MEDICARE FEEFOR-SERVICE

Modernizing Costsharing Design Would 

Involve Trade-offs, the 

Results of Which 

Would Depend on 

Time Horizon

Report to Congressional Requesters

January 2018

GAO-18-100

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-18-100, a report to 

congressional requesters

MEDICARE FEE-FOR-SERVICE

Modernizing Cost-sharing Design Would Involve 

Trade-offs, the Results of Which Would Depend on 

Time Horizon

What GAO Found

GAO and others have raised concerns about the design of Medicare fee-forservice (FFS) cost-sharing—the portion of costs beneficiaries are responsible for 

when they receive care. The current cost-sharing design has been largely 

unchanged since Medicare’s enactment in 1965, can be confusing for 

beneficiaries, and can contribute to overuse of services. Additionally, the design

leaves some beneficiaries exposed to catastrophic costs that can exceed tens of 

thousands of dollars annually. The complexity of the design and lack of an 

annual cap on cost-sharing responsibilities also increases demand for 

supplemental insurance, which can cost beneficiaries thousands annually and 

further contribute to overuse of services. 

Modernizing Medicare FFS’s cost-sharing design to include features found in 

private plans could help address these concerns, but would involve design tradeoffs. For example, adding an annual cap on cost-sharing responsibilities while 

maintaining Medicare’s aggregate share of costs similar to the current design 

would involve a trade-off between the level of the cap and other cost-sharing 

requirements.

In analyzing four illustrative FFS cost-sharing designs, GAO found that the direct 

effect of modernizing the design on beneficiaries’ cost-sharing responsibilities—

that is, the effect when holding utilization and enrollment constant—would

depend on the specific revisions and the time horizon examined. For example, 

GAO found that

• During year 1, cost-sharing designs that feature relatively low deductibles

(costs a beneficiary is responsible for before Medicare starts to pay) and 

relatively high caps would result in a median annual beneficiary cost-sharing 

responsibility close to or below that of the current design. In contrast, designs 

with relatively low caps—and therefore greater beneficiary protection from 

catastrophic costs—would result in a median annual cost-sharing 

responsibility above that of the current design.

• By the end of 8 years, there would still be differences in the median annual 

beneficiary cost-sharing responsibility across different designs, but they 

would become less pronounced.

Modernizing the Medicare FFS cost-sharing design would also affect 

beneficiaries’ costs indirectly through altered incentives. The studies GAO

reviewed and experts GAO interviewed identified several types of behavioral 

responses that would influence the net effect of a modernized design on 

beneficiaries’ out-of-pocket costs, including changes in beneficiaries’ demand for 

and insurers’ supply of supplemental insurance; changes in beneficiaries’ use of 

services; changes in Medicare beneficiaries’ enrollment in FFS versus 

Medicare’s private plan alternative; and interactions among these and other 

behavioral responses, including effects on the price of supplemental insurance.

View GAO-18-100. For more information, 

contact James Cosgrove at (202) 512-7114 or 

cosgrovej@gao.gov.

Why GAO Did This Study

To address concerns with the current 

Medicare FFS cost-sharing design, 

various groups have proposed 

modernizing the design to make it 

simpler and include features found in 

private plans. These proposals have 

generally included a single deductible, 

modified cost-sharing requirements 

(e.g., a uniform coinsurance), and the 

addition of a cap on beneficiaries’ 

annual cost-sharing responsibilities.

GAO was asked to review how 

modernized cost-sharing designs

would affect beneficiaries’ costs over 

multiple years. This report describes

implications of the current cost-sharing 

design; options for modernizing; and 

how modernized cost-sharing designs

could directly and indirectly affect 

beneficiaries’ costs.

GAO reviewed studies related to 

modernizing Medicare’s cost-sharing 

design and interviewed authors of 

those studies and other experts. GAO 

also used summarized Medicare 

claims data from 2007 to 2014 (the 

most recent data available) to develop 

four illustrative modernized designs, 

each including a single deductible, 

uniform coinsurance, and an annual 

cap while maintaining Medicare 

program spending similar to the current 

design. For each design, GAO

calculated how beneficiaries’ annual 

cost-sharing responsibilities compared

with the current design over a 1-, 4-, 

and 8-year time horizon.

The Department of Health and Human 

Services provided technical comments 

on a draft of this report, which GAO 

incorporated as appropriate. 
Page i GAO-18-100 Medicare Cost-sharing

Letter 1

Background 6

Medicare FFS Cost-sharing Can Be Confusing and Lead to 

Overuse of Services; Modernizing Could Address Concerns, 

but Would Involve Trade-offs 9

Direct Effect of Modernizing Medicare FFS Cost-sharing Design 

Would Depend on Specific Revisions and Time Horizon 14

Modernizing Medicare Cost-sharing Design Would Affect Costs 

Indirectly through Behavioral Responses 20

Agency Comments 23

Appendix I Direct Effect on Medicare Beneficiaries’ Cost-sharing Responsibilities 

under Four Illustrative Cost-sharing Designs 25

Appendix II GAO Contact and Staff Acknowledgments 29

Tables

Table 1: Medicare Fee-for-Service Cost-sharing Design (2017) 7

Table 2: Types of Supplemental Insurance Used by Medicare 

Fee-for-Service Beneficiaries 8

Table 3: Illustrative Medicare Fee-for-Service Cost-sharing 

Designs That Maintain Medicare’s Aggregate Share of 

Costs Similar to Current Design When Holding Utilization 

and Enrollment Constant 13

Table 4: Medicare Fee-for-Service Beneficiaries’ Annual Costsharing Responsibilities under the Current and Illustrative 

Cost-sharing Designs, over 1, 4, and 8 Years When 

Holding Utilization and Enrollment Constant 25

Table 5: Percentage of Medicare Fee-for-Service Beneficiaries, by 

Change in Annual Cost-sharing Responsibilities under 

Illustrative Cost-sharing Designs Relative to Current 

Design, over 1, 4, and 8 Years When Holding Utilization 

and Enrollment Constant 27

Table 6: Percentage of Medicare Fee-for-Service Beneficiaries, by 

Change in Annual Cost-sharing Responsibilities under 

Illustrative Cost-sharing Designs Relative to Current 

Design, and Whether Reached Cap, over 1, 4, and 8 

Years When Holding Utilization and Enrollment Constant 28

Contents
Page ii GAO-18-100 Medicare Cost-sharing

Figures

Figure 1: Medicare Fee-for-Service Beneficiaries’ Cost-sharing 

Responsibilities (2014) 11

Figure 2: Medicare Fee-for-Service Beneficiaries’ Annual Costsharing Responsibilities under the Current and Illustrative 

Cost-sharing Designs, over 1 and 8 Years When Holding 

Utilization and Enrollment Constant 16

Figure 3: Medicare Fee-for-Service Beneficiaries with Lower and 

Higher Annual Cost-sharing Responsibilities under 

Illustrative Cost-sharing Designs, over 1 and 8 Years 

When Holding Utilization and Enrollment Constant 19

Abbreviations

CMS Centers for Medicare & Medicaid Services

FFS fee-for-service

HIE Health Insurance Experiment

MA Medicare Advantage

MedPAC Medicare Payment Advisory Commission

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Page 1 GAO-18-100 Medicare Cost-sharing

441 G St. N.W.

Washington, DC 20548

January 9, 2018

Congressional Requesters

GAO and others have long noted concerns about the design of Medicare 

fee-for-service (FFS) cost-sharing—the portion of costs for covered 

services that beneficiaries are responsible for when they receive care.1

Generally, health care insurers set three types of cost-sharing 

parameters: (1) deductibles—costs a beneficiary is responsible for before 

the health insurance plan will start to pay any costs; (2) coinsurance or 

copayments (per-service payments) once the deductible is met;2 and (3) 

caps—limits on the maximum cost-sharing amount a beneficiary can be 

responsible for during a year for covered services. Medicare FFS’s costsharing is complicated and not well designed to discourage unnecessary 

use of services. For example, Medicare FFS’s cost-sharing design 

includes two separate deductibles: a relatively high deductible for hospital 

services, which are usually not discretionary and are less likely to be 

influenced by cost-sharing requirements, and a relatively low deductible 

for outpatient services, which are more often discretionary and likely to be 

influenced by cost-sharing requirements. In addition, Medicare FFS lacks 

an annual cap, which can leave beneficiaries vulnerable to catastrophic 

costs.

