Introduction and summary
Medicare is a bright spot in the American health care system. It provides universal health coverage for older adults and others while controlling costs better than commercial insurance.1 Medicare is also one of the great successes in American social policy writ large, proving itself as a reliable and popular centerpiece of how Americans of all stripes engage with the government representing them.2
However, Medicare faces significant challenges that must be addressed to make the program work better for older adults and to protect it for future generations. From a beneficiary standpoint, Medicare must be simplified and provide a better and more equitable experience in terms of enrollment choices and the types and costs of care it provides access to. From a practitioner standpoint, Medicare must be streamlined to make providing appropriate clinical care as easy as possible. From a health care policy standpoint, Medicare must be deployed to drive positive change in the delivery system and to advance health equity. From a population health standpoint, the Medicare program’s considerable financial resources and regulatory authority must be oriented toward the fundamental goal of improving the nation’s health. And from an existential standpoint, Medicare must be made fiscally solvent and sustainable for the long term.
Reforms to Medicare must take into account that the program has been bifurcated into two distinct parts: traditional Medicare and Medicare Advantage (MA). Traditional Medicare, the program composed of Parts A, B, and D, provides enrollees access to the full range of Medicare providers with a standard set of services and costs.3However, its multipart structure creates complex choices in beneficiary enrollment, including the need to purchase private supplemental insurance (such as Medigap) to make it more affordable for many beneficiaries to use their coverage.4 MA is the private alternative to traditional Medicare where the federal government pays a private plan to administer all of a person’s health insurance benefits. MA plans can offer extra benefits (such as dental and vision) and cover some of the costs that traditional Medicare beneficiaries would need to obtain supplemental insurance to cover. In exchange, MA plans impose far greater care restrictions than traditional Medicare.5 MA has grown rapidly over the past two decades and now accounts for more than half of the entire Medicare program.6 Some counties have seen consistently high MA penetration for years,7 and in some areas of the country, more than 70 percent of Medicare beneficiaries are now enrolled in MA.8
Medicare reform debates have typically focused on the problems of traditional Medicare or MA in isolation. Traditional Medicare’s shortcomings include a complicated and confusing benefit structure, gaps in covered services, high out-of-pocket costs (especially for enrollees without supplemental coverage),9 and a need to modernize payment models to promote health equity and bolster essential services such as primary care.10In contrast, challenges with MA include persistent and significant overpayments to MA plans that threaten the financial solvency of the Medicare Hospital Insurance Trust Fund; limited access to providers; insufficient transparency, oversight, and accountability; and interference with care, which can lead to poorer health outcomes for some enrollees.11
These problems have left many beneficiaries with a fraught choice when deciding whether to enroll in MA or traditional Medicare. For a middle- to lower-income person who lacks the disposable income to purchase a Medigap plan and who doesn’t qualify for other supplemental coverage, choosing traditional Medicare exposes them to potentially catastrophic out-of-pocket costs if they fall ill. MA’s cost protections are attractive; however, those protections come at the cost of significant limitations on care employed by the private insurance industry. The Center for American Progress’ “Medicare 2.0,” as detailed in this report, would address this dilemma by improving coverage for all Medicare beneficiaries.
Changes to traditional Medicare and MA should be considered as two interlocking elements of the same comprehensive reform. This report builds on the Medicare 2.0 framework initially proposed in a 2022 Journal of the American Medical Association article by providing additional context on the state of Medicare policy and demonstrating how the principles of Medicare 2.0 apply to both traditional Medicare and MA.12
Also read
A companion CAP report provides a detailed proposal for ending overpayments to MA—a critical reform in its own right—the savings from which would help provide financing for the proposed improvements here. While there is a policy and economic logic to reforming traditional Medicare and MA together, equally important, such a combined approach provides a viable political strategy: linking MA payment fixes to overall improvements across Medicare, including traditional Medicare. While there is broad consensus that MA plans are overpaid,13 it is politically challenging to fix this problem in isolation. The “losers” in this targeted reform would be a distinct and politically powerful group—health insurance corporations operating MA plans. The “winners,” on the other hand, are less readily identifiable, even though older adults, and future Medicare enrollees would all benefit from lower Part B premiums,14 which would be made possible by reduced overall Medicare spending. And all taxpayers, along with the federal government, would benefit from a more solvent Medicare Hospital Insurance Trust Fund and freed-up resources in the federal budget. The political strategy of this proposal is to turn the vast majority of Medicare beneficiaries into clear “winners” by improving the Medicare program overall, thereby providing a counterweight to the expected opposition of MA plans, which are likely to resist key reforms to overpayment. Recent political history provides a successful analogue for this strategy, with the Inflation Reduction Act of 2022 linking prescription drug pricing reforms to improvements in the Part D benefit by providing increased access and lower out-of-pocket costs for medications.15
While there is a policy and economic logic to reforming traditional Medicare and MA together, equally important, such a combined approach provides a viable political strategy: linking MA payment fixes to overall improvements across Medicare, including traditional Medicare.
Medicare 2.0 principles
The vision for Medicare 2.0 rests on five key principles: 1) guarantee simple and comprehensive coverage; 2) reduce out-of-pocket costs; 3) modernize prescription drug policy; 4) center primary care; and 5) focus on population health and health equity.
