Deep Think on How FFS Medicare Can Better Compete with MA

The Brookings Institution is well-known Washington, DC, think tank with center to left policy leanings that recently published a white paper on its ideas on how to modernize traditional FFS Medicare. The following is the analysis of that paper by Jay Gormley, chief investment officer, COO, Advisory for Zimmet Healthcare Services Group.

He said the core argument made by Brookings is that fee-for-service Medicare still looks far too much like the program Congress designed in 1965. “The authors are not arguing for getting rid of traditional Medicare. Quite the opposite: they want to make it a more viable long-term competitor to Medicare Advantage by making the benefit simpler, more protective, and more coherent,” Gormley said.

Their diagnosis is that traditional Medicare has three big structural problems: no out-of-pocket cap, separate and often irrational Part A and Part B cost-sharing rules, and a heavy reliance on Medigap and other supplemental insurance to fill those gaps.

Add a Cap

So, the first and most important recommendation made in the paper is for FFS Medicare to add a catastrophic out-of-pocket cap for Parts A and B. Traditional Medicare is unusual because beneficiaries can still face effectively unlimited cost-sharing unless they buy supplemental coverage.

Gormley said Brookings argues that this is fundamentally inconsistent with what insurance is supposed to do, which is protect people against catastrophic financial loss. “Their preferred neighborhood is roughly a $5,000 annual cap, similar to the average cap currently found in Medicare Advantage plans. They estimate that a cap around that level could cost Medicare roughly $20 billion to $40 billion per year, depending on how it is structured and how beneficiaries respond,” he said.

For SNFs, there is a very direct piece of this argument.

“Brookings points out that the current Part A cost-sharing structure is particularly awkward: beneficiaries face a separate SNF copayment beginning after day 20, currently $217 per day in 2026. The authors’ broader point is that Medicare imposes some of its largest cost-sharing obligations on services like longer hospital and SNF stays, where beneficiaries often have relatively little control over utilization,” Gormley said.

A redesign that folds those costs into a unified deductible and an annual catastrophic out-of-pocket cap could materially change the beneficiary economics around longer SNF stays and reduce the financial shock that occurs once the day-20 coinsurance kicks in, he adds.

Nothing Universal

The impact, however, is not the same everywhere. Because that $217 coinsurance amount is nationally set while the underlying SNF PPS rate varies materially based on case mix and geography, the beneficiary liability can represent a much larger percentage of the total Medicare payment in lower-wage-index markets.

CMS adjusts SNF PPS payments for geographic differences in wages, so low-AWI markets start from a materially lower reimbursement base. In some low-cost rural markets, that fixed $217 can approach roughly one-third of the facility’s daily Medicare reimbursement depending on the resident’s PDPM classification.

In those markets, changing the coinsurance structure is not some minor beneficiary-benefit tweak, Gormley said. “It can affect a very meaningful piece of the economics of a Medicare stay. There is also a potentially significant provider-side benefit. In states and markets where uncollected SNF coinsurance and Medicare bad debt are meaningful, reducing or restructuring that beneficiary liability could put more dollars directly into SNF pockets,” he said.

Facilities may ultimately recover a portion of qualifying unpaid Medicare cost-sharing through the Medicare bad-debt mechanism (65 cents on the dollar via the cost report up to 15 months later), but that is not equivalent to simply getting paid the full amount in the first place.

“It comes with collection requirements, documentation, delays and less-than-full reimbursement. A benefit structure that reduces the amount sitting with the beneficiary, particularly in those lower-AWI markets where the coinsurance represents such a large share of the total rate, could produce a cleaner and more predictable revenue stream for longer-stay Medicare patients,” Gormley said.

“So, while Brookings is framing this primarily as beneficiary protection and Medicare modernization, there is a real SNF reimbursement angle hiding underneath it. The lower the underlying Medicare rate, the more disproportionately painful the fixed coinsurance amount can become, both for the beneficiary and for the facility trying to collect it. Reducing that exposure could therefore have an outsized benefit in precisely the rural, lower-AWI markets where SNF economics are already the tightest.”

One Deductible

He said the second major idea in the paper is to collapse the separate Part A and Part B deductibles into one annual deductible. Brookings notes that some version of a unified deductible appears in almost every serious Medicare benefit-redesign proposal. It would make traditional Medicare easier to understand, reduce the arbitrary financial differences created by site of service, and make the benefit look more like modern insurance.

Various proposals they review put that combined deductible somewhere between roughly $250 and $850. “That sounds straightforward, but there is an interesting Part A financing wrinkle. A unified deductible would almost certainly be lower than today's $1,736 Part A hospital deductible and higher than the $283 Part B deductible. That shifts some cost away from Part A beneficiaries and onto the Hospital Insurance Trust Fund while potentially shifting more cost onto beneficiaries in Part B,” he said.

