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MEDICARE
CATASTROPHIC ACT
Options for Changing
Financing and Benefits
--
(;Ao/f1I(LI)-~)!)-IT,fi
GAO
United States
General Accounting Office
Washington, D.C. 20548
Human Resources Division
B-236862
September l&l989
The Honorable Dan Rostenkowski
Chairman, Committee on Ways and Means
House of Representatives
Dear Mr. Chairman:
On July 27, 1989, you asked us to review the Medicare Catastrophic
Coverage Act of 1988 (MCCA, Public Law 100-360) and provide a sum-
mary of the options available to either (1) revise the benefits and
financing under the act or (2) phase out the program. Concern about the
act has been expressed by members of Congress and the public, particu-
larly regarding the amount of supplemental premium that higher income
Medicare beneficiaries will pay.
This report presents options relating to reducing the amount of MCXA
funding coming from beneficiary premiums through financing the pro-
gram with other sources of revenue, reducing benefits, redistributing
the cost of the program among beneficiaries, and various combinations
of these alternatives. In summary, there are no painless ways to reduce
beneficiary funding. Revenues from other sources need to be raised or
benefits provided under
MCCA
need to be cut. Compounding the problem
from a budget deficit standpoint is the fact that MCCA was designed to
build a contingency reserve so that estimated revenues exceed estimated
costs for the catastrophic program in its early years. Therefore, repeal
of the program would increase the federal deficit for Gramm-Rudman-
Hollings (Public Law 100-l 19) deficit reduction purposes for the next
few years.
Benefits and Funding
Medicare, authorized by title XVIII of the Social Security Act, offers a
broad health insurance program to eligible individuals-almost all peo-
b
Under MCCA
ple 66 years old or older and some disabled persons. Benefits are pro-
vided under two parts. Part A, hospital insurance, covers inpatient
hospital, skilled nursing facility, home health, and hospice services. It is
financed primarily by a 1.45-percent Social Security payroll tax paid by
employees and by employers-the hospital insurance tax. People most
often become eligible for part A when they become 66 years old and
they or their spouses have worked for at least 40 quarters in jobs sub-
ject to Social Security payroll taxes.
Part B, supplementary medical insurance, covers physician services and
a broad range of other services furnished on an outpatient basis, such as
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GAO/HRD89-166 Medicare Catastrophic Act
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B-236852
laboratory and X-ray services and medical equipment used in the home.
All Americans 66 or older and any other person who is eligible for part
A are eligible for part B. People electing part B coverage pay 26 percent
of its costs through monthly premiums, and the government funds the
other 75 percent from general federal revenues. In 1989, the taxpayer
subsidy for part B is an estimated $1,004 per enrolled beneficiary.
MCCA was signed into law in July 1988. The act authorized substantial
increased protection for beneficiaries who incur large health care
expenses by limiting the amount of out-of-pocket costs for Medicare cov-
ered services. MCCA also authorized several new benefits and expanded
the extent of services covered for several other benefits.
Part A of Medicare was designed to be funded primarily as social insur-
ance; that is, people pay for the program while they are working and
reap the benefits when they are retired or become disabled. In effect,
part B of Medicare offers beneficiaries a heavily subsidized insurance
policy; beneficiary premiums cover only 26 percent of the program’s
total cost. In contrast, MCCA is designed to be self-funding with Medicare-
eligible beneficiaries paying all of the increased Medicare costs resulting
from the act.
To obtain the necessary funds, three new types of premiums are
included in MCCA. The first of these is referred to as the catastrophic
coverage premium and is paid by all beneficiaries. MCCA set the amount
of the catastrophic premium at $4.00 per month in 1989; this will
increase each year to $7.18 per month in 1993. For subsequent years,
MCCA provides that the catastrophic coverage premium will be adjusted
to reflect the rate of change in catastrophic costs in previous years and
whether the premiums in prior years were too high or too low with
respect to actual costs.’
The second new premium required of all Medicare beneficiaries is called
the prescription drug premium, which will begin in 1991 at $1.94 per
month rising to $3.02 per month in 1993. After that time, the drug pre-
mium will be adjusted annually in a manner similar to that used for the
‘The actual formula for computing the catastrophic coverage premium monthly amount is quite com-
plicated with a number of special ~ustmenta depending on changes in the consumer price index and
the extent of the surplus or deficit in catastrophic outlays in preceding years. See section 1839 (gX2)
of the Social Security Act for details.
Page 2
GAO/HRD-89-166 Medicare Catastrophic
Act
,’ I’
,:/’
B-236882
catastrophic coverage premium.2 Table 1 lists the monthly amounts for
the catastrophic coverage and drug premiums for 1989 through 1993.3
Table 1: Monthly Amounts of
Catastrophic Coverage and Prescription
Drug Premiums, 1989-93
Catastrophic
Prescription Total paid by
Year
coverage premium drug premium
beneficiary
per month
per month per month
1989
$4.00 $0
$4.00
4.90
0 4.90
1991
5.46
1.94
7.40
1992
6.75
2.45
9.20
___-
1993
7.18
3.02
10.20
The third new premium is related to the beneficiary’s income and is
called the supplemental Medicare premium. The amount of the supple-
mental premium is dependent upon the federal income tax liability of
the beneficiary. Beneficiaries who have a tax liability in a year of less
than $160 pay no supplemental premium. It is estimated that about 60
percent of beneficiaries will not pay supplemental premiums because
their tax liability is below this threshold. The remaining 40 percent of
beneficiaries will pay a supplemental premium for 1989 equal to $22.50
for each multiple of $150 in income tax liability up to a maximum
amount of $800 ($1,600 for a husband and wife who are both eligible
for Medicare). These amounts increase each year, and in 1993 they will
equal $42 per $160 in tax liability up to a maximum of $1,050 ($2,100
for a couple). It is estimated that about 6 percent of beneficiaries will
pay the maximum amount. After 1993, the maximum supplemental pre-
mium will be increased by the percentage, if any, by which part B costs
increased more than part B premiums in prior years.