1. Guarantee simple and comprehensive coverage
Current sources of complexity
Most traditional Medicare beneficiaries carry four distinct insurance plans: Part A for hospital services; Part B for physician services; Part D for prescription drugs; and supplemental coverage either purchased privately (for example, additional employer coverage or a Medigap plan that limits beneficiary out-of-pocket costs) or supplied by Medicaid (for those 12.5 million people who are enrolled in both Medicare and Medicaid, also known as “dual eligibles”).16
The separation of Medicare’s parts stems from political history rather than rational policy design. Hospital insurance for “the elderly”—those age 65 or older—was the dominant health insurance reform proposal in the early 1960s, while the American Medical Association offered a physician insurance program as an alternative approach.17 In a surprising and now famous legislative move, instead of choosing between the proposals, the chair of the House Ways and Means Committee combined them: The hospital insurance proposal became Medicare Part A, and the physician insurance proposal became Medicare Part B.18 A third proposal—for state-level insurance for some low-income people—became Medicaid, rounding out the so-called three-layer cake of the legislation.19
Because Medicare Parts A and B left enrollees with significant out-of-pocket costs for covered services, a market developed for supplemental private insurance plans to fill these gaps.20 The 1980 Medigap regulations were reformed in 1990 to define 10 standardized versions of Medigap that could be sold, each with a specified cost-sharing level. Prescription drug coverage was added to Medicare as Medicare Part D in 2003, during the George W. Bush administration.21 The choice to rely exclusively on private insurance companies to administer Part D benefits reflects the pro-market political tenor and considerable industry influence of the time.
The resulting patchwork of these decisions creates unnecessary complexity for beneficiaries and providers of care. Additionally, the various parts of traditional Medicare leave out several benefit categories important to overall health and well-being, including vision, dental, hearing, and long-term services and supports.22
MA, introduced along with Part D coverage in 2003, brings its own version of complexity and gaps in care.23 Covered services include the benefits provided by traditional Medicare and any additional benefits offered by the MA plan, such as dental, vision, and hearing.24 The MA program itself is also one of the most significant sources of complexity for beneficiaries in the Medicare program overall, creating the need for beneficiaries to make an annual, confusing choice between traditional Medicare and MA—and then within MA, requiring enrollees to make another annual choice from among the many plans offered in their particular geographic area. Given this complexity, 71 percent of Medicare beneficiaries report not even attempting to compare their current plan with other available options.25
One further source of complexity is that in most states, after a short initial time period, a patient who has chosen but is dissatisfied with MA and wants to switch to traditional Medicare can be denied or charged substantially more for a supplemental Medigap policy due to a preexisting condition, making that switch unaffordable.26 This is both a potential source of confusion for beneficiaries and a mechanism for keeping patients in MA who may be better served in traditional Medicare.27
Modern MA plans also impose a complex “superstructure” on the health care delivery system that often interferes with care.28The most visible and onerous of these restrictions are prior authorization requirements and claims denials. Prior authorization requirements in effect allow health insurance plans to delay or prevent care that a treating physician and a patient agree is in the patient’s best interest.29 Virtually all MA enrollees (99 percent) are in plans that require prior authorization for some services.30 In 2021, health care providers submitted more than 35 million prior authorization requests to MA plans, and more than 2 million (close to 6 percent) were denied.31
MA plans can use their own criteria for prior authorization and payment so long as those criteria are “no more restrictive than original Medicare’s national and local coverage policies.”32 In practice, however, MA plans impose stricter criteria than traditional Medicare, creating inequities in access to care across the Medicare program. For instance, an analysis of one large MA plan found that 64 percent of denied spending was due to traditional Medicare coverage rules, and the remaining 36 percent was due to additional restrictions imposed by the MA plan. The researchers found that the MA plan denied more than 5.6 million claims during the study period, corresponding to nearly one denial per beneficiary per year.33 The Office of Inspector General found that among claims denied by MA plans in 2019, nearly 1 in 5 met the MA plan’s billing rules but were still denied due to human error or systems processing errors.34 Recent reporting has also uncovered unregulated, tailor-made artificial intelligence models and computer algorithms that MA plans allegedly use to deny claims.35 In addition to the forgone payments from claims denials, the frequent and sometimes unpredictable use of claims denials risks producing a chilling effect that makes patients hesitant to receive care due to fear that the claim will be denied.
Other, more complex coverage limitation tactics employed by MA plans include downgrades and claims adjudication differences. Downgrades occur when an MA plan refuses to pay for an inpatient hospitalization, instead paying only for a less expensive “observation” stay where a patient is technically considered an outpatient even if they are physically in the hospital receiving treatment from hospital physicians and nurses.36 This tactic can decrease MA spending and reduce the apparent hospital admission rate of MA patients without any actual improvement in clinical care. Indeed, data published by an MA advocacy group in 2020 inadvertently showed that the reported decrease in MA hospitalizations compared with traditional Medicare was more than offset by increased observation stays.37 An industry analysis estimated that in the fourth quarter of 2022, hospitals were unable to collect nearly 12 percent of inpatient revenue from MA plans due to claims denials, compared with less than 8 percent for all payers.38 Frustration with these practices leads some hospitals to exit the MA program altogether, further jeopardizing access to care for MA patients.39
Finally, restrictive networks are another source of MA complexity for patients. Compared with beneficiaries in traditional Medicare, who can see any accepting provider nationally,40 some MA plans limit in-network coverage to an area as small as one county.41 Beyond geographic limitations, MA plans often impose dramatic limitations on access to in-network primary care physicians, specialists, and hospitals.42 Psychiatrist networks within MA are particularly narrow: In a recent study, just more than half of all counties had zero psychiatrists participating in MA.43 Many MA plans deem even local cancer centers, let alone national centers of excellence, to be out of network; consistent with this finding, MA patients are less likely to get care at high-quality cancer centers and are more likely to die after cancer surgery.44 Overall, available data suggest that on average, MA networks include only about half of doctors and hospitals in a given county, with a recent study finding that about two-thirds of MA networks include fewer than one-quarter of psychiatrists in the area.45 Furthermore, it is often difficult for beneficiaries to know which providers are covered, by their plan given that nearly half of entries in MA provider directories contain inaccuracies.46
Medicare 2.0 should simplify and enhance traditional Medicare
A thriving traditional Medicare program is important for a number of reasons: It provides a stable source of coverage that people can rely on for their rest of their lives, serves as a lifeline for people with chronic illness by giving access to a broad range of providers, offers shelter from potentially harmful practices in the private insurance industry, allows more time and resources to be devoted to clinical care by reducing administrative complexity, and serves as a promising platform for expanding coverage in the future.