To address these concerns, various groups have proposed revising 

Medicare FFS’s cost-sharing design, which has been largely unchanged 

 1

For example, see GAO, Medicare: Cost Sharing Policies Problematic for Beneficiaries 

and Program, GAO-01-713T (Washington, D.C.: May 9, 2001); GAO, Medicare Reform: 

Modernization Requires Comprehensive Program View, GAO-01-862T (Washington, D.C.: 

June 14, 2001); American Academy of Actuaries, Revising Medicare’s Fee-for-Service 

Benefit Structure (Washington, D.C.: March 2012); and Congressional Budget Office, 

Options for Reducing the Deficit: 2014-2023 (Washington, D.C.: November 2013), 211-

218. 

Medicare cost-sharing amounts may be paid by beneficiaries or on their behalf, such as 

by their supplemental insurance.

2

Cost-sharing requirements for services can be specified as a percentage of the allowable 

cost (referred to as coinsurance) or as a fixed dollar amount (referred to as copayments). 

Letter
Page 2 GAO-18-100 Medicare Cost-sharing

from when Medicare was enacted in 1965.3 Specifically, groups have 

proposed that Medicare FFS’s cost-sharing design be simplified and 

include features found in private plans (including in Medicare Advantage 

(MA), the private plan alternative to Medicare FFS), which have evolved 

over time to promote prudent use of health care services and protect 

beneficiaries from catastrophic care costs. Although the specifics of each 

proposal to revise Medicare FFS’s cost-sharing design have varied, the 

proposals have generally shared three features. First, they have 

proposed establishing a single deductible to replace the current separate 

deductibles for hospital and outpatient services. Second, they have 

proposed modifying the per-service payments, with some proposals 

suggesting moving to a uniform coinsurance that would be the same for 

all services and others suggesting variable copayments tied to the clinical 

value of the service. Third, they have proposed adding an annual cap.

Modernizing Medicare’s cost-sharing design would have both direct and 

indirect effects on beneficiaries’ costs. The direct effect would be how the 

revised design would change beneficiaries’ cost-sharing responsibilities 

for a given set of services. The indirect effect would be that the altered 

incentives under a revised design would trigger behavioral responses, 

such as changes in beneficiaries’ utilization of health care services, 

enrollment in supplemental insurance to help cover their Medicare costsharing responsibilities, or enrollment in Medicare FFS or MA. The 

indirect and direct effects together would determine how a modernized 

design would affect beneficiaries’ total out-of-pocket costs for covered 

services (the amount of cost-sharing paid directly by the beneficiary plus 

the premiums (monthly fees) that beneficiaries pay for their Medicare 

coverage and other supplemental insurance they may have).

Some studies have examined how modernizing Medicare’s cost-sharing 

design would affect beneficiaries financially; however, they have primarily 

focused on first-year effects and may have understated the advantages to 

 3

For example, see National Commission on Fiscal Responsibility and Reform, The 

Moment of Truth (Washington, D.C.: December 2010); Bipartisan Policy Center, A 

Bipartisan Rx for Patient-Centered Care and System-Wide Cost Containment

(Washington, D.C.: April 2013); and House Republicans, A Better Way: Our Vision for a 

Confident America (Washington, D.C.: June 22, 2016).
Page 3 GAO-18-100 Medicare Cost-sharing

beneficiaries of adding an annual cost-sharing cap.4 Over longer time 

horizons, the percentage of beneficiaries who would benefit from a 

catastrophic coverage cap in at least 1 year increases. However, as the 

time horizon lengthens it becomes more difficult to predict beneficiaries’ 

behavioral responses and their interactions with any degree of 

confidence. Analyzing the direct effect of a modernized cost-sharing 

design—the effect on beneficiaries’ cost-sharing responsibilities, holding 

utilization and enrollment constant—over multiple years provides a 

baseline for understanding how the effect would vary depending on the 

parameters of the revised design and the time horizon examined. In turn, 

discussing behavioral responses that might be triggered by this direct 

effect provides a fuller picture of how a modernized cost-sharing design 

might affect beneficiaries’ total out-of-pocket costs.

You requested that we examine the potential annual and multiyear effects 

on beneficiaries’ costs if the Medicare FFS cost-sharing design were 

modernized to include a single deductible, uniform coinsurance above the 

deductible, and an annual cap. This report describes

1. implications of the current Medicare FFS cost-sharing design and 

options for modernizing while maintaining Medicare’s and 

beneficiaries’ aggregate share of costs;

2. how modernized cost-sharing designs could directly affect 

beneficiaries’ cost-sharing responsibilities; and

3. how modernized cost-sharing designs could indirectly affect 

beneficiaries’ out-of-pocket costs.

To identify implications of the current cost-sharing design and options for 

modernizing, we reviewed relevant studies and analyzed summary 

Medicare claims data.5 In particular, we reviewed studies exploring 

implications of the current design and potential options for modernizing, 

 4

For example, see Juliette Cubanski et al., Restructuring Medicare’s Benefit Design: 

Implications for Beneficiaries and Spending (Menlo Park, Calif.: Kaiser Family Foundation, 

November 2011); Juliette Cubanski et al., Modifying Medicare’s Benefit Design: What’s 

the Impact on Beneficiaries and Spending? (Menlo Park, Calif.: Kaiser Family Foundation, 

June 2016); and Medicare Payment Advisory Commission, Report to the Congress: 

Medicare and the Health Care Delivery System (Washington, D.C.: June 2012), ch. 1. The 

Congressional Budget Office has examined the effect of revising the Medicare FFS costsharing design over multiple years, but these analyses have focused on the financial 

effects on the Medicare program.

5

Specifically, we used the Medicare Master Beneficiary Summary Files. 
Page 4 GAO-18-100 Medicare Cost-sharing

as well as studies and documentation on cost-sharing design in private 

plans, including those in MA.6 We also analyzed claims data from 2014 

(the most recent year of data available at the time we began our study) to 

describe beneficiaries’ cost-sharing responsibilities under the current 

design.7 We also used claims data to develop four illustrative options for 

modernized cost-sharing designs, each of which included a single 

deductible, uniform coinsurance, and an annual cap, while maintaining 

Medicare’s aggregate share of costs similar to the current design when 

holding health care utilization and beneficiary enrollment constant. To do 

so, we first identified the approximately 28 million Medicare FFS 

beneficiaries who were continuously enrolled in Medicare FFS from 

January 2007 through December 2014 or their death.8 We then 

calculated each beneficiary’s annual cost-sharing responsibilities under 

the current design and what they would have been under a revised 

design, holding utilization and enrollment constant. To identify the specific 

parameters for each illustrative design, we started with one of the four 

caps applicable to MA plans in 2014 and a uniform coinsurance of 20 

percent (the same level as the coinsurance for most Part B services 

under the current design). We then tested different possible levels of the 

deductible until we found a level that maintained Medicare program 

 6

Modernizing the Medicare FFS cost-sharing design would also involve important 

implementation decisions, such as how to treat beneficiaries who are enrolled in Part A or 

Part B only and whether to also revise Medicare financing and premiums (which are 

currently separate for Part A and Part B). Additionally, modernizing the Medicare FFS 

cost-sharing design would have implications beyond the Medicare program, such as 

altering federal and state Medicaid spending on beneficiaries eligible for both programs 

and requiring changes to federally standardized Medicare supplemental insurance plans 

(Medigap) to conform with the new design. A discussion of these issues was beyond the 

scope of this report. 

7

These analyses included all beneficiaries who were continuously enrolled in Medicare 

FFS Part A and/or Part B from January 2014 through December 2014 or their death, and 

excluded beneficiaries who were enrolled in MA at any point in the year. 

8

This cohort included Medicare FFS beneficiaries enrolled in Part A and/or Part B, but 

excluded those enrolled in an MA plan at any point between 2007 and 2014.
Page 5 GAO-18-100 Medicare Cost-sharing

spending and the split of costs between Medicare and beneficiaries 

similar to the current design.9

To illustrate how modernized cost-sharing designs could directly affect 

beneficiaries’ cost-sharing responsibilities, we used the same cohort of 28 

million beneficiaries. First, we calculated the distribution of these 

beneficiaries’ 1-year, 4-year, and 8-year annual cost-sharing 

responsibilities—including the median and maximum responsibility—

under the current cost-sharing design and each of the four illustrative 

designs, and compared these distributions.10 Second, we calculated the 

percentage of beneficiaries who would have experienced a change in 

their annual cost-sharing responsibilities in specified ranges—including at 

least $100 lower or at least $100 higher than their responsibilities under 

the current design—and the average change among these groups.11 We 

also calculated how these changes were related to whether a beneficiary 

reached the cap at least once. To assess the accuracy of the summary 

Medicare claims data, we reviewed related documentation; interviewed 

Centers for Medicare & Medicaid Services (CMS) officials knowledgeable 

about the data; conducted checks for missing, duplicative, or erroneous 

data; and compared our results with published data. Based on these 

activities, we determined that the data we used were sufficiently reliable 

for the purposes of our reporting objectives.

