RESE ARCH Highlights
C O R P O R AT I O N
Major Changes to Medicare Would Cut Costs but Also
Squeeze Enrollment and Raise Spending for Seniors
A
nticipated growth in Medicare spending over the
next two decades casts an ominous shadow over the
federal budget and the U.S. economy. The Affordable Care Act of 2010 made some changes to Medicare that
are expected to curb spending. However, even with these
changes, relentless cost growth looms. Medicare costs are
projected to increase from 16 percent of federal spending in
2012 to 24 percent in 2037, equaling 6 percent of the U.S.
gross domestic product (GDP). This increase is a major factor in the projected growth of the U.S. deficit. Faced with
this grim prospect, policymakers are exploring ways to curb
growth in Medicare spending.
A research team from RAND and other institutions (the
University of Southern California, Precision Health Economics, and Harvard University) analyzed the potential effects of
three large-scale policy changes intended to reduce Medicare
cost growth:
• charging a premium for hospital inpatient (Part A) benefits
• changing Medicare to a premium support program in
which seniors receive a credit toward the purchase of
health insurance
• raising the Medicare eligibility age from 65 to 67.
The team estimated the effects of these proposals using
the Future Elderly Model, a microsimulation model that
tracks cohorts older than age 50 to project their health status
and economic outcomes. The analysis found that each of
these alternatives would slow Medicare cost growth but
would also reduce enrollment in the program and increase
spending for beneficiaries. Raising the eligibility age to 67
would have the most dramatic effect on costs—saving an
estimated $1.2 trillion by 2036 (Figure 1)—but would also
reduce enrollment more than the other options because
7.6 million seniors age 65–66 would no longer be eligible
(Figure 2).
Key findings:
• Charging a premium for Medicare Part A (hospital)
benefits would save about $400 billion cumulatively
between 2012 and 2036 but would reduce enrollment
by 1.1 million.
• Changing Medicare to a premium support program would
save approximately $900 billion cumulatively between
2012 and 2036. However, this change would reduce
enrollment by 2.3 million and increase out-of-pocket costs
for beneficiaries.
• Raising the eligibility age from 65 to 67 would save an
estimated $1.2 trillion by 2036 but would reduce enrollment by 7.6 million.
Charging a Premium on Hospital Benefits
One proposal for reducing Medicare costs is to begin charging a premium for hospital inpatient benefits (Part A). The
analysis assumed that people with incomes below $85,000
would contribute a premium of 5 percent of expected Part A
spending. The analysis further assumed that the percentage of
Part A spending paid as premiums would increase as follows:
to 10 percent for incomes of $85,001–$107,000, 15 percent
for $107,001–$160,000, 20 percent for $160,001–$214,000,
and 25 percent for incomes higher than $214,000. Income
limits were double for couples, and no contribution was
required from people who were dually eligible for Medicare
and Medicaid because of their low incomes.
The analysis found that implementing a means-tested
premium for Part A would save the program about $400 billion cumulatively between 2012 and 2036. However, enroll-
This research highlight is based on Eibner C, Goldman DP, Sullivan J, and Garber AM, “Three Large-Scale Changes to the Medicare Program
Could Curb Its Costs but Also Reduce Enrollment,” Health Affairs, Vol. 32, No. 5, May 2013, pp. 891–899 (EP-51438,
http://www.rand.org/pubs/external_publications/EP51438.html).
Figure 1.
Policy Changes Would Save Medicare from $400 Billion to
$1.2 Trillion Between 2012 and 2036 (net present value)
Figure 2.
…But Would Also Reduce the Number of Seniors Enrolled in
Medicare, 2012–2020
1.2
0
1.2
1.0
0.9
0.8
0.6
0.4
0.4
0.2
0
Raise eligibility
age to 67
Premium support
(GDP indexed)
Part A premium
(means tested)
ment in the Part A program would decline by an estimated
1.1 million seniors who either could not or would not pay
the premium. In addition, out-of-pocket spending for those
who remain enrolled would increase by the amount of the
premium.
Changing Medicare to a Premium Support Program
Another widely discussed proposal, advanced in various forms
in recent years, involves changing how Medicare delivers
benefits. Currently, Medicare is a defined benefit program, in
which beneficiaries are guaranteed coverage for a fixed set of
benefits. Under a premium support plan, beneficiaries would
receive a fixed payment to shop for their own insurance.
The research team modeled a scenario in which Medicare
beneficiaries received a credit that compensated them for
current Part A and Part B (outpatient care) spending, minus
the current Part B premium. In 2014, this credit would
equal $8,900 per year for a person whose income is less than
$85,000; the credit would cover about 85 percent of hospital
and outpatient care.
The premium support plan would save approximately
$900 billion cumulatively between 2012 and 2036. However,
enrollment would decline by 2.3 million seniors. The proposal would also increase out-of-pocket costs for beneficiaries, who would have to pay the difference between the credit
amount and actual cost of buying coverage.
Reduction in Medicare enrollment,
2012–2020 (in millions)
Medicare savings, 2012–2036
(in trillions of dollars)
1.4
–1.1
–1.0
–2.0
–2.3
–3.0
–4.0
–5.0
–6.0
–7.0
–8.0
–7.6
Raise eligibility
age to 67
Premium support
(GDP indexed)
Part A premium
(means tested)
Raising the Eligibility Age
The team also analyzed the effect of raising the eligibility
age of Medicare from 65 to 67. This change would mirror
current Social Security eligibility for full benefits among
those born in 1960 or later. Of the three options, this one
would have the most dramatic effect on costs—saving an
estimated $1.2 trillion by 2036—but would also reduce
enrollment by 7.6 million by 2020, substantially more than
the other options. Nearly all of those no longer eligible to be
on the program rolls would be seniors age 65 and 66, who
would need to seek coverage elsewhere or be uninsured.
Implications for Policy
In considering whether to adopt any of these changes, policymakers must consider difficult trade-offs. Each option would
reduce Medicare costs, but at the price of reducing enrollment
in Medicare and, in the case of the Part A premium and the
premium support scenarios, raising out-of-pocket costs for
beneficiaries. The option that saves the most—raising the eligibility age—also reduces enrollment by the largest amount.
Ultimately, decisions about changes to Medicare will
depend on policy goals. Is it preferable to provide generous
benefits to a few or smaller benefits to many? Although
analysis by itself cannot determine the best way forward, it
can highlight the consequences of alternative paths to help
inform difficult policy choices. ■
Abstracts of all RAND Health publications and full text of many research documents can be found on the RAND Health website at www.rand.org/health. The RAND Corporation is a nonprofit research institution that helps improve policy and decisionmaking through research and analysis. RAND’s publications do not necessarily reflect the
opinions of its research clients and sponsors. R® is a registered trademark. © RAND 2013
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