Medicare 2.0 should transform and simplify traditional Medicare into a single, streamlined plan that covers comprehensive benefits including hospital and physician services, prescription drugs, vision, dental, hearing, and long-term services and supports.47
Traditional Medicare does not currently cover long-term services and supports. Although MA was granted new flexibility to cover in-home support services starting in 2019, in 2022, only 17 percent of plans offered these benefits.48 Medicaid remains the primary payer for long-term services and supports, leading many older Americans to deplete their life savings in order to qualify for Medicaid and get coverage for the services they need.49 Meeting the need for long-term services and supports in the United States is a complex problem that requires significant reform in its own right, and doing so will require considerable financial resources.50 Medicare 2.0 should begin this process by adding coverage for home and community-based services, which are less costly than institutional care and preferred by many patients and families.51
Medicare 2.0 should transform and simplify traditional Medicare into a single, streamlined plan that covers comprehensive benefits including hospital and physician services, prescription drugs, vision, dental, hearing, and long-term services and supports.
Providing coverage for dental, vision, and hearing services is a significant opportunity to improve equity and overall well-being for Medicare beneficiaries. One in 5 older adults have untreated tooth decay, and another 1 in 5 have complete tooth loss.52 Inequities in oral health are stark: Black and Hispanic Americans are two to three times more likely than white Americans to have untreated dental decay, and low-income older adults are more than three times as likely as those with incomes above 200 percent of the federal poverty level to have lost all their teeth.53 Thirty-seven million Americans older than age 50 have vision loss, and clinically relevant hearing loss affects two-thirds of adults older than age 70.54 Untreated dental, vision, and hearing problems can lead to poor health outcomes as well as significantly impaired quality of life from pain and difficulty eating, speaking, and communicating.55
Poor coverage of these services in Medicare appears to be a key driver of poor access. Traditional Medicare does not cover dental, vision, or hearing care.56 Only 1 in 5 traditional Medicare beneficiaries report purchasing standalone dental coverage, and very few (under 5 percent) have standalone hearing or vision coverage.57 Medicaid can provide some coverage of these services for dually eligible beneficiaries, but coverage varies by state, and many beneficiaries are left with limited or no coverage.58 Consistent with these shortcomings, researchers have found that at age 65, dental insurance rates decrease, use of dental services falls, and oral health outcomes worsen.59
Although most MA plans offer some coverage for dental, vision, and hearing services, this coverage has yet to translate into significantly improved access for beneficiaries.60 The failure of MA supplemental benefits to meaningfully improve access is likely driven by the factors described above, including restrictive provider networks, burdensome prior authorization requirements, confusing benefit structures, and limited financial protections.61 For instance, even MA enrollees with coverage for additional benefits pay a high proportion of total costs out of pocket, including 65 percent of vision costs, 76 percent of dental costs, and 79 percent of hearing costs.62
Coverage of dental, vision, and hearing under traditional Medicare could improve upon the current system in several ways. First, covering these services as a formal part of Medicare would allow policymakers to set standards for covered costs and benefits, alleviating the problem of having out-of-pocket costs so high that many people avoid using the benefit at all. Standards set for these benefits in traditional Medicare would then apply to MA, which would follow the same rules that currently govern medical benefits, including network adequacy. Standardized coverage of these services would simplify the experience for beneficiaries and improve awareness of these benefits. Extending coverage to dental, vision, and hearing under traditional Medicare would also allow for wider provider networks to help improve access. Finally, universal coverage of these services in Medicare would help reduce the stark inequities in access for low-income people and people of color, particularly for those who currently have low-quality benefits in MA or who do not have coverage at all in traditional Medicare.
Medicare 2.0 should simultaneously pursue several reforms to make MA simpler and more comprehensive
Medicare 2.0 should define a standard benefit for MA to dramatically simplify beneficiaries’ experiences with comparing and choosing among MA plans. The standard MA benefit should match the expanded services outlined above for traditional Medicare, including dental coverage and long-term services and supports with a focus on home and community-based services. The standard MA benefit should also match the improved cost-sharing structure for traditional Medicare under Medicare 2.0, as detailed in the next section of this report. The standard benefit would represent a floor; MA plans would still be able to offer additional services or lower cost sharing compared with the standard benefit.