 9

Specifically, among our cohort in 2007, each illustrative design maintained Medicare’s 

and beneficiaries’ aggregate share of costs within 0.2 percentage points of the current 

design: 85 percent and 15 percent, respectively (holding utilization and enrollment 

constant). To identify the corresponding deductible and cap in years prior to 2014, we 

indexed the level of the deductible and the cap to the average growth in Medicare 

expenditures per beneficiary on Part A and Part B services. For the illustrative design with 

the $10,000 cap in 2014, there was no level of a deductible that would have maintained 

Medicare’s share of costs similar to the current design if the uniform coinsurance was set 

at 20 percent; we therefore set the deductible to $0 and lowered the coinsurance until we 

found a design that met our criteria.

10The 1-year, 4-year, and 8-year results are presented in 2014 dollars. We calculated 

each beneficiary’s 4-year and 8-year annual cost-sharing responsibilities as the average 

of the annual responsibilities (expressed in 2014 dollars) across the beneficiary’s living 

years between 2007 and 2010, and 2007 and 2014, respectively. The median annual 

cost-sharing responsibility was calculated as the median across all beneficiaries of 

beneficiaries’ average annual cost-sharing responsibilities. 

11The 1-year, 4-year, and 8-year results are presented in 2014 dollars. We calculated 

each beneficiary’s 4-year and 8-year annual change in responsibilities as the average of 

the annual changes. We chose a $100 threshold to highlight those with more than minimal 

changes in their cost-sharing responsibilities.
Page 6 GAO-18-100 Medicare Cost-sharing

To identify how modernized cost-sharing designs could indirectly affect 

beneficiaries’ out-of-pocket costs, we reviewed relevant studies and 

interviewed experts. The experts we interviewed included staff from 

CMS’s Office of the Actuary; organizations that conducted studies on 

modernizing the Medicare FFS cost-sharing design (the Congressional 

Budget Office, Kaiser Family Foundation, and Medicare Payment 

Advisory Commission (MedPAC)); and other entities with insight on some 

of the potential effects of modernizing the Medicare FFS cost-sharing 

design (the American Academy of Actuaries and National Association of 

Insurance Commissioners).

We conducted this performance audit from March 2016 to January 2018 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

In 2016, Medicare spent about $380 billion on health care services for 

beneficiaries enrolled in Medicare FFS, which consists of two separate 

parts: Medicare Part A, which primarily covers hospital services, and 

Medicare Part B, which primarily covers outpatient services. The majority 

of the 38 million Medicare FFS beneficiaries were enrolled in both Part A 

and Part B, although about 5 million were enrolled in Part A only and 0.3 

million were enrolled in Part B only.12

The general design of Medicare FFS cost-sharing has been largely 

unchanged since Medicare’s enactment in 1965.13 It includes separate 

deductibles for Part A and Part B services, a variety of per-service 

copayments and coinsurance after the deductibles are met, and no cap 

on beneficiaries’ cost-sharing responsibilities (see table 1).

 12Medicare FFS beneficiaries may also enroll in Medicare Part D, which offers prescription 

drug coverage. For this report, discussions of Medicare FFS do not include Part D. 

13The specific levels of certain cost-sharing requirements have changed over time.

Background

Medicare FFS Program

Medicare FFS CostSharing Design
Page 7 GAO-18-100 Medicare Cost-sharing

Table 1: Medicare Fee-for-Service Cost-sharing Design (2017)

Cost-sharing requirements

Deductibles

Part A $1,316 per inpatient episodea

Part B $183 annually

Copayments or coinsurance above 

deductibles

Part A

Inpatient hospital Days 1-60 of episode: $0 (just deductible)

Days 61-90: $329 per day

Days 91+: $658 per day up to 60 lifetime 

reserve days; then 100% coinsurance (all 

costs)

Skilled nursing facility Days 0-20 of episode: $0

Days 21-100: $164.50 per day

Days 100+: 100% coinsurance (all costs) 

Home healthb $0

Hospice $0 (5% coinsurance for respite care; up to $5 

copayment for pain management prescription 

drugs)

Part B

Physician and outpatient 

services

20% coinsurance for most services; $0 for 

most preventive services

Durable medical equipment 20% coinsurance

Laboratory services $0 for most services

Annual cap

Part A Unlimited

Part B Unlimited

Source: Centers for Medicare & Medicaid Services, Medicare & You 2017. | GAO-18-100

Note: This table summarizes the main Medicare FFS cost-sharing requirements as of 2017. Medicare 

beneficiaries also are responsible for a Medicare Part B premium (about $1,300 per year for most 

beneficiaries), but generally do not pay a Part A premium. These cost-sharing responsibilities and 

premiums may be covered all or in part by supplemental insurance, often in exchange for an 

additional premium.

a

The Part A deductible per inpatient episode applies for each admission to an inpatient hospital or 

skilled nursing facility that occurs more than 60 consecutive days after the prior admission.

b

Home health services may be covered by Part A or Part B depending on the circumstances, but in 

both cases cost-sharing is $0.

The current cost-sharing design leaves beneficiaries exposed to 

potentially catastrophic cost-sharing, and in part because of that, in 2015, 

81 percent of Medicare FFS beneficiaries obtained supplemental 

insurance that covered some or all of their Medicare cost-sharing 

Supplemental Insurance 

among Medicare FFS 

Beneficiaries
Page 8 GAO-18-100 Medicare Cost-sharing

responsibilities, often in exchange for an additional premium (see table 2). 

For example, in 2015, 31 percent of Medicare FFS beneficiaries 

purchased a private Medigap plan, the most common types of which fully 

insulated them from Medicare cost-sharing responsibilities in exchange 

for an average annual premium of $2,400.14 Another 20 percent of 

Medicare FFS beneficiaries enrolled in Medicaid, which generally covered 

most of their Medicare cost-sharing responsibilities; however, these lowincome beneficiaries generally only paid a limited or no premium for this 

supplemental coverage.15

Table 2: Types of Supplemental Insurance Used by Medicare Fee-for-Service Beneficiaries 

Type Description Percentage of 

beneficiaries 

(2015) 

Coverage of 

Medicare 

cost-sharing 

Premium

Medigap Federally standardized insurance plans 

offered by private insurers.

31 All for most common 

Medigap plans.

Yes.

Employer-sponsored Insurance offered to retirees from their 

former employer.

18 Generally most, after 

a deductible.

Yes. 

Medicaid State-administered insurance provided to 

certain low-income and other beneficiaries.

20 Generally most. Generally limited 

or no premium.

Other Other private or public insurance, such as 

that for active-duty service members and 

their families.

12 Varies. Varies.

Source: Centers for Medicare & Medicaid Services and Medicare Payment Advisory Commission. | GAO-18-100

Note: The remaining 19 percent of Medicare fee-for-service beneficiaries did not have any 

supplemental insurance.

 14There are currently 11 standard Medigap plans, generally identified by letters of the 

alphabet. Of the 11 standard packages, 2 (Plan C and non-high-deductible Plan F) cover 

virtually all Medicare cost-sharing responsibilities. The Medicare Access and CHIP 

Reauthorization Act of 2015 prohibits the issuance of Medigap policies that provide 

coverage of the Part B deductible to newly eligible Medicare beneficiaries after January 1, 

2020. Pub. L. No. 114-10, § 401, 129 Stat. 87, 159 (codified at 42 U.S.C. § 1395ss(z)). 

This means that new beneficiaries purchasing Medigap plans beginning in that year would 

no longer be fully insulated from cost-sharing responsibilities.

