Medicare today is both the same—and very different—from the program launched in 1965.

From the perspective of beneficiaries, the traditional Medicare program (TM) hasn’t changed much in 61 years, except through the addition of Part D in 2003 and through changes in provider reimbursement.

But with the addition of the Medicare Advantage program (MA; originally established as Medicare Part C), which enrolled 54% of beneficiaries in 2025, the program as a whole has evolved to reflect changes in health care markets that have occurred over the succeeding six decades.

Policymakers and stakeholders today are assessing and debating what the future of Medicare will be.

There is considerable sentiment that traditional Medicare should be maintained, both to offer enrollees more choice and as a check on the MA program.

But there are several serious issues with the TM benefit design.

TM is designed as a separate hospital benefit (Part A) and medical benefit (Part B), with distinct cost-sharing parameters that reflect coverage practices in the mid-1960s and no out-of-pocket (OOP) cap on cost-sharing.

This cost-sharing design, in turn, has contributed to the growth of Medicare supplemental coverage.

The TM benefit design is outdated.

The lack of an OOP cap means the program provides insufficient risk protection to beneficiaries who incur catastrophic costs.

The cost-sharing parameters within each part do not achieve the desired balance between financial protection and incentives to use appropriate services.

The overall generosity of the benefit, measured as actuarial value, is substantially poorer than that of MA.

This poor benefit generosity, in turn, leads beneficiaries to obtain supplemental coverage, which increases Medicare costs and further erodes incentives for efficient service use.

Finally, the combination of a two-part benefit and supplemental coverage increases the complexity of decisionmaking required of beneficiaries.

This paper lays out the challenges in TM’s current design and proposes solutions, beginning with a catastrophic cap, which will address them.

Traditional Medicare’s current design

A central reason for the existence of health insurance is to protect people against catastrophically large financial risks and alleviate the uncertainties of illness.

To provide this protection, insurers can lower the price paid for services at the point of care through cost–sharing (e.g., charging coinsurance and copayments, which are only a fraction of the original service price).

They can also target the overall level of annual spending by limiting total OOP spending.

An OOP limit greatly reduces uncertainty, and it ensures the well-being of patients in medical crises.

For this reason, almost all health insurance plans, both public and private, include a cap on people’s OOP spending.

All expenses above that cap are paid by the insurer.

TM stands as a stark exception in that it does not have an OOP cap unless beneficiaries purchase supplemental coverage.

At the same time, when beneficiaries do not bear the costs of additional health care, there is a risk of an inefficient increase in the utilization of services, a phenomenon known as moral hazard.

Optimal insurance design balances financial risk protection against moral hazard through a combination of coinsurance and OOP limits.

The current TM cost-sharing structure is a consequence of the historical evolution of the Medicare program.

It does not achieve the desired balance between moral hazard and risk protection.

Medicare’s cost-sharing design is built on its original, bifurcated design.

TM beneficiaries have separate deductibles for Part A and Part B services.

The architecture of Part A cost–sharing is especially baroque.

The inpatient hospital deductible for Part A is $1,736 in 2026.

After 60 days, cost–sharing is $434 per day.

After the 90th day, a beneficiary begins drawing on lifetime reserve days (of which they have 60) at a cost of $868 per day.

After all lifetime reserve days are expended, the beneficiary pays all costs.

Skilled nursing facilities (SNFs) have a separate daily copayment, which kicks in after 21 days at $217 per day.

Cost-sharing should be designed to reduce inefficient use of services by targeting those with high responsiveness to price.

But under today’s prospective hospital payment incentives, there is little reason to impose costs on beneficiaries for long hospital stays (which they cannot control and which hospitals have no reason to induce).

Part A cost-sharing is the opposite of what we would expect under optimal design.

Part B cost-sharing is relatively simple.

The Part B deductible is $283 for 2026.

Most Part B services have coinsurance of 20%.

Coinsurance provides people with incentives to reduce the use of costly care and choose lower–cost providers.