Second, Medicare 2.0 should promote greater access to providers within MA, including through strengthened network adequacy requirements for MA plans. For instance, plans should be required to cover at least one comprehensive cancer center in a given geographic region. The Centers for Medicare and Medicaid Services (CMS) should also require MA plans to maintain updated and accurate provider directories, conduct regular audits, and impose penalties on plans that list providers who do not accept MA patients. Draft legislation on mental health parity released by the Senate Finance Committee provides one framework for operationalizing these strategies concerning behavioral health, where greater regulatory action is especially critical.63
Third, Medicare 2.0 should give patients and physicians, rather than insurance companies, greater control over individual health care decisions. One proposal is to delegate routine administrative functions to neutral third-party administrators, rather than for-profit health plans with a direct financial incentive to deny coverage. Practices such as prior authorization and claims processing should be treated as straightforward methods to ensure that care is within the bounds of accepted medical practice and falls under the plan’s covered benefits. The best way to enact this shift is to use Medicare Administrative Contractors—the entities that currently play a key role in administering traditional Medicare—to carry out the routine administrative functions of MA plans in a standardized fashion based on the same rules as traditional Medicare.64 This reform would also promote more equitable care across the Medicare program. It would be a significant benefit from the standpoint of clinicians and providers, who must currently navigate a complex and often confusing set of distinct rules and procedures from varying MA plans. Incorporating MA administrative functions into the same apparatus as traditional Medicare would simplify the experience of delivering care while reducing administrative expenses for providers and payers.
Medicare 2.0 should additionally ensure a seamless process for beneficiaries who want to transition from MA to traditional Medicare. A key barrier in the current system is that patients choosing to switch out of MA in nearly every state can be denied or charged significantly more for a Medigap plan due to a preexisting condition, leaving them with no limit on out-of-pocket costs.65 This policy only perpetuates racial disparities in Medicare, as people of color are already more likely to enroll in MA and, when enrolled in traditional Medicare, less likely to have Medigap.66 An intermediate remedy would be to ensure the guaranteed issue of Medigap plans for people switching from MA in all 50 states. Ultimately, under Medicare 2.0, people would have direct access to comprehensive coverage under the improved traditional Medicare plan without the need for additional supplemental insurance.
Finally, under Medicare 2.0, CMS should ensure that beneficiaries have simplified and easy-to-use information to make an informed choice about whether to enroll in MA or traditional Medicare. One important step would be for CMS to make it easier for beneficiaries to compare networks across MA plans and to ensure that beneficiaries are aware of the broad access to providers in traditional Medicare. CMS must also correct the asymmetry of information about MA vs. traditional Medicare that is currently provided to Medicare beneficiaries and people newly eligible for Medicare. Older adults are hit with a deluge of marketing materials for MA plans: During the nine-week open enrollment period for 2023 coverage, nearly 560,000 ads were aired for MA plans, with 3 in 4 older adults seeing ads daily.67 Because many MA advertisements contain false or misleading information, CMS should strengthen regulations against misleading advertising (as is currently in process) and funding should be significantly increased for programs such as the State Health Insurance Assistance Program, which provides unbiased counseling on Medicare options.68
2. Significantly reduce out-of-pocket costs for patients
Beneficiary affordability challenges
Traditional Medicare beneficiaries without Medigap or other supplemental insurance must pay 20 percent coinsurance for physician services, in addition to a range of other out-of-pocket expenses.69 Without supplemental insurance, there is no upper limit on out-of-pocket costs for traditional Medicare beneficiaries.70 Because of this, 1 in 5 Medicare beneficiaries is considered underinsured—that is, spending more than 10 percent of income on out-of-pocket costs alone.71 Medicare beneficiaries with low incomes are especially likely to be underinsured.72 In total, more than 1 in 4 Medicare beneficiaries (and 2 in 5 beneficiaries who are near poverty) spend 20 percent or more of their income on health care, including premiums and out-of-pocket costs.73
From this perspective, when all its parts are taken together, traditional Medicare without supplemental coverage arguably functions like a high-deductible health plan.74 The harms of high deductibles—because they involve significant out-of-pocket cost exposure—have been well-documented.75 High deductibles lead to reduced use of care, including necessary care.76 For instance, high deductibles have been shown to lead to delayed diagnosis and treatment of breast cancer.77
When all its parts are taken together, traditional Medicare without supplemental coverage arguably functions like a high-deductible health plan.
U.S. Centers for Medicare and Medicaid Services, “Costs.”
Supplemental insurance has become an important tool for traditional Medicare beneficiaries to protect themselves from high out-of-pocket costs. The most common sources of supplemental insurance are private Medigap plans, employer-provided coverage, and Medicaid.78 The primary purpose of these plans is to limit beneficiary exposure to traditional Medicare’s out-of-pocket costs. With Medigap, a variety of standardized plans are available that cover different amounts of cost sharing; private, nongovernmental entities administer these plans.79 Although many Medicare beneficiaries have a form of supplemental coverage, 1 in 10 traditional Medicare beneficiaries—3.2 million people—have no additional insurance.80
Out-of-pocket costs for traditional Medicare enrollees can vary dramatically based on whether a person has supplemental coverage. For instance, in the 1.2 years following a cancer diagnosis, Medicare patients with Medigap paid an average of 14 percent of their household income on out-of-pocket costs, while those with no supplemental insurance spent nearly 24 percent.81 Beneficiaries without supplemental coverage are especially vulnerable to catastrophic expenses: 1 in 10 Medicare beneficiaries without supplemental coverage spent more than 63 percent of their income on out-of-pocket health care costs in the 1.2 years after a cancer diagnosis.82
Even with the protections offered by Medigap plans, costs remain a burden for Medicare beneficiaries overall. Enrollees with Medigap, as with all Medicare enrollees, still face out-of-pocket costs for prescription drugs under Medicare Part D.83 Additionally, beneficiaries can be left with out-of-pocket costs for dental, vision, hearing, and long-term care services, which are not covered under traditional Medicare or Medigap.84 Of course, not everyone can afford a Medigap plan, which results in significant coverage inequities. For example, Black and Hispanic beneficiaries make up 19 percent of the total Medicare population but only 6 percent of Medigap enrollees.85 Likewise, people with incomes under $20,000 per year make up one-third of the Medicare population but only one-seventh of Medigap enrollees.86
Although many Medicare beneficiaries have a form of supplemental coverage, 1 in 10 traditional Medicare beneficiaries—3.2 million people—have no additional insurance.