15The specific Medicaid eligibility requirements, benefits, and premiums can vary by state 

and type of Medicaid beneficiary. Beneficiaries enrolled in Medicare and Medicaid may 

receive Medicare cost-sharing and/or premium assistance through full Medicaid benefits 

or one of four Medicare Savings Programs (programs that require states to help cover 

cost-sharing for certain low-income Medicare beneficiaries). Medicaid generally covers 

most Medicare cost-sharing responsibilities; however, beneficiaries may still be 

responsible for nominal Medicaid cost-sharing requirements.
Page 9 GAO-18-100 Medicare Cost-sharing

The current Medicare FFS cost-sharing design can be confusing, 

contribute to beneficiaries’ overuse of services, and leave beneficiaries 

exposed to catastrophic costs. Modernizing the design could address 

these concerns, but would involve trade-offs. For example, as shown in 

four illustrative designs that we evaluated, maintaining Medicare’s share 

of costs would involve a trade-off between the level of the cap and the 

deductible (or other cost-sharing).

As noted by Medicare advocacy groups and others, the current Medicare 

FFS cost-sharing design, which includes multiple deductibles, can be 

confusing for beneficiaries. In 2014, 16 percent of Medicare FFS 

beneficiaries were responsible for at least one Part A deductible for an 

episode of inpatient care as well as the annual Part B deductible. 

(Medicare FFS beneficiaries may be subject to more than one Part A 

deductible during the year, as the Part A deductible applies to each 

admission to an inpatient hospital or skilled nursing facility that occurs 

more than 60 consecutive days after the prior admission.) The 

Congressional Budget Office has cited the separate deductibles as one 

way in which Medicare FFS cost-sharing is more complicated than private 

plans.16 In 2016, according to a survey conducted by the Kaiser Family 

Foundation, only 1 percent of workers with employer-sponsored 

insurance had a separate deductible for inpatient services.17 Moreover, 

inpatient services tend to be nondiscretionary, and one or more 

deductibles for those services can create a financial burden for 

beneficiaries, while having minimal effect on their use of inpatient 

services.

The cost-sharing design also affects beneficiaries’ utilization of services. 

For example, as noted by the bipartisan Simpson-Bowles Fiscal 

 16Congressional Budget Office, Options for Reducing the Deficit: 2017-2026 (Washington, 

D.C.: December 2016), 239-247.

17Kaiser Family Foundation and Health Research & Educational Trust, Employer Health 

Benefits: 2016 Annual Survey (Menlo Park, Calif.: 2016). 

Medicare FFS Costsharing Can Be 

Confusing and Lead 

to Overuse of 

Services; 

Modernizing Could 

Address Concerns, 

but Would Involve 

Trade-offs

Medicare FFS Costsharing Design Can Be 

Confusing, Contribute to 

Beneficiaries’ Overuse of 

Services, and Leave Them 

Exposed to Catastrophic 

Costs
Page 10 GAO-18-100 Medicare Cost-sharing

Commission, the lack of a coherent cost-sharing system is a significant 

contributor to overuse and misuse of care.18 This is particularly true for 

services such as home health and clinical laboratory services, which 

currently have no cost-sharing under Medicare FFS and thus do not 

provide beneficiaries an incentive to decline care of negligible value. 

Because of these concerns, MedPAC recommended adding a costsharing requirement for home health services that were not preceded by 

hospitalization or post-acute care, noting that the current lack of costsharing has likely contributed to the significant rise in utilization for these 

services, which suggests some overuse.19

At the same time, the lack of an annual cost-sharing cap prevents 

Medicare FFS from fulfilling a key purpose of health insurance: protecting 

beneficiaries from catastrophic medical expenses. While most 

beneficiaries had cost-sharing responsibilities under $2,000 in 2014, 1 

percent—over 300,000 beneficiaries—had responsibilities over $15,000, 

including several hundred beneficiaries with responsibilities between 

$100,000 and $3 million. (See fig. 1.) Given the risk of catastrophic 

medical expenses, a focus group of current and future Medicare 

beneficiaries convened by MedPAC indicated that an annual cap is the 

cost-sharing design feature they were most interested in seeing added to 

the Medicare benefit.20 Annual caps are a common design feature of 

private plans, as most are required to have an annual cap, including 

those participating in MA. 21 Specifically, since 2011, CMS has required 

most MA plans to have an annual cap of $6,700 or less and grants them 

additional flexibility in their cost-sharing design if they voluntarily set their 

cap at or below $3,400.22 The mandatory and voluntary caps for certain 

 18National Commission on Fiscal Responsibility and Reform, The Moment of Truth, and A 

Closer Look at the Fiscal Commission’s Cost-Sharing Recommendations (Washington, 

D.C.: Nov.16, 2011).

19Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment 

Policy (Washington, D.C.: March 2011), ch. 8.

20Medicare Payment Advisory Commission, Medicare and the Health Care Delivery 

System (June 2012), ch. 1.

21Effective January 1, 2014, the Patient Protection and Affordable Care Act requires group 

health plans to have an annual cap. See, 42 U.S.C. § 300gg-6(b). MA plans are also 

required to have an annual cap. See, 42 U.S.C. § 1395w-27a(b)(2); 42 C.F.R. §§ 422.100 

(2016).

22CMS set the $6,700 and $3,400 caps based on the 95th and 85th percentiles of costsharing responsibilities among Medicare FFS beneficiaries enrolled in both Part A and 

Part B. 
Page 11 GAO-18-100 Medicare Cost-sharing

MA plans that provide both in- and out-of-network coverage are the same 

($6,700 and $3,400) for in-network services, and 1.5 times higher 

($10,000 and $5,100) for combined in- and out-of-network services.

Figure 1: Medicare Fee-for-Service Beneficiaries’ Cost-sharing Responsibilities (2014)

Note: Analysis includes all beneficiaries enrolled in Medicare fee-for-service Part A and/or Part B from 

January 2014 through December 2014 or their death. Most beneficiaries had supplemental insurance 

that covered some or all of these cost-sharing responsibilities, often in exchange for an additional 

premium. In addition to cost-sharing responsibilities, beneficiaries are also responsible for Medicare 

and any supplemental premiums, as well as costs for services not covered by Medicare.

In addition to these implications of the cost-sharing design itself, the 

American Academy of Actuaries and others have noted that the 

complexity and the possibility of unlimited responsibilities increases 

demand for supplemental insurance, which can lead to added costs for 

beneficiaries and the Medicare program. It is uncommon for beneficiaries 

enrolled in private health insurance to have supplemental coverage.23 By 

insulating beneficiaries from some or all cost-sharing responsibilities (and 

not just catastrophic costs), supplemental insurance further reduces the 

incentives for beneficiaries to evaluate the need for discretionary care. In 

part because of these reduced incentives, we previously estimated that 

both beneficiaries’ average total out-of-pocket costs and average 

 23In particular, beneficiaries enrolled in MA may not be sold Medigap polices; however, 

they may still have supplemental insurance through Medicaid.
Page 12 GAO-18-100 Medicare Cost-sharing

Medicare program spending were higher for Medicare FFS beneficiaries 

with Medigap than those with FFS only.24

Modernizing Medicare FFS cost-sharing could address these concerns, 

but would involve design trade-offs. Specifically, as proposed by various 

groups, revising Medicare’s cost-sharing design to include a single 

deductible, modified cost-sharing requirements, and an annual costsharing cap could address concerns with the current cost-sharing design. 

However, there are multiple options for revising within this broad 

framework, including two key design trade-offs that would affect the 

extent to which a modernized structure would address concerns about the 

current design (and possibly also raise new concerns).

One trade-off centers on how to modify the existing complicated set of 

cost-sharing requirements for different services. While the reform 

proposals have generally suggested moving to a single deductible, they 

have varied in how to modify the subsequent per-service payments. 

Some proposals have emphasized the value of simplicity and suggested 

replacing the complex set of per-service payments above the deductible 

with a uniform coinsurance. A uniform coinsurance would simplify the 

cost-sharing design, provide beneficiaries insight into the total cost of 

each service, and introduce cost-sharing for certain potentially 

discretionary services, such as home health services. However, as noted 

by the Medicare Payment Advisory Commission and Congressional 

Budget Office, uniform coinsurance also has drawbacks, such as a fixed 

percentage of an unknown bill being harder for beneficiaries to 

understand and predict than copayments. Other proposals have 

emphasized the need to set cost-sharing based on the value of services, 

and have suggested moving Medicare toward a value-based insurance 

design in which per-service cost-sharing would vary based on the clinical 

value of the service to an individual beneficiary. While a value-based 

 24In particular, we previously estimated that average Medicare spending for those with 

Medigap was nearly twice as high as for those with Medicare FFS only. Differences in 

Medicare FFS beneficiary characteristics between those with Medigap and those with FFS 

only may account for some of these differences in expenditures. Nonetheless, research 

that has tried to account for characteristics that influence a beneficiary’s choice of 

coverage has found that differences in expenditures for beneficiaries with supplemental 

coverage persisted even after adjusting for factors such as age, health status, and 

income. See GAO, Medicare Supplemental Coverage: Medigap and Other Factors Are 

Associated with Higher Estimated Health Care Expenditures, GAO-13-811 (Washington, 

D.C.: Sept. 19, 2013). 