The supplemental premium rate per $150 of income tax liability after
1993 will neither increase by more than $1.50 annually nor decrease.
b
Within this limitation, the rate will be adjusted annually in the same
manner as the catastrophic coverage premium discussed above.4 Table 2
lists the supplemental premium rate per $150 of income tax liability and
the maximum amount of supplemental premium for 1989-93.
28ee section 1839 (g)(3) for details.
3These premiums are additional to the regular part B premium, set at $27.90 per month for 1989.
4See section 6QB of the Internal Revenue Code of 1986 for details.
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Table 2: Supplemental Premium Rates
Per $150 in Federal Income Tax Liability
Supplemental premium rate per
Maximum supplemental
and Maxlmum Amount of Supplemental Tax year
$150 of tax liability premium per person
---
Premium, 1989-93
1989 $22.50 $800
1990 37.50
850
1991
39.00
900
--
-
1992
40.50
950
1993
42.00
1.050
The following sections compare Medicare benefits before and after MCCA.
Hereafter, benefits in effect before MCCA will be referred to as “regular
benefits” while those under MCCA will be called “enhanced benefits.”
Part A Benefits
InI.$tient Hospital Services
All enhanced part A benefits under MCCA were effective January 1,
1989. The Congressional Budget Office’s (CBO) July 1989 estimate of the
value of these benefits is $1.1 billion for fiscal year 1989 increasing to
$2.4 billion in fiscal year 1993.
Before MCCA, the beneficiary was responsible for an inpatient hospital
deductible ($560 in 1989) for each new spell of illness.6 After 60 days in
a hospital, the beneficiary was responsible during each of the next 30
days for a copayment equal to one-fourth of the inpatient deductible. If
the beneficiary were hospitalized for more than 90 days, he or she could
draw on a lifetime reserve of 60 days and would be responsible for a
copayment each day equal to one-half of the inpatient deductible. Once
lifetime reserve days were exhausted, Medicare would make no payment
and the beneficiary would be responsible for all hospital charges. With-
out MCCA, if a beneficiary were hospitalized for the maximum possible
coverage of 150 days in 1989, he or she would have been liable for
$21,660 in deductible and coinsurance. Moreover, if a beneficiary had
l
had hospitalizations during more than one spell of illness in a year, mul-
tiple deductibles would have applied.
Under MCCA, the maximum liability a beneficiary can incur for covered
inpatient hospital services is one inpatient deductible per year. All coin-
surance requirements were eliminated as was the limit on days and the
possibility of multiple deductibles. In 1989,
HCFA
figures indicate that
about 1 million beneficiaries are expected to benefit from elimination of
multiple deductibles, and about 300,000 beneficiaries from elimination
“A new spell of illness would have begun when the beneficiary had not been in a hospital or skilled
nursing facility for at least 60 consecutive days.
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GAO/HRDSB156 Medicare Catastrophic Act
B-236952
Skilled Nursing Facility Services
Home Health Care Services
Hospice Care
Part B Benefits
Physician and Ancillary Services
of coinsurance and the day limit. The number of people benefiting from
the changes should increase over time as the total number of benefi-
ciaries increases.
Before MCCA, beneficiaries were entitled to payments for skilled nursing
facility services if they had been hospitalized for at least 3 days and,
generally, were admitted to the facility within 30 days of discharge
from a hospital. The first 20 days were without cost to the beneficiary,
who then paid coinsurance for each of the 21st through the 100th day
equal to one-eighth of the inpatient hospital deductible ($70 per day in
1989). After 100 days in a spell of illness, benefits were exhausted. For
a loo-day stay in 1989, without MCCA, beneficiaries would have been
responsible for coinsurance totaling $5,600.
Under MCCA, beneficiaries pay coinsurance equal to 20 percent of the
national average cost of a day of care in a skilled nursing facility
($26.60 in 1989) for each of the first 8 days. Beneficiaries pay nothing
further through the expanded limit of 150 days per year. Thus, maxi-
mum beneficiary liability in 1989 is $204 for 150 days of care. Benefi-
ciaries with lengths of stay of 20 days or less pay more than under
former law ($204 versus nothing) while beneficiaries with lengths of
stay over 22 days pay less. In addition, a prior hospitalization is no
longer required to qualify for skilled nursing facility services.
Before MCCA, Medicare covered an unlimited number of home health vis-
its at no cost to the beneficiary as long as he or she was homebound and
in need of intermittent skilled nursing, physical therapy, or speech ther-
apy services.
MCCA
more explicitly defined intermittent with the effect
that more intensive home care will now be covered.
Before MCCA, Medicare covered a maximum of 210 days of hospice care.
MCCA removed the day limit. A small number of beneficiaries will have
additional days of hospice care covered.
Enhanced benefits under part B will become effective on January 1,
1990. CBO'S July 1989 estimates show the value of these benefits to be
about $2 billion in fiscal year 1990 increasing to $4.9 billion in fiscal
year 1993.
Before MCCA, the beneficiary was generally responsible for the first $75
in allowed charges (the part B deductible) after which Medicare usually
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GAO/HRD-89-156 Medicare Catastrophic Act
B236862
paid 80 percent of allowed charges for covered services6 Under
MCCA,
once beneficiary cost sharing totals $1,370 in 1990, Medicare will pay
100 percent of allowed charges. Each year after 1990, the limit on bene-
ficiary cost sharing will be adjusted so that 7 percent of beneficiaries
will become eligible for the 100 percent of allowed charges benefit. In
1990, an estimated 2.3 million beneficiaries will receive benefits at a
total cost of about $1.8 billion while in 1993, about 2.4 million benefi-
ciaries will receive benefits of about $4.3 billion.
