have different out-of-pocket spending limits for those at different income levels. The simple way to do so would be to tie different limits to the same income brackets Medicare uses to determine higher monthly premiums for Part B coverage, which currently start above $85,000 in annual income for single filers and $170,000 for joint filers. Alternatively, Medicare could look at the same income levels that determine eligibility for premium subsidies under the Affordable Care Act.

Whatever solution lawmakers choose, Medicare faces the challenge of coordinating with Medicare Advantage plan coverage and other supplemental retiree coverage to ensure that the insurance protection works well together. Yet that challenge also presents some opportunities, as changes could leave employer-provided coverage for retirees with less catastrophic exposure, which in turn might spur more employers to keep retiree coverage in place. The recent trend has been to eliminate employer-provided retiree healthcare coverage, so anything that could cut the private cost of providing that insurance would be of potential benefit to employers and workers alike.

Medicare's biggest flaw is that you can end up spending your entire savings on healthcare even under its coverage. With these proposals to provide limits on out-of-pocket costs, there's an increasing chance to find a solution that will fix this flaw and leave Medicare recipients in a much stronger position to care for themselves financially.

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