These costs do not include spending on premiums for Medicare, Part D, or supplemental coverage. On average, premiums added another $1,900 to annual costs. If we add premiums to medical care spending, one-fifth of all beneficiaries —12 million people — spent 20 percent or more of their incomes on coverage and care (data not shown).

Implications

In the period between 2010 and 2016, we saw substantial shifts in overall Medicare spending and out-of-pocket spending by type of service, indicating a mix of positive news and concern about the future. The slowdown in spending and the decline in spending on core Medicare services (including physician and inpatient care) likely reflect a combination of delivery system changes, increased effectiveness of medical care, and strategic payment policy reforms enacted with the Affordable Care Act (ACA). These policies included limiting payment increases per service, as well as incentives to deliver improved care at lower costs by holding providers more accountable.

The ACA also included reforms to bring cost relief and better protection to beneficiaries in the Medicare Part D program for prescription drugs. This included gradually improving coverage in the “donut hole” — the gap in coverage that occurs in Part D. Congress then accelerated improvements in the Bipartisan Budget Act of 2018; in 2019 beneficiaries will be responsible for 25 percent of the cost of brand-name drugs rather than 35 percent.6 Studies that examined Part D spending beyond 2016 find that reforms initially decreased out-of-pocket costs for those in the coverage gap but costs have continued to rise as a result of rapid increases in prices.7 MedPAC finds that growth in program spending on drugs was driven almost entirely by increases in the average price per prescription.8

Prices for specialty drugs and even key generic drugs have been rising rapidly for private payers, as well as Medicare. Although a recent study suggests that some of the new medications have helped contribute to reduced use of expensive inpatient and other medical care services,9 the United States continues to pay substantially more than other countries do for new drugs as well as those that have been on the market for years.

In 2016, Medicare spent an estimated $128.6 billion on Part D plus Part B drugs — this amounts to nearly 20 percent of total Medicare spending. Given its substantial market share, Medicare could use its purchasing and pricing leverage to yield cost relief for the program as well as beneficiaries. But without effective policies aimed at prices, Medicare and beneficiaries will remain at financial risk.

Care Systems

The data also highlight progress in keeping beneficiaries out of nursing homes and hospitals. This conclusion is supported by other studies that find the total number of hospitalizations and the number of beneficiaries having at least one hospitalization have declined among Medicare beneficiaries since the early 2000s.10 Hospital readmissions also have declined.11

Beneficiaries continue to face costs for meeting their needs at home. Approximately one-fifth of Medicare beneficiaries have severe functional or cognitive impairment that requires long-term services and supports.12 Medicare beneficiaries who receive paid help for personal care at home spend an average $9,100 annually out-of-pocket.13 These costs are not accounted for in this analysis because the data are not included in the Medicare Current Beneficiary Survey.

Uncovered Services and Limits on Out-of-Pocket Costs

Uncovered services pose financial and health risks for beneficiaries. Dental, vision, and hearing services represents a quarter of out-of-pocket spending for community-dwelling beneficiaries. Insurance coverage of these services is relatively limited, and varies even among state Medicaid programs. Because of the high costs of care, many Medicare beneficiaries go without these important services.14 Untreated oral health issues and vision and hearing loss are associated with poor health outcomes and higher health care use and spending.15

Conclusion

Persistently high cost burdens and the sharp increase in spending on drugs, despite slower growth in total spending, underscore the need for policies to address both payments and benefits to ensure Medicare can help protect the health and financial independence of its nearly 60 million beneficiaries. Without more direct policy intervention through price regulation and improved benefit coverage, Medicare beneficiaries will remain at risk for high out-of-pocket costs and potentially going without needed care.