Expanded Benefits Under Part B
MCCA
added two new benefits expanding ones previously covered by
part B. A respite care benefit was added to the home health benefit.
Under this benefit, a voluntary care-giver living with a chronically
dependent beneficiary can obtain a rest period from these responsibili-
ties for up to 80 hours in the 12-month period following the date the
beneficiary exceeds the catastrophic cost sharing limit or prescription
drug deductible. This benefit is estimated to cost about $420 million in
1993. The second benefit added coverage of screening mammography to
the outpatient X-ray benefit. While Medicare does not cover most types
of preventive care, periodic mammograms will be covered beginning
January 1, 1990. An estimated 3.1 million beneficiaries will receive cov-
ered mammograms in 1993 at a cost of about $160 million.
Prewription Drug Benefits Before
MCCA,
Medicare did not cover prescription drugs that could be
self-administered unless they were furnished as part of inpatient treat-
ment.
MCCA
added two drug coverage provisions to Medicare. Beginning
January 1, 1990, Medicare will pay for home intravenous
(IV)
drug ther-
apy services, including all personnel, supplies, and equipment, but not
the drugs themselves. A fee schedule will be established by the Depart-
ment of Health and Human Services
(HHS)
to pay for therapy services,
and the drugs will be covered under the provisions of an outpatient pre-
scription drug program.
l
The second benefit, covering outpatient prescription drugs, will be
phased in from January 1, 1990, to January 1, 1993. Medicare will pay
for covered drugs after the beneficiary meets the catastrophic drug
deductible, which is set at $660 for 1990, $600 for 1991, and $652 for
1992. After 1992,
HHS
will set the deductible at a level estimated to
result in 16.8 percent of beneficiaries receiving payment for drugs dur-
ing the year.
%everal exceptions to the deductible and coinsurance requirements existed. Major ones include that
beneficiary cost sharing does not apply to clinical diagnostic laboratory services or
to home health
services paid under part
B.
Page 6 GAO/HRD99-156 Medicare Catastrophic Act
B-236852
In 1990, only drugs approved for home IV therapy and those used in
immunosuppressive therapy are covered. The beneficiary will pay 20-
percent coinsurance requirement in 1990 and succeeding years on these
drugs after meeting the drug deductibles7
Beginning January 1,1991, all other prescription drugs and insulin will
be covered. A 50-percent coinsurance requirement applies in 1991,
40-percent in 1992, and 20-percent coinsurance after then. In 1993, an
estimated 6.9 million beneficiaries will have payments made for them
under the catastrophic drug benefit at a cost to Medicare of about
$4.3 billion.
Options Related to
Fin@ncing Sources
One way to decrease the extent of MCCA funding coming from benefi-
ciaries is by using other revenue sources. To accomplish this in a budget
neutral way the Congress would need to raise sufficient revenues from
other sources to offset the amount that would otherwise have been col-
lected from beneficiaries.
The following sections describe various alternative funding mechanisms
for MUX. A number of these options are summarized in table 1.1.
Use ‘Hospital Insurance
Tax #to Fund All or Part of
MCCA Costs
Some or all of the revenues needed to fund MCCA could be raised by
increasing the hospital insurance tax rate. This would, in effect, make
selected catastrophic benefits regular part A benefits and result in shift-
ing some or all of the financing burden from beneficiaries to active
workers and their employers. If the costs of MCCA funded by higher hos-
pital insurance taxes increased faster than the wages to which the tax
applies, using this revenue source would have adverse implications for
the long-term health of the part A trust fund. We did not estimate long-
b
term implications.
Under current law, regular part A benefits are funded by the hospital
insurance tax. An increase in the hospital insurance tax rate from 1.45
to 1.50 percent would be needed to fund part A catastrophic benefits.
This would cost the average worker and his/her employer about $0.26
per week each. This would raise an estimated $2.7 billion in fiscal year
1993, while the estimated cost of the enhanced part A benefits is $2.6
billion. Beneficiary catastrophic coverage and drug premiums and/or
‘The exception is immunosuppressive drugs used more than 1 year after a transplant in which case a
60-percent coinsurance requirement applies in 1990 and 1991, declining to 40 percent in 1992, and 20
percent thereafter.
Page 7 GAO/HRD-89-166 Medicare Catastrophic Act
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B-236862
Raising the Hospital Insurance
Wage Base or Applying It to A.Il
State and Local Employees or
Both
supplemental premiums could be reduced by the same amount. This rev-
enue would permit a 33-percent reduction in the supplemental premium.
The catastrophic coverage and drug premium could be cut by about 65
percent if this $2.7 billion were used to reduce them.
If all part A and B enhanced benefits were funded by the hospital insur-
ance tax, its rate would need to be increased to 1.60 percent, which
would cost the average worker and his/her employer about 75 cents per
week each. This increase would raise about $8 billion in 1993 while the
estimated cost of parts A and B enhanced benefits is $7.6 billion. Supple-
mental premiums could be eliminated or catastrophic coverage and drug
premiums could be eliminated and supplemental premiums reduced by
about 50 percent. Under this option, part B related benefits would, for
the first time, be partially funded by the hospital insurance tax.
All catastrophic benefits, including drugs, could be funded by the hospi-
tal insurance tax. This would necessitate an increase to 1.70 percent in
the hospital insurance tax rate, costing the average worker and his/her
employer about $1.50 per week. This would raise about $13.3 billion
versus estimated 1993 costs of $12.5 billion, Beneficiaries would not
share in the cost of catastrophic benefits. Again, under this option bene-
fits not related to part A would be financed by payroll taxes for the first
time.
As an alternative to increasing the hospital insurance tax rate, an addi-
tional payroll tax could be instituted at a rate that would produce reve-
nues equal to the amounts discussed under the three options above. The
revenues could be placed in a trust fund specifically for catastrophic
benefits.