Modernizing Medicare 

FFS Cost-sharing Could 

Address Concerns, but 

Would Involve Design 

Trade-offs
Page 13 GAO-18-100 Medicare Cost-sharing

design would specifically target cost-sharing to promote prudent use of 

health care services, implementing it is challenging in practice and would 

be more complicated for beneficiaries to understand and for CMS to 

administer, though CMS is testing the feasibility of value-based insurance 

design in MA.25

A second design trade-off centers on how to set the level of the 

deductible and the annual cap. As shown in the four illustrative costsharing designs we evaluated, the lower the cap, the higher the 

deductible (or other cost-sharing requirements) would need to be to 

maintain Medicare’s and beneficiaries’ aggregate share of costs similar to 

that of the current design.26 For example, holding utilization and 

enrollment constant, we found that even without any deductible, a uniform 

coinsurance of 18 percent (a level below the existing 20 percent 

coinsurance for most Part B services) would be sufficient to add a cap 

near $10,000 (the mandatory cap for certain MA plans that allow 

beneficiaries to see any provider). In contrast, it would take a deductible 

near $1,225 (a level similar to the existing Part A deductible for each 

inpatient episode) and a uniform coinsurance of 20 percent to establish a 

cap of $3,400 (the voluntary cap for most MA plans). (See table 3.)

Table 3: Illustrative Medicare Fee-for-Service Cost-sharing Designs That Maintain 

Medicare’s Aggregate Share of Costs Similar to Current Design When Holding 

Utilization and Enrollment Constant

Single annual 

deductible (dollars)

Uniform coinsurance 

(percent)

Annual cap

(dollars)

Example 1 0 18 10,000

Example 2 175 20 6,700

Example 3 525 20 5,100

Example 4 1,225 20 3,400

Source: GAO analysis of Centers for Medicare & Medicaid Services data. | GAO-18-100

Note: Analysis based on the 28 million beneficiaries who were enrolled in Medicare fee-for-service 

Part A and/or Part B from January 2007 through December 2014 or their death. Holding utilization 

 25CMS currently has a demonstration on value-based insurance designs for certain MA 

plans, which allows them to offer reduced cost-sharing or supplemental benefits to 

beneficiaries with certain chronic conditions. 

26Alternatively, offsetting changes could be made outside the Medicare cost-sharing 

design, such as increasing the Part B premium. In addition, some proposals have 

suggested more than offsetting the addition of a cap, so that Medicare’s share of costs is 

decreased (and beneficiaries’ is increased), in order to produce Medicare program 

savings. 
Page 14 GAO-18-100 Medicare Cost-sharing

and enrollment constant, each of the four illustrative designs would have led to the Medicare program 

covering approximately 85 percent of total covered costs (while beneficiaries would have been 

responsible in aggregate for the remaining 15 percent)—levels within 0.2 percentage points of the 

existing cost-sharing design in 2007. The deductible and cap in each illustrative design are described 

using their 2014 values, with values in prior years indexed to the average growth in Medicare 

expenditures per beneficiary on Part A and Part B services. As a result, the deductible and cap in a 

given year or set of years, expressed in 2014 dollars, can be a few hundred dollars above or below 

the level in 2014, depending on whether Medicare spending or inflation grew faster over that time 

period.

Different levels of the deductible and cap would address certain concerns 

of the current design raised by GAO and others but also could create new 

ones. For example, as our analysis of four illustrative cost-sharing 

designs shows, designs with relatively high caps would provide some 

additional protection from catastrophic costs while maintaining a 

deductible and coinsurance near or below the current levels for Part B 

services. However, per an analysis conducted by Kaiser Family 

Foundation and the Urban Institute, half of Medicare beneficiaries in 2016 

were living on less than $26,200 in income;27 thus, caps of $6,700 or 

higher may still leave some beneficiaries vulnerable to costs that are 

catastrophic for them and may not significantly decrease the associated 

demand for supplemental insurance. In contrast, designs with relatively 

low caps would provide greater protection from catastrophic costs. 

However, as noted by the Congressional Budget Office, beneficiaries who 

reached the cap would have less incentive to use services prudently. In 

addition, the higher deductible needed to offset a lower cap while 

maintaining Medicare’s share of costs could present a financial barrier for 

some beneficiaries to obtain necessary care.

The direct effect of modernizing the Medicare FFS cost-sharing design 

(i.e., the effect when holding utilization and enrollment constant) on 

beneficiaries’ cost-sharing responsibilities would depend on the specific 

revisions and the time horizon examined. As we noted above, 

modernizing the FFS cost-sharing design while maintaining Medicare’s 

aggregate share of costs similar to the current design requires a trade-off 

between the level of the deductible and cap. At the beneficiary level, this 

design trade-off affects beneficiaries’ annual cost-sharing and the degree 

to which beneficiaries would be protected from catastrophic costs. One 

way of viewing how the design trade-off affects beneficiaries is to 

compare across different designs the median annual cost-sharing 

 27Gretchen Jacobson et al., Income and Assets of Medicare Beneficiaries, 2016-2035 

(Menlo Park, Calif.: Kaiser Family Foundation, April 2017).

Direct Effect of 

Modernizing 

Medicare FFS Costsharing Design Would

Depend on Specific 

Revisions and Time 

Horizon
Page 15 GAO-18-100 Medicare Cost-sharing

responsibility with the level of the cap (see fig. 2). In examining the direct 

effect of the four illustrative modernized designs we analyzed, we found 

the following:

• During year 1, cost-sharing designs that feature relatively low 

deductibles and relatively high caps would result in a median annual 

beneficiary cost-sharing responsibility close to or below that of the 

current design. In contrast, designs with relatively low caps—and 

therefore greater beneficiary protection from catastrophic costs—

would result in a median annual beneficiary cost-sharing responsibility 

above that of the current design. For example, during year 1 of a 

design with no deductible, 18 percent coinsurance, and a cap near 

$10,000, we found that the median annual cost-sharing responsibility 

would be $479, which is below that of the current design ($621), 

despite the addition of a cap. In contrast, during year 1 of a design 

with a $1,225 deductible, 20 percent coinsurance, and a cap near 

$3,400, the median annual cost-sharing responsibility would be 

$1,486, which is 2.4 times higher than that of the current design. 

However, in exchange for this higher median annual cost-sharing 

responsibility, beneficiaries would have much greater protection from 

catastrophic costs, as their annual cost-sharing responsibilities would 

be capped near $3,400.

• By the end of 8 years, there would still be differences in the median 

annual beneficiary cost-sharing responsibility across different designs, 

but they would become less pronounced—despite the significantly 

different levels of catastrophic protection. As beneficiaries age and 

become more likely to have catastrophic costs in at least one year, 

the median annual cost-sharing responsibility would increase,

regardless of the cost-sharing design. However, by the end of 8 years 

the differences in the median annual cost-sharing responsibility 

across different designs would become less pronounced. For 

example, the median annual cost-sharing responsibility under the 

design with a cap near $10,000 would increase from below that of the 

current design in year 1 to 1.1 times higher than the current design by 

the end of 8 years. In contrast, the median annual cost-sharing 

responsibility under the design with the cap near $3,400 would 

decrease from 2.4 times higher than the current design in year 1 to 

only 1.6 times higher by the end of 8 years. (See app. I table 4 for 

more details, including results on our other two illustrative designs and 

results over 4 years.)
Page 16 GAO-18-100 Medicare Cost-sharing

Figure 2: Medicare Fee-for-Service Beneficiaries’ Annual Cost-sharing Responsibilities under the Current and Illustrative 

Cost-sharing Designs, over 1 and 8 Years When Holding Utilization and Enrollment Constant
Page 17 GAO-18-100 Medicare Cost-sharing

Note: Analysis includes the 28 million beneficiaries who were enrolled in Medicare fee-for-service 

Part A and/or Part B from January 2007 through December 2014 or their death. Results are from 

2007 (1 year) and average of 2007-2014 (8 years), expressed in 2014 dollars and holding utilization 

and enrollment constant. Most beneficiaries had supplemental insurance that covered some or all of 

these cost-sharing responsibilities, often in exchange for an additional premium. In addition to costsharing responsibilities, beneficiaries are also responsible for any costs for services not covered by 

Medicare and for Medicare and any supplemental premiums, which may also change under a revised 

design.

a

Each of the four illustrative designs consisted of a single deductible, uniform coinsurance, and 

annual cap, and would have led to the Medicare program covering approximately 85 percent of total 

covered costs (while beneficiaries would have been responsible in aggregate for the remaining 15 

percent)—levels within 0.2 percentage points of the existing cost-sharing design in 2007. The 

deductible and cap in each illustrative design are described using their 2014 values, with values in 

prior years indexed to the average growth in Medicare expenditures per beneficiary on Part A and 

Part B services. As a result, the deductible and cap in a given year or set of years, expressed in 2014 

dollars, can be a few hundred dollars above or below the level in 2014, depending on whether 

Medicare spending or inflation grew faster over that time period.