That means even if the redesign were budget-neutral for Medicare overall, it could actually worsen Part A trust-fund finances unless Congress offset that effect somewhere else.

“Brookings explicitly flags that issue. Once the deductible is met, Brookings looks at whether Medicare should retain broad percentage-based coinsurance or move toward defined copayments by service,” he said. A simple 20 percent coinsurance structure would be easy to administer and understand. A more sophisticated system could charge lower copays for high-value care and more for services policymakers want beneficiaries to use more carefully.

The paper’s authors are skeptical that the extra complexity is worth it, however, because the evidence suggests targeted cost-sharing may change utilization patterns without generating much actual savings.

Medigap Reform

The third, and what Gormley called “probably most politically explosive, part of the paper is Medigap reform.”

Brookings argues that supplemental insurance exists in large part because traditional Medicare itself is incomplete, he said. Medigap protects beneficiaries from the holes in Medicare, but by eliminating or substantially reducing cost-sharing it also increases utilization and therefore raises Medicare spending. The authors cite evidence suggesting Medigap can increase spending per beneficiary by something in the neighborhood of 20 percent to 30 percent.

They explore several ways of dealing with that: restricting first-dollar Medigap coverage, taxing supplemental insurance premiums, eventually eliminating Medigap altogether, and making Medigap guaranteed issue so beneficiaries can move back from Medicare Advantage into traditional Medicare without medical underwriting.

They ultimately stop short of recommending outright elimination. Instead, their preferred middle ground is essentially to make traditional Medicare better first, then tax supplemental coverage and use some of those revenues to finance the improved traditional Medicare benefit.

MA Twist

That has an important Medicare Advantage angle, Gormley said. Traditional Medicare without Medigap currently has an actuarial value of only about 85.6 percent, versus roughly 92.2 percent for the average MA-PD plan, according to estimates cited by Brookings.

“MA also provides an out-of-pocket cap and typically drug coverage in one product, while traditional Medicare beneficiaries may need Part A and B, a Part D plan and Medigap to assemble something comparable,” he said. “The authors view that imbalance as one reason MA has become increasingly attractive.”

So, part of this is really about restoring competition between traditional Medicare and MA. A catastrophic cap and simpler benefit could make FFS Medicare more attractive to new beneficiaries and potentially slow migration into MA. At the same time, the paper would make it easier for people already in MA to return to traditional Medicare by requiring guaranteed-issue Medigap coverage.

“Today, beneficiaries who leave MA after their initial enrollment period can face underwriting or much higher Medigap premiums in many states. Brookings argues that this creates a one-way door into MA for some beneficiaries, particularly sicker people,” Gormley said.

There is actually a particularly interesting SNF nugget here, he explained. Brookings notes that people who switch from MA back to traditional Medicare tend to be sicker and more expensive, and that a meaningful part of their higher spending is driven by SNF utilization. “The authors nevertheless argue that guaranteed Medigap issue would probably have only a small overall budget impact and cite evidence that Medigap itself does not appear to induce additional SNF utilization. That is potentially important for our sector,” Gormley said.

“Anything that makes it easier [although it is pretty easy right now] to move from MA back to traditional Medicare could, at the margin, be positive for SNFs because FFS Medicare generally offers better SNF-economics than MA. I would not overstate that effect because Brookings itself expects switching to remain relatively limited, but it is directionally noteworthy.”

The biggest takeaway, he said, is that Brookings is basically proposing a bargain: make traditional Medicare substantially more generous where it matters most, particularly catastrophic protection, simplify the Part A/Part B structure, and then claw back some of the resulting cost by reducing the role and generosity of supplemental insurance.

Takeaways for SNFs

For SNFs, Gormley said he would watch three things if ideas like those in the paper ever gained political traction.

- First, eliminating the separate SNF cost-sharing cliff after day 20 could have real impact on providers in certain markets.

- Second, strengthening traditional Medicare relative to MA could modestly shift enrollment back toward FFS, which would generally be favorable for SNFs.

- Third, anything that increases FFS utilization would eventually create pressure elsewhere in Medicare to control spending, meaning that benefit modernization could ultimately be paired with stronger utilization management, bundled payments, or other provider-side reforms.

“So, there is nothing remotely imminent here, but it is an interesting policy direction. Rather than accepting the continued march from traditional Medicare into MA as inevitable, Brookings is asking a different question: what if Congress simply made traditional Medicare a better insurance product?” he said.

Comments? Contact Patrick Connole at pconnole@parkplacelive.com.