There are two additional ways to increase revenues from the hospital
b
insurance tax for use in reducing beneficiary premiums under MCCA.
First, the maximum wage to which the tax applies could be increased.s
The maximum is expected to be $50,700 in 1990. Increasing this to
$60,000 and adjusting it in future years, as under current law, would
raise about $560 million in fiscal year 1990, increasing to $2 billion in
fiscal year 1993. Table 3 lists estimated revenues that would be raised in
fiscal years 1990 and 1993 by increasing the hospital insurance wage
sEach year a maximum amount of earnings is established that the hospital insurance tax will be
applied to. Earnings above this level are not subject to the tax. Annual adjustments to the maximum
reflect changes in average annual wages in previous years.
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GAO/HRD-89-X6 Medicare Catastrophic Act
-
B-236852
base to various levels in 1990, and adjusting the new wage bases annu-
ally as provided under current law. The table also lists the percentage of
estimated 1993 supplemental premiums represented by the revenues
realized from increasing the wage base.
Table 3: EMmated Fiscal Year 1990 and
1993 lncreare in Revenues From Raising
the Maximum for Wages Subject to
Increased revenues
in fiscal year
Percentage of fiscal year
Hobpftal Insurance Payroll Tax
Increase 1990 wage base
(Dollars in billions)
1993 supplemental
from 50,700 to
1990
1993
premium revenues
represented
$60,000
$0.6
$2.0 26
75,000
1.1 3.9
51
90,000
1.4 5.0
66
100.000
1.6
5.6
74
These new revenues could be used to decrease beneficiary funding of
MUX in the same way as the options for using revenues from increasing
the hospital insurance tax rate. The effect would be to transfer part of
the funding responsibility from program beneficiaries to higher income
workers and their employers.
Second, the hospital insurance tax could be made mandatory for all
state and local government employees. The Consolidated Omnibus
Budget Reconciliation Act of 1985 required application of the tax to all
state and local government employees hired on or after April 1, 1986.
Extending this to state and local employees hired before then would
raise about $1.2 billion in fiscal year 1990, and about $1.9 billion in fis-
cal years 1991-94. Such a change would not, however, represent a long-
term funding source because revenues would decrease over time as
affected employees retire. Moreover, it would also increase somewhat
the number of Medicare beneficiaries in the future and thereby would
increase overall Medicare costs in the future.O
“In a staff study, Eligibility of Civil Service Annuitants, Survivors, and Employees for Medicare,
GAO/HRD-83-26. Mar. 10.1983. we renorted that about 81 wrcent of retired federal emnlovees
become eligible for Medicare at age 66 because of earnings in-other employment or because oi their
spouses’ earnings records. Thus, applying the hospital insurance tax to federal employees, as was
done effective January 1, 1983, would make an additional 20 percent of them eligible for Medicare.
We would expect a similar pattern for state and local employees.
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GAO/HRD89-166 Medicare Catastrophic Act
B-286862
Use General Revenues to
General revenues could be raised to fund all or part of MCCA. General
Fund All or Part of MCCA
revenue sources that have been mentioned include alcohol and tobacco
costs
taxes and eliminating the “income tax bubble.“lO The Joint Committee on
Taxation estimates that doubling the tax on a pack of cigarettes to 32
cents would raise $2.9 billion in 1990. Because of the downward trend in
the number of smokers, revenues would tend to decrease over time. The
Joint Committee’s estimate for 1994 is $2.7 billion. Increasing the tax on
beer and wine to the rate per volume of alcohol for hard liquor is esti-
mated to raise $4.7 billion in 1990 increasing to $5.0 billion in 1994.
Eliminating the income tax bubble (but retaining a 2Spercent cap on
capital gains) would raise $3.3 billion in 1990, increasing to $9.6 billion
in 1994.
The estimates cited above indicate that alcohol and tobacco tax
increases would not keep up with the rate of growth in the cost of MCCA
benefits and, thus, we consider them to be only short-term funding
sources. Additional revenue sources would have to be found after a few
years. Elimination of the income tax bubble should tend to result in an
increasing revenue stream as the incomes of those subject to the higher
tax rate increase.
Currently, regular part B benefits are funded 25 percent by beneficiary
premiums and 75 percent by general revenues.” If the Congress decides
to fund the enhancements to part B benefits in the same ratio, about
$3.7 billion in new general revenues would be needed in 1993. This
amount could be raised through various combinations of the tax
changes. Supplemental premiums could be cut in half or about 90 per-
cent of the catastrophic coverage and drug premiums could be elimi-
nated under this option.
To pay for 75 percent of part B catastrophic benefits and drug benefits
*
using general revenues, about $7.5 billion would need to be raised in
1993. This amount would enable virtual elimination of supplemental
“Under current law, some of the revenue otherwise forgone under the Tax Reform Act of 1986 is
recaptured from higher income people by increasing the marginal income tax rate for them from 28 to
33 percent above certain income levels. Once recapture is complete, the rate for additional income
reverts to 28 percent. The income ranges where the 33-percent rate applies are referred to as the
bubble. If the tax rate did not revert to 28 percent, this would eliminate the bubble.
“The percent of part B costs covered by beneficiary premiums has been set at 26 percent for the
years 1983 through 1989. This percentage probably will decrease because premium increases after
1989 will be limited to the percentage increase ln retirement benefits under title II of the Social Secur-
ity Act and part B cost increases have historically exceeded this percentage. Our discussion of part B
catastrophic funding assumes the 26-percent beneficiary share will be extended. If this is not the
case, additional general revenues would be needed for options using the 26/76 funding split.
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GAO/HRD-84166 Medicare Catastrophic Act
IS230862
premiums or elimination of the catastrophic coverage and drug premi-
ums and reduction of supplemental premiums by about 45 percent.
