Medicare Reform: Issues and Implications for Retiree Health Insurance

March 2008

The standard Medicare benefit package includes a considerable amount of beneficiary spending. Hospitalizations are covered by Part A and entail a per-admission deductible of over $1,000. Physician services are covered by Part B and entail both a premium of at least $96 per month (for 2008) and a 20 percent coinsurance rate on covered services. Prescription drugs are covered by Part D and entail both a premium averaging about $28 per month and significant cost-sharing, particularly within the so-called “donut hole” gap in coverage. For this reason, it is crucial for future Medicare beneficiaries to be adequately prepared for the high costs of healthcare spending in retirement, especially given the trends of both healthcare spending growth outpacing general inflation and the recent gradual erosion of retiree health benefits. The most likely reforms to Medicare are likely to increase the need for adequate savings even more. Policymakers appear to be reluctant to limit the administered prices for physician services and pharmaceutical drugs in order to lower total spending. Policymakers, on the other hand, appear to be eager to both cut payments to Medicare Advantage plans – thereby decreasing the benefits available to enrollees through these private plans – and impose increased means testing of premiums for Parts B and D of Medicare – thereby increasing the premiums required for higher income beneficiaries. The demand for retiree health benefits is therefore expected to increase over time.