What the Medicare 'Doc Fix' Means for Your Pocketbook

The Medicare "doc fix" is in. The question now: What will it mean for seniors' pocketbooks?

President Obama recently signed the most significant Medicare legislation in years--a plan to fix a Medicare formula that threatened to slash payments to doctors every year. The law achieves several positive Medicare reforms, but it will increase some costs for enrollees. The changes are set to be phased in over a period of years, so it's worth understanding the reforms if you're already signed up for Medicare, or will be enrolling during the next decade. The reforms also may change the math on one of the most basic Medicare enrollment decisions--whether to use traditional fee-for-service Medicare or Medicare Advantage, the all-in-one managed-care alternative.

The doc-fix issue had become a case of bad Kabuki theatre that needed to be yanked off the stage. Doctors regularly faced the threatened payment cuts while waiting for the inevitable kicking of the can down the road by Congress. The cuts were mandated under a formula called the Sustainable Growth Rate (SGR) that became law in 1997; the idea was to keep growth in physician payments in line with the economy's overall growth. Instead, it created annual uncertainty and animosity among physicians. This year, for example, payment rates would have been slashed 21% if Congress had not taken action.

The new legislation contains several important reforms, including:

• Replacement of the SGR with a new formula that rewards physicians who meet certain government standards for providing high-quality, cost-effective care. The new formula aims to move Medicare away from rewarding doctors for the quantity of services they provide.
• Addressing concerns about Medicare beneficiaries' access to physicians. The fear has been that doctors would simply get tired of the ongoing threat of reduced payments and stop accepting Medicare patients. It's worth noting that this reform heads off a potential future problem--not one that is present today. The Medicare Payment Advisory Commission (MedPAC), the independent research and policy organization that advises Congress on Medicare, reports that current Medicare enrollees aren't experiencing significant problems with access to care.
• Making permanent a 100% subsidy of Part B premiums for certain low-income Medicare beneficiaries (the Qualifying Individual program). The program covers the Part B premium for beneficiaries with incomes ranging from 120% to 135% of the federal poverty guidelines, and who have modest assets.

But the plan comes with a significant price tag. It will increase federal deficit spending by $141 billion from 2015-25, and it calls for savings to the government by boosting premiums for high-income seniors ($34.7 billion in savings) and by prohibiting Medigap from covering the Part B deductible for new enrollees beginning in 2020 ($400 million in savings). The plan also will mean somewhat higher Part B premiums spread across the entire base of seniors.

If you're enrolled in Medicare--or will be in the years ahead--here's how the law could impact your pocket book.

Medigap Most Medicare enrollees have some type of coverage that limits the program's cost-sharing requirements. According to the Kaiser Family Foundation (KFF), 23% of all Medicare enrollees buy private Medigap policies; 35% have employer- or union-sponsored supplemental coverage; and Medicaid augments Medicare coverage for low-income seniors (19% of all enrollees).

Under the doc-fix law, Medigap plans will no longer cover the annual Part B deductible for new enrollees ($147 this year). That will mean changes for Medigap "C" and "F" plans, the two most popular plan choices and the only ones that cover Part B deductibles. Starting in 2020, seniors would have to pay it themselves. Current Medigap policyholders and new enrollees up to 2020 would be protected. First-dollar coverage from employers and Medicaid are unaffected.

The goal is to give seniors more "skin in the game," which conservatives have long argued would lower costs by making patients think twice about using medical services if they know they must pay something for all services they use.

The idea is to encourage enrollees to utilize less health care by eliminating first-dollar coverage. Research confirms that higher out-of-pocket expense will result in people using fewer services, but that's not always a good thing. A 2011 study by National Association of Insurance Commissioners (NAIC) found that beneficiaries may avoid necessary services that worsen their health in the long run, increasing the need for more intensive care and driving up Medicare costs. The NAIC report also found that once patients do seek care, it is doctors and other health-care providers who drive up utilization, not patients.

Elimination of first-dollar coverage could lead to several possible changes in Medigap. It could bring down premiums, since plans will cover a smaller share of claims. "Theoretically, that should happen," says Tricia Neuman, senior vice president and director of KFF's Program on Medicare Policy. "But it's hard to say if premiums actually will fall."

Another possible outcome is an accelerated shift from traditional fee-for-service Medicare to Medicare Advantage plans. Advantage plans are allowed to include deductibles for visits to physicians and hospitals, and for prescription drugs--but some don't. They also can charge co-pays, but all plans include limits on the amount of cost-sharing you pay during the year ($6,700), providing predictability of cost similar to that offered by Medigap plans. (By law, insurers are prohibited from selling you a Medigap plan if you're enrolled in Advantage.)

In recent years, use of Medigap has been falling, and Advantage enrollment has been rising. Thirty percent of Medicare enrollees are in Advantage plans, and enrollment has almost tripled since 2004, from 5.3 million to 15.7 million in 2014, according to KFF.

High-Income Premium Surcharges This feature of the new law socks it to the highest-income seniors. Affluent beneficiaries already pay more for Medicare; individuals with modified adjusted gross income (MAGI) starting at $85,000--or $170,000 for joint filers--pay a higher share of the government's full cost of coverage in Medicare Part B and Part D for prescription-drug coverage. This year, for example, seniors with incomes at or below $85,0000 pay $104.90 per month in Part B premiums, but higher-income seniors pay between $146.90 and $335.70 monthly, depending on their income.

The new plan will shift a higher percentage of costs to higher-income seniors starting in 2018 for those with MAGI between $133,500 and $214,000 (twice that for couples). Seniors with incomes of $133,000 to $160,000 would pay 65% of total premium costs, rather than 50% today. Seniors with incomes between $160,000 and $214,000 would pay 80% rather than 65%, as they do today.

Notably, earlier reform proposals to boost high-income surcharges would have effectively lowered the income thresholds, tapping less affluent households.

Higher Part B Premiums Under current law, enrollee premiums must cover 25% of Medicare Part B costs. Although health-care inflation has been flat for the past several years, the Congressional Budget Office (CBO) forecasts that costs will begin rising sharply in the years ahead. The Part B monthly premium is forecast to soar from $104.09 this year to $171 in 2025--and that's without the impact of the doc fix. The CBO says the doc-fix solution will add another $10 per month to Part B premiums by 2025, for a total of $181 monthly.

Even Higher Health-Care Costs Down the Road? Part B Premiums aren't the only place seniors may feel the impact of impending health-care inflation. J.P. Morgan Asset Management research found that the average 65-year-old paid $4,400 in Medicare premiums (Part B, Part D, and Medigap), out-of-pocket expenses, and vision and dental services in 2014. J.P. Morgan expects those costs to rise at an annual rate of 6.1% over the next 20 years, to $17,000 at age 85. That outlook includes a sizable bump for what J.P. Morgan calls "uncertainties"--mainly about the actual rate of health-care inflation and federal policy changes that could saddle seniors with a larger share of the health-care bill.

The doc fix is one example of such policy changes, and it might be the first in a wave of similar reforms. Two reform ideas that have gotten some bipartisan traction in Washington--means-testing Medicare and increasing cost-sharing--could be revisited by lawmakers again.

Mark Miller is a retirement columnist and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living. The views expressed in this article do not necessarily reflect the views of Morningstar.com.