Funding 76 percent of all MCCA benefits through general revenues would
require raising $9.4 billion in 1993. This would enable reducing benefici-
ary funding of MCCA by 75 percent.
Fund Parts A and B
Another option is to fund enhanced benefits in the same manner as regu-
Enhanced Benefits Like
lar benefits and new benefits entirely from beneficiaries. This would
Regular Benefits and Drug
entail (1) increasing the hospital insurance payroll tax to 1.50 percent to
Benefits From
fund the enhanced part A benefits, (2) substituting a $3.00 per month
Beneficiaries
increase in the part B premium for the $7.18 catastrophic coverage pre-
mium scheduled for 1993 to fund 25 percent of the enhanced part B
benefits, (3) raising $3.8 billion in general revenues to fund the other 75
percent, and (4) obtaining $5 billion from beneficiaries through the sup-
plemental premium or drug premiums or both. Fully funding drug bene-
fits with supplemental premiums would still permit a one-third
reduction in these premiums in 1993.
The issue of maintaining an adequate revenue stream to fund increases
in catastrophic costs over time mentioned under previously discussed
options would also apply here. The taxpayer subsidy rate for part B
would remain constant at 75 percent but the dollar value of the subsidy
would increase by about $110 per beneficiary in 1993.
Reducing Benefits to
Rather than using alternative revenue sources to enable reduction of
Reciuce Beneficiary
beneficiary funding of MCCA benefits, the benefits provided under the act
could be reduced to achieve this purpose. The result would be that bene-
Funding
fit reductions would produce lower costs, which in turn would permit
b
raising less revenue from beneficiaries while still fully funding the
smaller program. A number of these options are summarized in table 1.2.
Repealing or Modifying
Repealing all of the enhanced part A benefits would decrease 1993 MCCA
Enhanced Part A Benefits
costs by about 20 percent and permit reducing beneficiary or supple-
mental premiums or both by about $2.4 billion. Repeal would again
expose beneficiaries with long hospital or skilled nursing facility stays
to large out-of-pocket expenses of $20,000 or more in a year.
Reinstituting multiple inpatient hospital deductibles for multiple spells
of illness in a year would reduce
MCCA
costs by about $750 million in
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B-236862
1993, or about 6 percent. According to Health Care Financing Adminis-
tration
(HCFA)
data, about 1 million beneficiaries would pay multiple
deductibles. Reimposing coinsurance on hospital stays over 60 days
would reduce
MCCA
costs by about $880 million (or 7 percent) in 1993.
Repealing any of the other enhanced part A benefits would result in sav-
ings of $600 million or less in 1993.
Repealing or Modifying
Repealing all enhanced part B benefits would result in
MCCA
costs being
Enhanced Part B Benefits
reduced by $4.9 billion, or about 39 percent, in 1993. Most costs of the
enhanced benefits are related to the cap on beneficiary cost sharing-
$4.3 billion in 1993. Repeal of the respite care benefit-$420 million-
and the screening mammography benefit-$150 million-would reduce
MCCA
costs by 6 percent.
Rather than outright repeal of the beneficiary cost-sharing cap, the
amount of the cap could be increased so that fewer beneficiaries reach it
and
MCCA
costs are reduced. However, because current law is designed to
result in 7 percent of beneficiaries receiving enhanced benefit payments
after exceeding the cap, incremental increases in the amount of the cap
would result in relatively small reductions in Medicare costs. For exam-
ple, increasing the cap from $1,370 to $1,500 in 1990 could be expected
to reduce costs by only about $400 million, or 3 percent, by 1993. An
increase in the 1990 cap to $1,700 could reduce
MCCA
costs by about $1
billion, or 6 percent, in 1993.
To affect more beneficiaries, and therefore reduce Medicare costs by
larger amounts, the part B deductible could be raised. More beneficiaries
would receive no payments under part B but the same number would
benefit from the cap. Increasing the deductible by $25 to $100 would
yield reduced Medicare costs of about $600 million in 1993. About 25
b
million beneficiaries would have increased out-of-pocket costs. An addi-
tional 6 million beneficiaries would not receive any part B payments
because their total covered expenses would not exceed the increased
deductible. Doubling the deductible to $160 would reduce costs by $1.5
billion in 1993. A $200 part B deductible would reduce Medicare costs
by about $2 billion in 1993.
Repealing or ,,Modifying
MCCA Drug Benefits
The main new service coverage benefit provided by
MCCA
is the one for
outpatient prescription drugs and it represents about 40 percent of
MCCA'S
estimated costs in 1993. Repealing the benefit, which is expected
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GAO/HRDSS-166 Medicare Catastrophic Act
.
B-236862
to help 6.9 million beneficiaries, would reduce costs by about $6 billion
in that year.
One alternative to outright repeal would be to decrease the number of
people obtaining payments under the drug benefit by increasing the
drug deductible. Under current law, 16.8 percent of beneficiaries will
receive payments in 1993. If this were decreased to 10 percent, MCCA
costs would be reduced by about $1.9 billion. Another alternative would
be to increase the coinsurance that beneficiaries are liable for after
meeting the drug deductible. Increasing the coinsurance rate from 20 to
30 percent would reduce costs by about $550 million in 1993. An
increase to 40 percent would yield reduced costs of about $1 billion and
to 60 percent of about $1.6 billion. The same number of people would
benefit as under current law but their out-of-pocket drug costs would be
higher.
Redistributing MCCA
To reduce the amount of supplemental premiums while retaining the
Fhjding Among
same benefit package under MCCA, its funding could be redistributed
among beneficiaries. Several options are summarized in table 1.3.