The same patterns held when looking at how the design trade-off affects 

beneficiaries in another way: the percentage of beneficiaries with costsharing responsibilities lower and higher than under the current design 

(see fig. 3). In examining the direct effect of our four illustrative designs, 

we found the following:

• During year 1, designs that feature relatively low deductibles and 

relatively high caps would result in a minority of beneficiaries having 

cost-sharing responsibilities that are at least $100 higher than under 

the current design. In contrast, designs with relatively high deductibles 

and relatively low caps would result in the majority of beneficiaries 

having cost-sharing responsibilities that are higher than under the 

current design. For example, during year 1 of a design with no

deductible, 18 percent coinsurance, and a cap near $10,000, 16 

percent of beneficiaries would have cost-sharing responsibilities at 

least $100 higher than their responsibilities under the current design. 

In contrast, during year 1 of a design with a $1,225 deductible, 20 

percent coinsurance, and a cap near $3,400, 69 percent of 

beneficiaries would have cost-sharing responsibilities at least $100 

higher than their responsibilities under the current design.

• By the end of 8 years, there would still be differences across the 

designs, but they would become less pronounced—despite levels of 

catastrophic protection that vary significantly. Over a longer time 

horizon, a larger percentage of beneficiaries would reach the cap at 

least once, regardless of the cost-sharing design (ranging from 23 

percent reaching the cap at least once over 8 years under the design 

with a cap near $10,000 to 66 percent under the design with a cap 

near $3,400). However, the subset of these beneficiaries who 

nonetheless had annual cost-sharing responsibilities at least $100 

higher would also increase. Whether this increase would be 
Page 18 GAO-18-100 Medicare Cost-sharing

augmented or offset by the changes over time in the percentage of 

beneficiaries who never reached the cap and had higher cost-sharing 

responsibilities would depend on the specific design. For example, the 

percentage of beneficiaries with annual cost-sharing responsibilities at 

least $100 higher than the current design would increase from 16 

percent in year 1 to 38 percent by year 8 under the design with a cap 

near $10,000. In contrast, this percentage would decrease from 69 

percent in year 1 to 67 percent by year 8 under the design with a cap 

near $3,400. (See app. I tables 5 and 6 for more details, including 

results on our other two illustrative designs and results over 4 years.)
Page 19 GAO-18-100 Medicare Cost-sharing

Figure 3: Medicare Fee-for-Service Beneficiaries with Lower and Higher Annual Cost-sharing Responsibilities under 

Illustrative Cost-sharing Designs, over 1 and 8 Years When Holding Utilization and Enrollment Constant

Note: Analysis includes the 28 million beneficiaries who were enrolled in Medicare fee-for-service 

Part A and/or Part B from January 2007 through December 2014 or their death. Results are from 

2007 (1 year) and average of 2007-2014 (8 years), expressed in 2014 dollars and holding utilization 

and enrollment constant. Most beneficiaries had supplemental insurance that covered some or all of 

these cost-sharing responsibilities, often in exchange for an additional premium. In addition to costsharing responsibilities, beneficiaries are also responsible for any costs for services not covered by 
Page 20 GAO-18-100 Medicare Cost-sharing

Medicare and for Medicare and any supplemental premiums, which may also change under a 

modernized design.

a

Each of the four illustrative designs consisted of a single deductible, uniform coinsurance, and 

annual cap, and would have led to the Medicare program covering approximately 85 percent of total 

covered costs (while beneficiaries would have been responsible in aggregate for the remaining 15 

percent)—levels within 0.2 percentage points of the existing cost-sharing design in 2007. The 

deductible and cap in each illustrative design are described using their 2014 values, with values in 

prior years indexed to the average growth in Medicare expenditures per beneficiary on Part A and 

Part B services. As a result, the deductible and cap in a given year or set of years, expressed in 2014 

dollars, can be a few hundred dollars above or below the level in 2014, depending on whether 

Medicare spending or inflation grew faster over that time period.

Modernizing the Medicare FFS cost-sharing design would affect 

beneficiaries’ costs indirectly through beneficiaries’ and supplemental 

insurers’ behavioral responses to altered incentives, according to the 

studies we reviewed and the experts we spoke to. These studies and 

experts identified several types of behavioral responses that would 

influence the net effect of a modernized design on beneficiaries’ out-ofpocket costs, including

• changes in beneficiaries’ demand for, and insurers’ supply of, 

supplemental insurance;

• changes in beneficiaries’ utilization of services;

• changes in Medicare beneficiaries’ enrollment in FFS versus MA; and

• interactions among these and other behavioral responses, including 

effects on the price of supplemental insurance.

According to studies we reviewed and experts we spoke to, implementing 

a modernized cost-sharing design would likely trigger changes in the 

demand for and supply of supplemental insurance. For example, a focus 

group of current and future Medicare beneficiaries convened by MedPAC 

and a report from the American Academy of Actuaries stated that the 

addition of an annual cap would reduce the need of some beneficiaries to 

purchase supplemental insurance.28 While beneficiaries who drop their 

supplemental insurance would then need to pay all their Medicare costsharing responsibilities, those might be less than their annual premium for 

supplemental insurance.29 Additionally, according to the same MedPAC 

study and a Congressional Budget Office report, retiree coverage may 

 28American Academy of Actuaries, Revising Medicare’s Fee-for-Service Benefit Structure

(March 2012), and Medicare Payment Advisory Commission, Medicare and the Health 

Care Delivery System (June 2012), ch. 1.

29In 2014, the average Medigap premium was about $2,200, which was higher than 81 

percent of Medicare FFS beneficiaries’ cost-sharing responsibilities.

Modernizing 

Medicare Costsharing Design Would 

Affect Costs Indirectly 

through Behavioral 

Responses
Page 21 GAO-18-100 Medicare Cost-sharing

change under a modernized design.30 For example, with a cap in place, 

there would be less difference between employer-sponsored plans and 

Medicare, and employers may choose to alter the supplemental 

insurance they offer. CMS officials told us that this would continue the 

trend of private employers reducing retiree health coverage.

Several studies we reviewed and experts we interviewed indicated that 

implementing a modernized design could also trigger changes in 

utilization of Medicare services, the extent of which would affect 

beneficiaries’ out-of-pocket costs. For example, the RAND Health 

Insurance Experiment (HIE), which some experts consider to be the most 

comprehensive study on price and utilization, found that patients were 

“moderately sensitive to price.” The RAND HIE found that patients 

respond to increases in cost-sharing that they need to pay at least partly 

out-of-pocket by decreasing their use of some services. 31 Similarly, CMS 

officials told us that they would expect utilization to decrease as 

beneficiaries’ out-of-pocket costs increased, while a study in the 

American Economic Review found that the addition of a copayment led to 

a decline in office visits.32 The RAND HIE study suggests that a 10 

percent increase in cost-sharing would lead to a 1 to 2 percent decline in 

patients’ use of services.33 In the case of the RAND HIE study, costsharing affected the number of contacts people initiated with their 

physician, which impacted preventive care and diagnostic tests. The 

study found that this could potentially affect patients’ use of both effective 

and less effective services.

 30Congressional Budget Office, Options for Reducing the Deficit: 2017-2026, 239-247.

31The RAND HIE, conducted between 1971 and 1982, is considered the most 

comprehensive study evaluating patient response to cost-sharing. However, the study did 

not include individuals over age 65, which are the majority of Medicare beneficiaries. See 

Willard G. Manning et al., “Health Insurance and the Demand for Medical Care: Evidence 

from a Randomized Experiment,” American Economic Review, vol. 77, no. 3 (1987).