Commercial insurance has evolved to favor copayments, rather than coinsurance, for routine primary care visits, simplifying decisions and encouraging use of these services (66% of commercially insured workers have flat copayments for primary care).

This logic is even more salient for Medicare, which sets all provider prices, leaving less rationale for using coinsurance rather than simple copayments for services.

The complicated coinsurance and deductible structure, together with the lack of an OOP cap, leaves beneficiaries with significant risk.

In many cases, they respond to this risk by purchasing supplemental coverage that covers part of the TM cost-sharing.

Many TM enrollees purchase a supplemental insurance plan called a Medigap plan.

Other enrollees receive supplemental coverage from a former employer.

These supplemental insurance (SI) plans can often eliminate so much risk that they result in substantial moral hazard, increasing utilization and raising program costs for all enrollees.

At the same time, they can be inaccessible both because they are very costly and because they are often underwritten.

The result is a bifurcated program that fails to prevent moral hazard for some enrollees and leaves coverage gaps for others.

The TM cost-sharing structure has also generated an imbalance between the value of TM and MA plans.

Actuarial value is one way to measure the relative generosity of benefits covered by an insurance plan.

It measures the average share of health spending covered by the plan, as opposed to being paid out of pocket by the beneficiary, accounting for cost–sharing features such as coinsurance, deductibles, and OOP limits.

It does not consider premiums.

The actuarial value of Medicare Advantage Prescription Drug (MA-PD) plans in 2025 has been estimated at 92.2%, while traditional Medicare plus Prescription Drug Plans (TM-PDP) without supplemental insurance have an actuarial value of just 85.6%.

This difference in actuarial value favors the choice of an MA plan.

In general, MA and TM enrollees both pay Part B premiums ($185 per month in 2025).

However, MA plans sometimes rebate part of the Part B premium.

MA enrollees also get an OOP cap and often drug coverage, while paying an average of only $17 a month in plan premiums on top of Part B in 2025.

By contrast, adding Medigap can significantly increase the actuarial value of TM, but TM beneficiaries pay substantial costs for that additional coverage.

Medigap added an average of $217 a month in premiums in 2023.

Even then, a TM beneficiary still needs a separate drug plan.

The value proposition between MA and TM is increasingly skewed.

Finally, the enrollment process for TM is too complicated.

New beneficiaries must make separate choices about Part A and B enrollment, prescription drug plans, and Medigap coverage.

Once enrolled, they face complicated cost-sharing arrangements, including separate plan deductibles and an OOP cap for drug coverage, but not for other forms of medical spending.

They can also face penalties for switching between MA and TM, such as underwriting, if they opt into Medigap.

By unifying the deductible and reducing the importance of Medigap, this paper moves toward a simpler choice set for enrollees.

In what follows, we consider benefit design improvements in TM, which are intended to address these issues, noting interactions with MA throughout.

We review options in TM in three main areas: adding an OOP cap (catastrophic coverage), modifying coinsurance and deductible parameters, and restricting/reforming supplemental insurance.

In each case, we discuss the implications for both TM and MA.

We conclude with recommendations for action from among these options.

We also emphasize that these reforms should not come at the expense of the solvency of the Hospital Insurance (HI) trust fund.

Capping out–of–pocket spending

The first step in reforming the TM benefit design is to add an out-of-pocket spending cap.

Such a cap would protect people from catastrophic risk and improve the actuarial value of TM relative to MA.

The numbers from the Urban Institute model (Table 4) imply that adding a $5,000 cap to TM would increase actuarial value by about 5 percentage points.

MedPAC focus groups suggest that adding OOP protection is the most desired change to TM offerings.

Similarly, a recent survey found that one-fifth of MA enrollees reported choosing MA over TM because MA plans do provide an OOP limit.

Introducing an OOP cap would help reduce cost–sharing burdens.

Importantly, this is most protective for those beneficiaries with serious health issues.