Berieficiaries
The supplemental premium is estimated to raise about $7.6 billion in
1993. For every $1 billion supplemental premiums are reduced, cata-
strophic coverage or drug premiums or both would need to be increased
by $2.60 per month to maintain revenues. Cutting in half the maximum
amount of supplemental premium an individual can be liable for (e.g.,
from $1,060 to $626 in 1993) would reduce revenues by about $2.4 bil-
lion, which could be offset by increasing other premiums by about $6
per month. Cutting in half the supplemental premium rate per $150 of
income tax liability would reduce revenues by $2.7 billion, which would
require a $6.70 per month increase in other premiums.
Changes like those discussed above would result in a more regressive
funding scheme than current law because a higher portion of revenues
would be raised from lower income beneficiaries. The lowest income
beneficiaries would be protected, however, because another provision of
MCCA (section 301) requires that no later than January 1, 1993, state
Medicaid programs must pay Medicare premiums,‘2 deductibles, and
coinsurance for individuals with incomes at or below the poverty level.
Because the federal government pays on average 55 percent of state
12Medicaid is a means-tested program under which the federal government shares in state costs of
health care services received by cash welfare recipients and other low income persons.
Page 13
GAO/HID-89-166 Medicare Catastrophic Act
Medicaid costs, increasing premiums, deductibles, or coinsurance would
have the effect of increasing the need for general revenues but we did
not estimate the amount involved.
Another possible option would be to repeal the MCCA drug benefits and
protect lower income beneficiaries from drug costs by amending section
301 to require states to include Medicaid drug coverage along with cov-
erage of beneficiary cost sharing. The drug premium would be elimi-
nated and supplemental premiums could be reduced by half. Medicare
beneficiaries whose incomes are too high to qualify for full Medicaid
coverage but below the poverty line would have their drug costs cov-
ered. The income threshold could also be modified to cover a larger por-
tion of Medicare beneficiaries; for example, beneficiaries with incomes
below 160 percent of the poverty line could be provided Medicaid drug
coverage.
Medicaid drug coverage for low-income Medicare beneficiaries would
require additional revenues for both the federal and state governments
but sufficient data was not readily available for us to estimate the
amount required. One disadvantage to this approach is that drug cover-
age under Medicaid is not uniform from state to state and two states do
not cover drugs. Thus, the extent of drug coverage available would
depend on where a beneficiary resides.
Combinations of New
Revenues, Benefit
Cuts, or Redistribution
of Funding
.
.
Many of the features of the options discussed above could be used in
combination to reach a given goal. For example, if the goal were to
enable cutting the supplemental premium rate in half, many combina-
tions of new revenues, benefit cuts, or other premium increases would
offset the revenue forgone by reducing the rate-about $2.7 billion in
1993. Two possible combinations are:
Covering enhanced part A benefits by an increase of 0.06 percentage
point in the Social Security payroll tax (new revenues of $2.7 billion)
and increasing the part B deductible by $15 (Medicare savings of $400
million) would produce the needed amount in 1993 with a small cushion.
An increase of $2 per month in the catastrophic coverage premium
(redistribution among beneficiaries of $800 million), setting the benefici-
ary cost-sharing cap at $1,700 in 1990 (MCCA savings of $1 billion), and a
6-cents per pack increase in the cigarette tax ($1 billion in new revenue)
would also offset the 1993 revenue loss from such a cut in the supple-
mental rate.
Page 14
GAO/HRD-89-166 Medicare Catastrophic Act
B-236852
Repealing or Phasing
One way to reduce the need to raise funds from beneficiaries is to repeal
Out MCCA
or phase out the Medicare catastrophic program. This would reduce out-
of-pocket costs for beneficiaries who have Medicare supplement (Medi-
gap) policies partly or fully paid for by their former employers.13 Benefi-
ciaries purchasing Medigap policies themselves would tend to have
increased out-of-pocket costs because Medicare administrative costs are
normally much lower than administrative costs and profits on Medigap
policies.14 Medicaid costs could also increase because Medicaid would
pay for costs that Medicare would have paid for low-income benefi-
ciaries also eligible for Medicare. In addition, out-of-pocket costs would
increase for beneficiaries not poor enough to qualify for Medicaid who
do not have employer subsidized Medicap policies.
If MCCA were repealed or phased out and the Congress wanted to provide
similar protection to lower income beneficiaries, it could amend the
Medicaid program to require states to pay premiums, deductibles, and
coinsurance for additional beneficiaries. For example, all Medicare bene-
ficiaries with incomes below 160 percent of the poverty level could be
provided Medicaid coverage for their Medicare cost-sharing liabilities.
Lower income beneficiaries would be protected from catastrophic costs
associated with regular Medicare benefits but would lose coverage for
the new benefits in MCCA, in particular those for prescription drugs. As
discussed on page 14, the Congress could also require states to cover
prescription drugs for low-income beneficiaries. Again, drug benefits
would not be uniform from state to state. If the Congress were to require
states to cover Medicare cost-sharing or prescription drugs or both for
additional beneficiaries, this would increase Medicaid costs and necessi-
tate increased general revenues for both the federal and state
governments.
A complicating factor for the Congress related to repealing or phasing
out MUX is that such action could increase the federal deficit for
Gramm-Rudman-Hollings deficit reduction purposes. In designing MCCA
the Congress decided to build a contingency reserve during the early
years of the program. Thus, the revenues resulting from MCCA are
expected to exceed program costs in fiscal years 1990 and 1991, and
eliminating these revenues would result in a larger deficit in those years.
i3Medigap policies available to individuals do not generally cover drugs but we do not have informa-
tion on the extent of drug coverage under employer-sponsored Medigap policies. To the extent these
plans do not cover drugs, beneficiaries would lose an important benefit provided by MCCA.
a Insurance: Law Has Increased Protection Against Substandard and Overpriced Policies
$7-8, Oct. 17,1086), Insurance: Effect of the Catastrophic Coverage Act of
1988 on Benefits and Premiums ( 89-13, Apr. 6,1989).