KFF, “A Snapshot of Sources of Coverage Among Medicare Beneficiaries" (2023).
As previously mentioned, lower-income people who can’t afford Medigap but don’t qualify for Medicaid or have access to other supplemental coverage are left with a difficult choice: Stay in traditional Medicare without supplemental coverage or go with MA and accept the greater restrictions that come with narrower provider networks, prior authorizations, and claims denials. This choice is borne out in the data, where lower-income people are disproportionately likely to enroll in MA or to have traditional Medicare with no supplemental coverage.87 Traditional Medicare beneficiaries without supplemental coverage are also in poorer health and have lower educational attainment compared with the overall traditional Medicare population, further underscoring the health inequities in the current system.88
Beyond inequitable access, a major downside of supplemental Medicare plans is their administrative inefficiency, with only 77 percent of Medigap premium dollars being used on actual medical care.89 The remainder—nearly one-quarter of what older adults spend on Medigap premiums—goes toward administrative costs and profit.90 This stands in stark contrast to the traditional Medicare program, where more than 97 percent of the budget goes toward medical care.91
Beneficiaries covered by MA can also experience significant affordability problems. Costs to enrollees include paying the Medicare Part B premium to obtain MA coverage, paying any additional MA premium, and then paying any associated out-of-pocket costs for covered services.92 On average, MA beneficiaries are responsible for a maximum of about $5,000 in annual out-of-pocket costs for in-network services or nearly $9,000 for both in-network and out-of-network services.93
A critical but underappreciated fact is that out-of-pocket costs in MA are actually higher than in traditional Medicare with supplemental insurance.94 While a report commissioned by UnitedHealth Group estimated that the actuarial value (the percentage of costs paid by insurance rather than out of pocket) of traditional Medicare alone is 84 percent compared with 91 percent in MA, the actuarial value of traditional Medicare plus Medigap can approach 100 percent for Part A and B services.95
A recent systematic review demonstrated that patients with MA have more difficulty affording care than those with traditional Medicare and supplemental coverage such as a Medigap plan.
KFF, “Beneficiary Experience, Affordability, Utilization, and Quality in Medicare Advantage and Traditional Medicare: A review of the literature" (2022).
Consistent with this, a recent systematic review demonstrated that patients with MA have more difficulty affording care than those with traditional Medicare and supplemental coverage such as a Medigap plan.96 Nearly 1 in 5 MA beneficiaries reported a cost-related problem, compared with just 12 percent for traditional Medicare beneficiaries with supplemental coverage.97 As expected, traditional Medicare beneficiaries without supplemental coverage had the most cost-related problems at 30 percent.98
The health care cost burden is an important health equity issue. Half of U.S. adults report difficulty affording health care costs, with greater difficulty faced by those who are Black, Hispanic, or low income.99 One 2022 study found that nearly 40 percent of Medicare beneficiaries prescribed an expensive specialty medication did not fill the prescription.100 With respect to MA, beneficiaries who are Black, have a disability, or are in poor health report more cost-related problems than their peers in traditional Medicare.101 MA beneficiaries with mental health conditions, including depression, reported greater dissatisfaction with out-of-pocket expenses than traditional Medicare beneficiaries with similar health concerns.102
Ultimately, on average, traditional Medicare with supplemental coverage provides beneficiaries with the best financial protection, traditional Medicare alone offers the least protection, and MA falls somewhere in the middle. In the current system, the people with the best financial protection are more likely to have higher incomes, while lower-income people are more likely to be exposed to exorbitant out-of-pocket costs.
In the current system, the people with the best financial protection are more likely to have higher incomes, while lower-income people are more likely to be exposed to exorbitant out-of-pocket costs.
Medicare 2.0 should significantly reduce out-of-pocket costs
Under Medicare 2.0, traditional Medicare should have a single, unified cost-sharing structure that significantly reduces out-of-pocket expenses and provides greater protection for lower-income people. Ideally, there should be no cost sharing for people with low incomes—for instance, for anyone under 200 percent of the federal poverty level. All beneficiaries should have zero deductible, free primary care, and other needed high-value services (such as highly effective care for chronic illnesses), a package of high-value drugs at no out-of-pocket cost, and a reasonable out-of-pocket maximum tied to income. Any remaining cost sharing should be designed to be equivalent to or better than what is currently available in MA.
One desired effect of lower out-of-pocket costs is increased access to care, a critical strategy for combating the underuse of effective care that plagues many Medicare beneficiaries, particularly those from historically marginalized populations who are more likely to skip care or medication due to cost.103 Guaranteeing low cost sharing across traditional Medicare would also be more equitable than the current system, where only some beneficiaries have consistent access to low cost sharing through Medigap plans.104 This reform would also result in greater efficiencies. Those protections would be provided efficiently through the traditional, public Medicare program rather than relying on private Medigap plans that retain more than 20 percent of funds for administration and profit.105
Applications to MA
This improved cost-sharing structure for traditional Medicare would be mirrored in MA. According to program rules, MA plans must offer coverage with cost sharing that is equivalent to or better than in traditional Medicare.106 Likewise, any additional spending under traditional Medicare that results from these changes would be reflected in MA payment benchmarks. Once again, this emphasizes the importance of linking benefit improvements with an end to MA overpayment: The reforms here would raise the baseline level of coverage in Medicare, while ending MA overpayment would eliminate the unjustified disparity in payment levels between traditional Medicare and MA.