32See Amitabh Chandra, Jonathan Gruber, and Robin McKnight, “Patient Cost-Sharing 

and Hospitalization Offsets in the Elderly,” American Economic Review, vol. 100, no.1

(2010). 

33According to a study by the RAND Corporation, patients may respond differently 

depending on whether the service is inpatient or outpatient. Specifically, price elasticity 

varies for inpatient and outpatient services, with the demand for inpatient services being 

less responsive to changes in price than the demand for outpatient services. See Emmett 

B. Keeler, “Effects of Cost Sharing on Use of Medical Services and Health,” Journal of 

Medical Practice Management, research conducted by RAND Health, vol. 8 (Summer 

1992).
Page 22 GAO-18-100 Medicare Cost-sharing

According to several studies and interviews with experts, design changes 

could trigger other behavioral responses. For example, a study by the 

Kaiser Family Foundation and a report by the Congressional Budget 

Office both anticipated that a modernized design could change the 

proportion of Medicare beneficiaries who decide to enroll in FFS or MA.34

Similarly, officials from the American Academy of Actuaries told us that 

they would expect a change in demand for MA under a modernized 

design. Under the current Medicare design, all MA plans have an annual 

cap that protects beneficiaries from catastrophic medical expenses. 

Between 2008 and 2017, the percentage of Medicare beneficiaries who 

chose to enroll in an MA plan increased from 22 to 33 percent. CMS 

officials told us that the increases in MA enrollment may be due in part to 

the requirement that MA plans must include an annual cost-sharing cap. 

The Kaiser Family Foundation study found that a modernized design, 

similar to that of an MA plan, might incentivize some MA beneficiaries to 

move back to FFS.

According to experts we interviewed and studies we reviewed, different 

behavioral responses described above would also likely interact and 

affect beneficiaries’ out-of-pocket costs. CMS officials told us that when 

all of the factors contributing to out-of-pocket costs are combined, it is

difficult to assess the net effect of a modernized cost-sharing design on 

beneficiaries’ out-of-pocket costs. For example, officials with the National 

Association of Insurance Commissioners emphasized that as both 

demand for supplemental insurance and expected utilization changed, 

supplemental premiums would also change, which would change out-ofpocket costs. Similarly, studies by both MedPAC and the Congressional 

Budget Office found that changes in beneficiaries’ level of supplemental 

insurance might trigger additional changes in utilization, which would also 

result in changes to the pricing of supplemental insurance.35 Specifically, 

if a number of relatively healthy beneficiaries dropped their supplemental 

insurance, and the beneficiaries left were sicker (that is, more costly), 

premiums for supplemental insurance might increase. Officials from the 

Congressional Budget Office told us that, conversely, if the more costly 

beneficiaries dropped their supplemental insurance, premiums might be 

lower.

 34See Cubanski et al., Modifying Medicare’s Benefit Design (Kaiser Family Foundation), 

and Congressional Budget Office, Options for Reducing the Deficit: 2017-2026, 239-247. 

35Medicare Payment Advisory Commission, Medicare and the Health Care Delivery 

System (June 2012), ch. 1, and Congressional Budget Office, Options for Reducing the 

Deficit: 2017-2026, 239-247.
Page 23 GAO-18-100 Medicare Cost-sharing

We provided a draft of this report to the Department of Health and Human 

Services for comment. The Department provided technical comments, 

which we incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to appropriate congressional 

committees, the Secretary of Health and Human Services, and other 

interested parties. In addition, the report will be available at no charge on 

the GAO website at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact 

me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made key contributions to this 

report are listed in appendix II.

James Cosgrove

Director, Health Care

Agency Comments
Page 24 GAO-18-100 Medicare Cost-sharing

List of Requesters

The Honorable Orrin Hatch

Chairman

Committee on Finance

United States Senate

The Honorable Greg Walden

Chairman

Committee on Energy and Commerce

House of Representatives

The Honorable Kevin Brady

Chairman

Committee on Ways and Means

House of Representatives

The Honorable Fred Upton

House of Representatives
Appendix I: Direct Effect on Medicare 

Beneficiaries’ Cost-sharing Responsibilities 

under Four Illustrative Cost-sharing Designs

Page 25 GAO-18-100 Medicare Cost-sharing

The direct effect of modernizing the Medicare fee-for-service (FFS) costsharing design (i.e., the effect when holding utilization and enrollment 

constant) on beneficiaries’ cost-sharing responsibilities would depend on 

the specific revisions and the time horizon examined. Tables 4, 5, and 6 

present the direct effect of modernizing the Medicare FFS cost-sharing 

design on beneficiaries’ cost-sharing responsibilities under four illustrative 

designs. Each table presents the direct effect of each illustrative design 

over 1-, 4-, and 8-year time horizons.

Table 4: Medicare Fee-for-Service Beneficiaries’ Annual Cost-sharing Responsibilities under the Current and Illustrative Costsharing Designs, over 1, 4, and 8 Years When Holding Utilization and Enrollment Constant

Cost-sharing design (deductible / 

coinsurance / cap)

Minimum 25th percentile Median (50th 

percentile)

75th 

percentile 

Maximum 

Dollar amount ($)

1 year (2007)

Current 0 218 621 1,888 2,209,026 

$0 / 18% / $10,000a 0 117 479 1,808 9,728 

$175 / 20% / $6,700a 0 266 668 2,145 6,519 

$525 /20% / $5,100a 0 539 941 2,418 4,964 

$1,225 / 20% / $3,400a 0 651 1,486 2,963 3,310 

4 years (2007-2010)

Current 0 419 1,050 2,233 3,677,251

$0 / 18% / $10,000a 0 303 1,022 2,898 10,150

$175 / 20% / $6,700a 0 471 1,274 2,907 6,802

$525 /20% / $5,100a 0 728 1,526 2,852 5,178

$1,225 / 20% / $3,400a 0 1,084 1,851 2,670 3,452

8 years (2007-2014)

Current 0 567 1,256 2,501 3,818,411 

$0 / 18% / $10,000a 0 489 1,441 3,175 10,227 

$175 / 20% / $6,700a 0 677 1,619 3,114 6,854 

$525 /20% / $5,100a 0 920 1,764 2,952 5,216 

$1,225 / 20% / $3,400a 0 1,261 1,974 2,713 3,477 

Appendix I: Direct Effect on Medicare 

Beneficiaries’ Cost-sharing Responsibilities 

under Four Illustrative Cost-sharing Designs
Appendix I: Direct Effect on Medicare 

Beneficiaries’ Cost-sharing Responsibilities 

under Four Illustrative Cost-sharing Designs

Page 26 GAO-18-100 Medicare Cost-sharing

Cost-sharing design (deductible / 

coinsurance / cap)

Minimum 25th percentile Median (50th 

percentile)

75th 

percentile 

Maximum 

Amount relative to current design (ratio)

1 year (2007)

Current 1.0 1.0 1.0 1.0 1.000

$0 / 18% / $10,000a 1.0 0.5 0.8 1.0 0.004

$175 / 20% / $6,700a 1.0 1.2 1.1 1.1 0.003

$525 /20% / $5,100a 1.0 2.5 1.5 1.3 0.002

$1,225 / 20% / $3,400a 1.0 3.0 2.4 1.6 0.001

4 years (2007-2010)

Current 1.0 1.0 1.0 1.0 1.000

$0 / 18% / $10,000a 1.0 0.7 1.0 1.3 0.003

$175 / 20% / $6,700a 1.0 1.1 1.2 1.3 0.002

$525 /20% / $5,100a 1.0 1.7 1.5 1.3 0.001

$1,225 / 20% / $3,400a 1.0 2.6 1.8 1.2 0.001

8 years (2007-2014)

Current 1.0 1.0 1.0 1.0 1.000

$0 / 18% / $10,000a 1.0 0.9 1.1 1.3 0.003

$175 / 20% / $6,700a 1.0 1.2 1.3 1.2 0.002

$525 /20% / $5,100a 1.0 1.6 1.4 1.2 0.001

$1,225 / 20% / $3,400a 1.0 2.2 1.6 1.1 0.001

Source: GAO analysis of Centers for Medicare & Medicaid Services data. | GAO-18-100

Note: Analysis includes the 28 million beneficiaries who were enrolled in Medicare fee-for-service 

Part A and/or Part B from January 2007 through December 2014 or their death. Results are from 