According to a 2017 study of Medicare beneficiaries with a cancer diagnosis, the mean annual OOP costs in the first two years after diagnosis were $11,585 (inflation–adjusted) for TM beneficiaries without supplemental insurance, implying that many beneficiaries have even higher OOP spending.

Overall, TM beneficiaries in the 90th percentile of spending or higher spent an average of $10,535 OOP on health services, adjusted for inflation.

For context, the median annual household income for those over 65 was $56,680 in 2024, and this tends to decline substantially with age.

Clearly, OOP costs of $10,535 or more are catastrophic for the typical Medicare beneficiary, and they can be even more overwhelming for many low-income beneficiaries.

For instance, a senior living at 150% of the poverty line is not eligible for dual enrollment in Medicaid, and $10,535 would represent almost half of their annual income.

For those using TM without supplemental insurance, OOP costs can grow especially fast.

In 2016, this group had average OOP spending on services of $7,820 (inflation–adjusted).

Consistent with these high OOP levels, 11% of Medicare beneficiaries delayed medical care due to cost concerns in 2017, disproportionately driven by those with annual incomes below $25,000.

These figures highlight that an OOP cap aligns well with our goals for benefit redesign.

It improves the risk–bearing structure of TM, increases parity between MA and TM, and reduces coverage gaps for those without supplemental insurance.

An OOP cap already exists for Part D spending, and this paper focuses on the implementation of an OOP cap in Medicare Parts A and B.

General considerations in setting an out-of-pocket cap

Many proposals over the years have considered adding an OOP cap to Medicare.

Appendix Table 1 surveys several comprehensive proposals that have been made since the Affordable Care Act (ACA).

Importantly, we do not adjust for inflation when reporting numbers from the OOP cap proposals in this paper.

Both the cap level and any cost estimates are reported directly and in the dollar-years chosen by the authors.

Because many of these estimates predate 2025, the figures may be lower than their 2025 dollar equivalents.

Most reform proposals would both cap OOP spending and change cost–sharing structures and financing more generally.

The Congressional Budget Office (CBO), for instance, has regularly released an estimate on the effect of instituting an OOP cap while simultaneously creating a combined Part A and B deductible and uniform 20% coinsurance rate.

The most recent estimate (2024) was for an OOP cap of $8,500 with a combined Part A and B deductible of $850.

While the OOP cap would increase costs to the Medicare program, the additional changes to the combined deductible and coinsurance would reduce these costs.

In the CBO proposal, the deductible is set higher than the current Part B deductible but lower than the current Part A deductible.

While a decrease in Part A cost-sharing for those with high inpatient spending pushes up costs for Medicare, this is more than offset by an increase in cost-sharing for the majority of beneficiaries who have only Part B spending.

On net, introducing these policies would save around $3 billion per year from 2028 to 2034.

It is also helpful to know what the effect of an OOP cap would be on budgets and beneficiaries when it is considered separately from other policies.

This provides a sense of the possible budget outcomes and factors affecting spending.

These estimates should be used with caution since changes to the OOP cap will interact with Medigap, deductibles, and coinsurance adjustments in ways that may be difficult to predict.

An OOP cap is also likely to reduce Medicaid spending, since Medicare is the primary payer for those who are dual eligible for both programs.

Two recent analyses that focus on the effect of an OOP cap alone are a 2022 Urban Institute proposal and a 2020 KFF proposal.

The three key parameters that determine the cost to the Medicare program of an OOP cap are how the cap will affect service utilization, how it will affect decisions to enroll in TM versus MA, and how it will affect decisions to enroll in supplemental insurance.

When beneficiaries do not bear the costs of additional health care, there is a risk of moral hazard.

This happens because after enrollees reach the cap, their cost-sharing for services falls to zero, and people are much more likely to use services when the price is zero.

This reduction in cost-sharing has been shown to increase service use, even among those with high initial utilization.