Page 15
GAO/HRD-89-166 Medicare Catastrophic Act
E226852
For fiscal year 1990, MCCA revenues are expected to exceed costs by $4.2
billion and for fiscal year 1991 by $2 billion.
Another complicating factor related to repealing or phasing out
MCCA
is
that if section 301 (which requires Medicaid coverage of low-income
Medicare beneficiary cost sharing) is not also repealed, Medicaid costs
will increase because it will be paying for cost-sharing items
that
would
not exist with
MCCA.
For example, low-income Medicare beneficiaries
would again be liable for coinsurance on long hospital stays and for part
B coinsurance for services above the level that would have triggered
MCCA'S cost-sharing cap. We did not estimate the additional federal (or
state) Medicaid funds that would be required if
MCCA
was repealed with-
out repealing section 301. Of course, repealing section 301 would again
expose low-income Medicare beneficiaries who do not qualify for Medi-
caid to catastrophic out-of-pocket costs.
M&king MCCA
Coverage Optional
The Committee’s office asked us to consider the effects of making cover-
age under MCCA optional for beneficiaries. We considered two different
versions of optional coverage. The first is to allow beneficiaries to
choose coverage under MCCA and to prohibit them from participating in
part B if they decline MCCA. Because of the large 75 percent taxpayer
subsidy of regular part B benefits, we would expect few beneficiaries
would choose not to be covered by MCCA. Purchasing private health
insurance without the benefit of the taxpayer subsidy would typically
be significantly more expensive than the maximum a beneficiary would
pay under MUX. To our knowledge, the only major group of persons 66
years old or older that would be eligible for comprehensive employer-
sponsored private health insurance is retired federal employees because
other employers only offer Medigap policies to persons who could be or
are covered by Medicare.
b
Alternatively, if beneficiaries were allowed to decline coverage under
MCCA but retain regular part B, we would expect a much larger number
of beneficiaries to decline MCCA. Those beneficiaries with Medigap poli-
cies paid in whole or in part by their former employers would probably
have lower out-of-pocket costs by declining coverage, especially because
we expect that these beneficiaries would tend to be the ones with higher
incomes and thus subject to supplemental premiums. Therefore, reve-
nues resulting from MCCA would probably decline much more than pro-
gram costs. And premiums for beneficiaries electing coverage under
MCCA would have to be raised substantially or other revenues generated
through increased taxes on the general public or both.
Page 16
GAO/HRD-89-156 Medicare Catastrophic Act
, /, I,
”
.:,
%
,.
‘. ,.’
“‘Yd * ,,
B-236862
Part A Costs for
Enhanced Skilled
Nursing Facility
Benefit% May Bi
Higher Than
Estimated
Recent
HCFA
data indicate that Medicare costs for skilled nursing facility
services increased rapidly in the first part of 1989. The extent to which
the increase was due to enhanced
MCCA
benefits or to other factors is not
clear.
We have received anecdotal information that one of the reasons that
Medicare costs increased was that states were using the enhanced
MCCA
benefits to reduce their Medicaid expenses by transferring Medicaid/
Medicare dual beneficiaries to Medicare certified beds. By doing this,
Medicare would pay for the care for up to 160 days, relieving Medicaid
of the cost.
HCFA
data indicates that this could be part of the cause of the
increased Medicare costs. Medicare skilled nursing home admission
notices increased dramatically in January 1989 when this benefit was
effective to about 105,000 from a rate in the mid-40,000’s during the
preceding 6 months. Admission notices dropped to about 64,600 and
about 67,100 for February and March 1989.
We do not believe it was the Congress’ intention to shift funding of a
portion of Medicaid skilled nursing facility costs from general revenues
to Medicare beneficiary premiums. Thus, regardless of any other actions
taken with respect to
MCCA,
we believe it would be reasonable to fund
from nonbeneficiary sources any Medicare cost increases resulting from
increased Medicaid beneficiary use of the enhanced skilled nursing facil-
ity benefits of
MCCA.
CBO
and
HCFA
are both looking at the implications for
MCCA
cost estimates
of the unexpected increase in Medicare costs for skilled nursing
facilities.
ObjCctives, Scope, and
As requested, our objective was to identify options for restructuring
b
Methodology
benefits and financing under
MUX,
including repealing or phasing out
the program.
We reviewed title XVIII of the Social Security Act as in effect before
MCCA
and
MCCA
itself to identify the benefits and financing of each. We
discussed with and obtained information from
HCFA
and
CBO
officials
about their estimates of the costs and revenues associated with
MCCA.
We also obtained information from the Joint Committee on Taxation and
CBO related to changing various tax rates, such as those on cigarettes
Page 17
GAO/HRD-89-166 Medicare Catastrophic Act
and alcohol, and revising the hospital insurance tax. Using the informa-
tion obtained and our knowledge of the Medicare program and its inter-
relationships with the Medicaid program, we formulated various options
for MCCA.
The estimates of the fiscal consequences of and number of beneficiaries
affected by each option presented are based on the best data available
at the time this report was prepared. These estimates are based on
CBO
and other estimates and are subject to change.
Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 6 days after its issue date. At that time,
we will send copies to interested congressional committees, the Secre-
tary of Health and Human Services, and to other interested parties. We
will make copies available to others on request. Major contributors to
this report are listed in appendix II.
Sincerely yours,
Lawrence H. Thompson
Assistant Comptroller General
Page 18
GAO/HRD-88156 Medicare Catastrophic Act
Page 19
GAO/HRD-SB-156 Medicare Catastrophic Act
-,/
,/...