3. Modernize prescription drug policy
Existing prescription drug affordability challenges
Prescription drugs are an essential component of modern medicine, and Medicare 2.0 should aim to ensure broad access to medications while promoting genuine pharmaceutical innovation. As detailed in the previous section, many Medicare beneficiaries can face out-of-pocket drug costs so high that they don’t take their medications at all.
Medicare patients across both traditional Medicare and MA can face high out-of-pocket costs even for medications that they could die without.107 Fortunately, the Inflation Reduction Act of 2022 took historic steps toward reducing beneficiary prescription drug costs, including by eliminating coinsurance past the (now former) catastrophic coverage phase for all Medicare Part D plans in 2024—effectively capping out-of-pocket spending at roughly $3,300 annually for brand-name drugs—and formally capping annual out-of-pocket drug costs at no more than $2,000 for all beneficiaries beginning in 2025.108 Before the Inflation Reduction Act, estimated annual out-of-pocket costs were more than $2,500 for lifesaving heart failure medications and more than $10,000 for many cancer drugs.109 Critically, the Inflation Reduction Act also granted CMS the ability to negotiate prices directly with drug manufacturers for a limited number of medications on the market, instituted a $35-per-month insulin cost cap, and established inflation rebates for both Part B and Part D drugs.110 The Inflation Reduction Act represents a significant first step toward modernizing Medicare’s prescription drug policy, and Medicare 2.0 should build on these reforms.
Medicare 2.0 must make medications even more affordable and promote genuine innovation
The first pillar of Medicare 2.0 prescription drug reform is to pursue fair pricing that rewards true pharmaceutical innovation. Medicare’s new negotiation authority and review capacity should be expanded to all drugs, building on the Inflation Reduction Act. CMS should pursue innovative purchasing strategies in these negotiations, such as subscription-based contracts where one sum covers all medication use for a specified time period, as well as competitive bidding and direct contracting with generic drug manufacturers. CMS should also consider patent abuses in price negotiations; for instance, if a medication’s primary patent has expired and the pharmaceutical company is protecting it only with secondary patents or other excessive patenting strategies, it should be paid for at a lower price. The clinical and public health value of drugs should also be a significant factor in price negotiations. This would be a critical mechanism for aligning private incentives for pharmaceutical research and development with the public value created by new discoveries.111
Medicare 2.0 must also ensure that all beneficiaries have fair and affordable medication access. Due to extraordinary scientific advances over the past century, many medications available today can dramatically improve and extend life, especially for people with chronic health conditions. Unfortunately, high out-of-pocket costs are a barrier that prevents many people from accessing these medications. Recent research has put this problem in stark relief, demonstrating that Medicare beneficiaries with higher out-of-pocket costs for medications are more likely to die before their peers.112 In line with this finding, a randomized trial showed that providing free medications after a heart attack reduced the rate of stroke and other serious complications.113
To further build on the affordability improvements of the Inflation Reduction Act, prescription drug coverage should be included under traditional Medicare and covered with no deductible. Medicare 2.0 should also have a package of high-value drugs at no out-of-pocket cost to beneficiaries. The CMS Innovation Center recently announced a “High-Value Drug List” that will offer a set of generic medications at a $2 copay, providing a valuable proof of concept for this approach—which should be extended to branded drugs and generics.114 Reducing or eliminating copayments for effective medications is an important strategy for improving racial equity. For instance, research has found that eliminating copayments for drugs after a heart attack reduced racial disparities in cardiovascular health.115
To help implement this provision, a “U.S. Chronic Disease Task Force” should be created to evaluate the clinical effectiveness of medications for common chronic conditions. This would be analogous to the successful and respected U.S. Preventive Services Task Force.116 In addition to providing useful information for clinicians and patients, the evaluations of the task force could help guide both benefit design and price negotiations by identifying medications with important clinical and public health value. Medicare should aim to cover medications receiving an “A” or “B” recommendation at low or no out-of-pocket cost.
Applications to MA
These reforms would all apply to MA. However, MA beneficiaries also face additional prescription drug affordability challenges. For example, researchers have demonstrated that MA plans design their drug formularies to discourage beneficiaries with high medical costs from enrolling.117 So-called adverse tiering—for example, placing all medications for HIV in a tier with high cost sharing—has been identified by researchers as a practice employed by insurers to discriminate against potentially high-cost patients.118 Regulations to combat the practice in MA should be strengthened and enforced within the framework of Medicare 2.0. In addition to promoting equity for patients with complex chronic diseases, this would help curtail the selective enrollment of healthier beneficiaries into MA plans.