2007 (1 year), average of 2007-2010 (4 years), and average of 2007-2014 (8 years), expressed in 

2014 dollars and holding utilization and enrollment constant. Most beneficiaries had supplemental 

insurance that covered some or all of these cost-sharing responsibilities, often in exchange for an 

additional premium. In addition to cost-sharing responsibilities, beneficiaries are also responsible for 

any costs for services not covered by Medicare and for Medicare and any supplemental premiums, 

which may also change under a modernized design.

a

Each of the four illustrative designs consisted of a single deductible, uniform coinsurance, and 

annual cap, and would have led to the Medicare program covering approximately 85 percent of total 

covered costs (while beneficiaries would have been responsible in aggregate for the remaining 15 

percent)—levels within 0.2 percentage points of the existing cost-sharing design in 2007. The 

deductible and cap in each illustrative design are described using their 2014 values, with values in 

prior years indexed to the average growth in Medicare expenditures per beneficiary on Part A and 

Part B services. As a result, the deductible and cap in a given year or set of years, expressed in 2014 

dollars, can be a few hundred dollars above or below the level in 2014, depending on whether 

Medicare spending or inflation grew faster over that time period.
Appendix I: Direct Effect on Medicare 

Beneficiaries’ Cost-sharing Responsibilities 

under Four Illustrative Cost-sharing Designs

Page 27 GAO-18-100 Medicare Cost-sharing

Table 5: Percentage of Medicare Fee-for-Service Beneficiaries, by Change in Annual Cost-sharing Responsibilities under 

Illustrative Cost-sharing Designs Relative to Current Design, over 1, 4, and 8 Years When Holding Utilization and Enrollment 

Constant

Lower cost-sharing than current design Similar Higher cost-sharing than current design

Cost-sharing design

(deductible / coinsurance / 

cap)

-$5,000 

or more

-$1,000 

up to 

-$5,000

-$500 up 

to 

-$1,000

-$100 up 

to 

-$500

Within 

$100

+$100 

up to 

+$500

+$500 up 

to 

+$1,000

+$1,000 

up to 

+$5,000

+$5,000 

or 

more

1 year (2007)

$0 / 18% / $10,000a 1 3 6 49 25 3 3 9 2

$175 / 20% / $6,700a 2 3 2 8 63 8 3 10 0

$525 /20% / $5,100a 3 3 1 3 20 55 4 10 0

$1,225 / 20% / $3,400a 4 6 2 2 18 15 47 7 0

4 years (2007-2010)

$0 / 18% / $10,000a 1 4 3 40 22 9 7 13 1

$175 / 20% / $6,700a 2 5 2 6 48 15 11 12 0

$525 /20% / $5,100a 2 6 2 4 14 47 15 10 0

$1,225 / 20% / $3,400a 3 9 3 4 12 18 43 8 0

8 years (2007-2014)

$0 / 18% / $10,000a 1 4 3 30 23 14 10 13 1

$175 / 20% / $6,700a 2 6 3 6 36 23 13 12 0

$525 /20% / $5,100a 2 8 3 5 12 43 18 9 0

$1,225 / 20% / $3,400a 3 10 4 5 10 19 40 8 0

Source: GAO analysis of Centers for Medicare & Medicaid Services data. | GAO-18-100

Note: Analysis includes the 28 million beneficiaries who were enrolled in Medicare fee-for-service 

Part A and/or Part B from January 2007 through December 2014 or their death. Results are from 

2007 (1 year), average of 2007-2010 (4 years), and average of 2007-2014 (8 years), expressed in 

2014 dollars and holding utilization and enrollment constant. Results may not sum to 100 due to 

rounding. Most beneficiaries had supplemental insurance that covered some or all of their costsharing responsibilities, often in exchange for an additional premium. In addition to cost-sharing 

responsibilities, beneficiaries are also responsible for any costs for services not covered by Medicare 

and for Medicare and any supplemental premiums, which may also change under a modernized 

design.

a

Each of the four illustrative designs consisted of a single deductible, uniform coinsurance, and 

annual cap, and would have led to the Medicare program covering approximately 85 percent of total 

covered costs (while beneficiaries would have been responsible in aggregate for the remaining 15 

percent)—levels within 0.2 percentage points of the existing cost-sharing design in 2007. The 

deductible and cap in each illustrative design are described using their 2014 values, with values in 

prior years indexed to the average growth in Medicare expenditures per beneficiary on Part A and 

Part B services. As a result, the deductible and cap in a given year or set of years, expressed in 2014 

dollars, can be a few hundred dollars above or below the level in 2014, depending on whether 

Medicare spending or inflation grew faster over that time period.
Appendix I: Direct Effect on Medicare 

Beneficiaries’ Cost-sharing Responsibilities 

under Four Illustrative Cost-sharing Designs

Page 28 GAO-18-100 Medicare Cost-sharing

Table 6: Percentage of Medicare Fee-for-Service Beneficiaries, by Change in Annual Cost-sharing Responsibilities under 

Illustrative Cost-sharing Designs Relative to Current Design, and Whether Reached Cap, over 1, 4, and 8 Years When Holding 

Utilization and Enrollment Constant

Never reached cap Reached cap at least once

Cost-sharing design 

(deductible / coinsurance / 

cap)

Lower by 

$100 or 

more

Within 

$100

Higher by 

$100 or 

more

Subtotal Lower by 

$100 or 

more

Within 

$100

Higher by 

$100 or 

more

Subtotal

1 year (2007)

$0 / 18% / $10,000a 56 26 13 95 2 <1 3 5

$175 / 20% / $6,700a 10 63 17 90 5 <1 5 10

$525 /20% / $5,100a 3 20 62 86 7 <1 7 14

$1,225 / 20% / $3,400a <1 17 60 77 12 1 9 23

4 years (2007-2010)

$0 / 18% / $10,000a 42 21 22 86 6 <1 8 14

$175 / 20% / $6,700a 5 47 22 74 10 1 15 26

$525 /20% / $5,100a 1 13 52 66 13 2 19 34

$1,225 / 20% / $3,400a <1 10 41 51 18 2 28 49

8 years (2007-2014)

$0 / 18% / $10,000a 31 22 25 77 8 1 13 23

$175 / 20% / $6,700a 3 33 24 60 14 2 23 40

$525 /20% / $5,100a <1 9 40 50 17 3 30 50

$1,225 / 20% / $3,400a <1 7 27 34 22 3 40 66

Source: GAO analysis of Centers for Medicare & Medicaid Services data. | GAO-18-100

Note: Analysis includes the 28 million beneficiaries who were enrolled in Medicare fee-for-service 

Part A and/or Part B from January 2007 through December 2014 or their death. Results are from 

2007 (1 year), average of 2007-2010 (4 years), and average of 2007-2014 (8 years), expressed in 

2014 dollars and holding utilization and enrollment constant. Results may not sum to subtotal or 100 

due to rounding. Most beneficiaries had supplemental insurance that covered some or all of their 

cost-sharing responsibilities, often in exchange for an additional premium. In addition to cost-sharing 

responsibilities, beneficiaries are also responsible for any costs for services not covered by Medicare 

and for Medicare and any supplemental premiums, which may also change under a modernized 

design.

a

Each of the four illustrative designs consisted of a single deductible, uniform coinsurance, and 

annual cap, and would have led to the Medicare program covering approximately 85 percent of total 

covered costs (while beneficiaries would have been responsible in aggregate for the remaining 15 

percent)—levels within 0.2 percentage points of the existing cost-sharing design in 2007. The 

deductible and cap in each illustrative design are described using their 2014 values, with values in 

prior years indexed to the average growth in Medicare expenditures per beneficiary on Part A and 

Part B services. As a result, the deductible and cap in a given year or set of years, expressed in 2014 

dollars, can be a few hundred dollars above or below the level in 2014, depending on whether 

Medicare spending or inflation grew faster over that time period.
Appendix II: GAO Contact and Staff 

Acknowledgments

Page 29 GAO-18-100 Medicare Cost-sharing

James Cosgrove, (202)-512-7114 or cosgrovej@gao.gov

In addition to the contact named above, Greg Giusto (Assistant Director), 

Alison Binkowski, George Bogart, Reed Meyer, Beth Morrison, Brandon 

Nakawaki, and Brian O’Donnell made key contributions to this report. 

Also contributing were Todd Anderson, Emei Li, Yesook Merrill, Vikki 

Porter, and Frank Todisco.

Appendix II: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(100763)
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