Appendix I
Selected Options for Modifying Medicare
Catastrophic Act Financing and Benefits
Table 1.1: Some Alternative Sources of
Flnanclng
Dollars in billions
Option
Hosoltal insurance (HI) tax
Increase HI tax rate to 1.50 percent
to cover part A benefits.
Grease HI tax rate to 1.60 percent
to cover parts A and B benefits
Increase HI tax rate to 1.70 percent
to cover all MCCA costs,
1993 Effects on need for beneficiary
Revenue funding
Reduce supplemental premium by
$2.7 33% or reduce flat premium by 65%.
Eliminate supplemental premium or
eliminate flat premium and reduce
8.0
supplemental premium by 50%.
13.3
Eliminate beneficiary funding.
Raise 1990 HI tax wage base from
Raise 1990 HI tax wage base to
$100,000.
$50,700 to $75.000. 3.9
Reduce supplemental premium by
75% or eliminate flat premium and
Reduce supplemental premium by
50% or reduce flat oremium bv 95%
5.6
reduce supplemental premium by
20%.
Other taxes
Double cigarette tax.
2.9
Reduce supplemental premium by
40% or reduce flat oremium bv 70%
Increase tax on beer and wine to
hard liquor rate.
Reduce supplemental premium by
65% or eliminate flat premium and
4.9
yodd/uce supplemental premium by
Oo
Eliminate income tax “bubble.”
8.4
Eliminate supplemental premium
and reduce flat premium by 20% or
eliminate flat premium and reduce
supplemental premium by 55%.
Fund 75% of part B enhancements
with general revenues.
Fund 75% of part B enhancements
and drug benefits from general
revenue.
--
Fund 75% of all catastrophic
benefits from general revenues.
3.7
Reduce supplemental premium by
50% or reduce flat premium by 90%.
Eliminate supplemental premium or
eliminate flat premium and reduce
7.5 supplemental premium by 45%.
Eliminate supplemental premium
and reduce flat premium by 45% or
eliminate flat premium and reduce
b
9.4 suoblemental oremium bv 70%.
Example of funding through
multiple financing sources
Fund parts A and B enhanced
benefits like regular benefits and
drug benefits from beneficiaries by
1) increasing HI tax to 1.50 percent,
2) reducina flat oremium to $3.00.
2.7
1.2
Reduce catastrophic coverage
premium by 58% and reduce
supplemental premium by 35%
Page 20 GAO/HRD-89-166 Medicare Catastrophic Act
(continued)
Appendix I
Selected Optiona for Mod@ing Medicare
Catastrophic Act Pinan- and J3eneflts
Option
1993
Effects on need for beneficiary
Revenue
funding
3) raising $3.7 billion in general
revenues, and
4) funding drug benefits from
beneficiaries.
3.8
5.0
aThe flat premium is composed of the catastrophic coverage and drug premiums which are paid by all
part
B
beneficiaries,
table 1.2: Reducing Benefits to Reduce
Beneficiary Spending
Dollars in billions
Option
1993
savings Effects on beneficiary funding
Part A benefits
Repeal enhanced part A benefits.
Reinstitute multiple inpatient hospital
deductibles for multiple spells of
illness in a year.
Reimpose coinsurance for hospital
stays over 60 days.
Part B benefits
Repeal enhanced part B benefits.
Reduce supplemental premium by
;W&,or reduce flat premiuma by
$2.4 o
Reduce supplemental premium by
0.75
10% or reduce flat premium by
20%.
0.88
Reduce supplemental premium by
10% or reduce flat premium by
20%.
4.9
Reduce supplemental premiums
by 65% or eliminate flat premium
and reduce supplemental
premium by 10%.
Repeal cap on beneficiary cost
sharing.
Increase 1990 cap to $1700.
Increase part B deductible to $150.
Drua benefits
Repeal drug benefit.
Reduce supplemental premium by
4.3
55% or eliminate flat premium.
Reduce supplemental premium by
15% or reduce flat premium by
1.0
25%.
Reduce supplemental premium by
$I; or reduce flat premrum by
1.5 0.
Reduce supplemental premium by
65% or eliminate flat premium and
reduce supplemental premium by
5.0
10%.
Decrease percentage of beneficiaries
receivin
from 16. 8
payment under drug benefit
to 10%.
1.9
Reduce supplemental premium by
25% or reduce flat premium by
45%.
aThe
flat premium is composed of the catastrophic coverage and drug premiums which are paid by all
part B beneficiaries.
Page 21
GAO/HRD-89-156 Medicare Catastrophic Act
/
.’
Appendix I
Selected Options for ModVying Medicare
Catastrophic Act Financing and Benefits
Table 1.3: Redistributing Catastrophic
Funding Among Beneficiaries
Dollars in billions
Option
Reduce supplemental premium payment cap
by one-half.
Reduce supplemental premium rate per $150
of income tax for liability (from $42.00 to
$21 .OO in 1993).
Amount
shifted in
1993 Would require
Increase flat premiuma by
$2.4 60% ($6.00 per month).
2.7
Increase flat premium by
65% ($6.70 per month).
aThe flat
premium is composed of the catastrophic
coverage and drug premiums which are paid by all
beneficiaries.
Page 22
GAO/HRD-89-166 Medicare Catastrophic Act
Abpendix II
Major Contributors to This Report
Human Resources
1202) 276-646 1
Division.
~ashin&on, D.C.
(106aea)
J&e R&s, Senior Assistant Director
Thomas G. Dowdal, Assistant Director
Peter E. Schmidt, Evaluator-in-Charge
Page 23
GAO/HRD99-156 Medicare Catastrophic Act
’ .: ‘,
‘P..:. .,.
‘I’Iwrt~ is ii 25”~ discount. 011 orckrs for 100 or more copies rnailtd t.0 a
siuglth
iltltIWSS.
httiill y for I’yiv;r t (k I iw !S300
First-(3ass Mail
I~ost.agc~ & Fws Paid
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