4. Place primary care at the center of the health care system
Primary care is a major underinvestment
Primary care is the bedrock of a well-functioning health care system, but Medicare vastly underinvests in primary care.119 Payment policy largely determines where money flows in the health care system. As a payer for tens of millions of people and as a major funder of graduate medical education,120 Medicare has significant influence on the future of primary care—even more so because other payers tend to follow Medicare’s lead.121
Payment for primary care consists of two main components: payment level and payment form. In simple terms, current payment levels for primary care are low relative to specialty care, and the form of payment has traditionally been fee-for-service (FFS), though with a progressive move toward alternative payment models that can offer more predictable and stable payment streams.122
The level of primary care payment in Medicare is largely determined by the Relative Value Scale Update Committee (RUC). The RUC is a panel organized by the American Medical Association that gives CMS specific recommendations on the “relative value” of a vast range of medical services and procedures. The relative value is supposed to reflect the resources (for example, physician work and practice expense) needed to provide a service. Although on paper the RUC’s recommendations are simply advisory, in practice CMS typically adopts the RUC’s recommendations wholesale.123 For various reasons—including the fact that only a tiny minority of RUC members represent primary care fields—the RUC has consistently undervalued primary care relative to specialty services, and it more generally undervalues cognitive services relative to procedures.124
The form of primary care payment has traditionally been FFS, but Medicare and other payers have been progressively moving toward alternative payment models.125 Even more than in other areas of health care, primary care is particularly ill-suited for FFS payment: The true value of primary care lies not in individual services delivered at discrete moments in time but in relationships formed over years with ever-evolving diagnosis and treatment plans that can involve attending to multiple issues in any single visit.126 Exemplary primary care also relies heavily on multidisciplinary care teams—for instance, nurses, social workers, community health workers, and behavioral health clinicians—not lone physicians billing for services.127
Medicare 2.0 payment policy should center primary care
Medicare 2.0 should pursue several reforms to place primary care at the center of the health care system. While payment for primary care and other health services can and should migrate away from pure FFS, in the short and medium terms, FFS is likely to play at least some role in payment. Payment reform should therefore proceed along two simultaneous tracks. First, the process used to set payment levels should be improved, and second, the form of payment should be reformed to move away from pure FFS.
The process that CMS uses to set payments must be significantly reformed. Most fundamentally, CMS must develop its own internal infrastructure for developing payment rates, with the RUC relegated to a purely advisory role. In the short term, CMS should pursue a bold and permanent 50 percent increase in payment levels for primary care.128 Because primary care accounts for only 2 percent to 5 percent of total spending in traditional Medicare, this transformative investment in primary care would still cost only 1 percent to 2.5 percent of total program spending.129 In the longer term, CMS must undertake the hard and technical work of building out a full process for determining payment rates across the range of service and procedure codes.130
As the payment system moves further away from an FFS backbone, detailed value assessments for individual services will become less important. During this transition, however, it is critical to reform the fee-based payment system to drive positive changes in the health care system writ large—including by elevating primary care.
Ultimately, Medicare 2.0 should pursue a move away from pure FFS for primary care. The current Medicare Shared Savings Program (MSSP), which operates through accountable care organizations (ACOs), represents a major and continuously evolving effort to move traditional Medicare payments away from pure FFS and toward more population-based payment models.131 As of 2023, 38 percent of traditional Medicare beneficiaries are cared for in an MSSP ACO.132 The CMS Innovation Center recently announced a new primary care model (“Making Care Primary”) that represents a further promising step toward paying primary care teams to manage population health.133 These payment models (including hybrids between FFS and prospective payment) are consistent with current best practices for integrated team-based primary care, rather than the traditional fee-for-visit model built around individual physicians. As part of these reforms, all Medicare beneficiaries should be empowered to declare a primary care clinician to serve as the core of their health care team.134
Finally, Medicare 2.0 should include investments in the primary care workforce. While arguably the most important workforce policy is paying more for primary care, which would make it a more attractive career choice for budding physicians and provide the resources to support a wide range of primary care jobs at all levels of training, CMS should couple this with additional direct investments in the primary care workforce. These investments should emphasize expanding existing programs such as the National Health Service Corps and Teaching Health Centers to train more physicians, nurse practitioners, and physician assistants in community health centers and other underserved settings. Medicare should also leverage its role as a major funder of graduate medical education to support primary care and other fields where public health need outstrips current supply. Funding for graduate medical education should be streamlined to provide direct funding of residency positions, rather than the current system where the majority of funding is provided through add-ons to Medicare hospital payments that disadvantage training programs not affiliated with hospitals or that care for more nonelderly patients.135 Medicare should also directly increase the number of training slots in primary care, especially in community settings and in underserved areas.
Applications to MA
All these reforms would directly benefit MA enrollees as well. Workforce and graduate medical education policies will help all patients independent of their insurance plan. Increased primary care payments in traditional Medicare would flow into MA because these higher payments would be reflected in MA benchmarks and because, in general, MA payment rates have been shown to follow traditional Medicare rates.136
5. Reinvent Medicare as a program that finances population health and advances health equity, not just an insurer that reimburses for services
Medicare is evolving to include a focus on population health
While Medicare was initially passed as—and of course still is—an insurance program, the role of CMS has expanded over time to include improving health care quality and stewarding broad changes in health care delivery.137 The core priorities of CMS under Medicare 2.0 should include improving population health (i.e., the health outcomes of a group of people) and health equity (i.e., giving everyone a fair and just opportunity to be as healthy as possible).138 With annual spending approaching $1 trillion and tens of millions of covered beneficiaries, CMS has an enormous opportunity to improve both.139
CMS has already taken steps in this direction. The MSSP—now more than a decade old—is one of Medicare’s primary existing efforts to reorient toward improving population health.140 While progress has been uneven, the best evidence suggests that the MSSP has produced modest cost savings, enabling health care organizations to grow their capacity to manage population health.141 However, payment reforms to date have done too little to combat the health inequities faced by populations of color, in part because a focus on cost saving is often at odds with improving care for historically disadvantaged groups.142 Both the progress—and just as critically, the shortcomings—of the MSSP provide important lessons for future reforms.
It has been more challenging to integrate MA into an overarching strategy for advancing population health or health equity. The fundamental business priority of for-profit firms—including those that operate MA plans—is to deliver value to shareholders, not to pursue specific goals in population health or health equity. MA plans have worse racial disparities than traditional Medicare on critical measures such as avoidable hospitalizations, and the current MA quality bonus program exacerbates racial inequities while having a dubious impact on actual quality improvement.143
Medicare 2.0 must improve population health and health equity
Under Medicare 2.0, the goals of the Medicare program should be expanded to include improving the quality and experience of care for patients and clinicians, promoting high-value care while controlling costs, improving health equity, and ultimately improving the nation’s health. These goals cannot be accomplished if Medicare is viewed only as an insurer paying the bills for care. To achieve these goals, CMS must be conceived of as an agency that finances population health and advances health equity.
Concerning quality improvement, Medicare (and CMS as a whole) should be a persistent, major force for continuous improvement—including, but not limited to, patient safety—for all beneficiaries, and, consequently, for all Americans. Among the many quality improvement tools at Medicare’s disposal are measurement and surveillance through CMS survey and certification programs;144 transparency for public accountability and supports for quality research leveraging its enormous database, with strict attention to personal patient privacy;145 CMS’ convening capacity to organize improvement campaigns, learning collaboratives, and technical support; and opportunities to directly link care excellence to payment incentives. Medicare’s quality improvement methods should always include active participation by beneficiaries in reporting on their experiences of care. Congress and the administration should ensure sufficient funding and regulatory authority for CMS to discharge this crucial public health role.146
Quality improvement endeavors should also support efforts to meet the social needs of patients. One way to do this is by further integrating social investments into Medicare payment models: Health care provider groups receiving payments to manage population health should be granted flexibility to put money into health-related social needs, including by partnering with existing nonprofit and public agencies in the local area.
Another critical reform principle is to target payments toward beneficiary populations’ actual medical needs, not toward their historical spending patterns, which may fail to meet many of those needs. This is a key issue for alternative payment models because spending in a given year is generally benchmarked to spending in prior years for a given population. But historical spending also reflects inequities that payment policy should not perpetuate.
For instance, consider a low-income Medicare patient with poorly controlled diabetes and limited access to transportation who hasn’t seen his doctor in years and isn’t taking any medications. If prospective payments are benchmarked to prior spending patterns, his providers would receive a low level of funding to take care of him because he has used very little health care in recent years (even if that lack of care puts him at risk of expensive complications in the future). In contrast, a payment policy oriented toward medical and social needs would pay providers more for patients like him to enable what he really needs—for instance, his clinic builds a diabetes registry, a population health manager identifies that he has not had a recent visit, a community health worker calls him and helps him arrange a free ride to the clinic through a local program, and his doctor checks his lab work and starts him back on medications for his diabetes. A nurse calls him afterward to make sure he was able to start taking the medication and to review his follow-up plan. The infrastructure that helps this patient—chronic disease registries, population health managers, community health workers, community partnerships, team-based care—enables the health care organization to manage population health for the community it serves.
The lesson from this example is that historically marginalized patients with poor access to care deserve more resources for their care than mere retrospective cost analyses would suggest.147 The “health equity benchmark adjustment” in the CMS Innovation Center’s latest ACO model is a small but positive step in the direction of setting payment levels based on medical and social needs.148 More broadly, under Medicare 2.0 an explicit purpose of payment reform should be to advance health equity, rather than simply manage spending compared to an FFS baseline. Building equity into payment models is an increasingly important area for policy innovation.149
CMS should also require that health care organizations have governance structures to help ensure that population-based payments get to the patients who need them. Taking inspiration from the federally qualified health center model and Oregon’s Coordinated Care Organizations, organizations accepting population-based payments from CMS should be required to have governing boards that include a meaningful percentage of patients and community members, including representation for people with chronic illness and from historically marginalized populations.150
Applications to MA
Integrating MA into the unified strategy for improving population health and health equity called for under Medicare 2.0 is more challenging. While it might be tempting to simply pay MA plans more to enroll disadvantaged beneficiaries, this would be a risky strategy without clear mechanisms to ensure that funds are actually passed through to beneficiaries or their clinical teams—and without clear consequences if they do not. A more targeted, outcome-oriented option is to reform the MA quality program to reward MA plans that improve population health and narrow health disparities over time.151
One way of thinking about traditional Medicare payment reforms (including the MSSP) that make provider teams accountable for the care of populations is that those reforms build a clear alternative to for-profit plans when it comes to managing costs and aiming to improve care. MA plans must compete even harder against these new models for patients and to justify generous CMS payments. As discussed in CAP’s accompanying MA overpayment report, ending overpayments to MA is important to ensuring that MA plans’ performance on population health can be reliably compared to traditional Medicare’s payment reform efforts.152
Conclusion
Medicare 2.0 provides a blueprint for improving Medicare for all beneficiaries by making coverage simple and comprehensive, reducing out-of-pocket costs, modernizing prescription drug policy, centering primary care, and focusing on population health and health equity. Achieving these goals will require simultaneous reforms to traditional Medicare and MA. Importantly, improvements to the overall Medicare program should be linked to reforms that end overpayments to MA plans: MA payment fixes can provide financing for holistic Medicare reforms, and in turn, broad improvements to Medicare can build the political will for action. Taken together, these reforms aim to create a strong Medicare that better serves today’s beneficiaries and protects the program for future generations.
Acknowledgments
The authors extend their sincere appreciation to Brian Keyser for his thorough research assistance.
This work was conducted while Dr. Micah Johnson was a consultant with the Center for American Progress.