There is, however, considerable uncertainty about the extent of this utilization effect, especially in the Medicare program.

A cap will also affect the decision to enroll in MA rather than TM.

One of the benefits of MA plans is that they do incorporate a cap on OOP expenses.

In the short run, evidence suggests that an OOP cap will induce only a small amount of switching.

Medicare beneficiaries show some sensitivity to OOP cost protection for prescription drugs, but often undervalue it relative to its worth.

And historically, even when differences between plans are reflected in salient premium prices, rates of switching between MA and TM are low.

In the longer run, the survey evidence above suggests that an OOP cap in Medicare might induce new enrollees to forego initial enrollment in MA.

Finally, a cap on OOP costs may affect beneficiaries’ decisions to purchase Medigap supplemental insurance.

Some (though not all) SI plans currently include an OOP cap.

In MedPAC focus groups, future beneficiaries expressed that a cap on costs would reduce their desire for supplemental insurance.

Many proposals assume that an OOP cap (and other improvements to the generosity of cost-sharing) would push beneficiaries away from SI.

For example, the KFF 2016 model assumes that the OOP cap, combined with a proposal requiring SI plans to cover at most 50% of the Part A/B deductible, would lead 600,000 enrollees to drop their SI coverage.

Much of this projected change, however, is likely due to the restriction on SI cost-sharing, rather than the cap.

In the absence of this restriction on SI cost-sharing, there is less reason to believe that an OOP cap would have a strong effect on SI preferences.

SI plans reduce all cost-sharing (often to zero for older plans), not just high-end cost-sharing.

This reduction in cost-sharing, rather than the OOP cap, may be the attraction for most beneficiaries.

That’s particularly true for those already enrolled in Medigap, whose preferences appear to be especially sticky.

Indeed, an OOP cap might even encourage enrollment in SI by reducing SI premiums.

An OOP cap would mean Medigap insurers w ould no longer be on the hook for beneficiaries with OOP spending beyond the cap.

The Urban Institute estimates that SI providers would realize $12 billion per year in savings from a $5,000 OOP cap, representing a 26.5% reduction in expenditures relative to current law.

These savings would eventually be passed on to beneficiaries in the form of lower premiums.

The Commonwealth Fund estimates that a $3,500 cap would lower Medigap premiums by at least $3.7 billion per year overall.

The Commonwealth Fund estimated costs of implementation for 2016; as with other estimates in the paper, the change would be substantially larger in 2025 dollars.

If an OOP cap lowers premiums for Medigap plans, it could promote more enrollment in Medigap.

The effect of changes to an OOP cap or cost–sharing on employer–sponsored supplemental insurance plans is even less clear because these plans are more diverse and more opaque.

The Commonwealth Fund estimates that employer–sponsored supplemental insurance plans would save $6.5 billion per year if a $3,500 OOP cap were introduced.

By contrast, the CBO estimated in 2019 that introducing a unified deductible of $750 plus a $7,500 OOP cap would increase employer–sponsored insurance costs by 4.2% overall from 2022 to 2028.

It is unclear how much of this divergence is driven by differences in the proposals versus differences in modeling.

Regardless, it makes clear the unpredictable effect of a cap on the provision of employer-sponsored SI.

The Urban Institute and KFF analyses make different assumptions about these key parameters and reach different conclusions about costs.

The Urban Institute estimates that the Medicare program would incur costs of $39 billion in the first year of implementation under a $5,000 cap, and $25 billion under a $7,550 cap.

It is important to note that some of these increased costs are already borne by the Medicaid program, so the total effect on the federal budget is meaningfully lower than this headline number.

How the cap affects different payers is shown in the chart below, which shows projections for the implementation of a cap in 2023.

When the OOP cap is hit, cost–sharing drops to zero.

A variety of experimental and quasi-experimental evidence has shown that reduced cost–sharing, and especially zero-dollar cost–sharing, leads to substantial increases in the use of discretionary care.

The Urban Institute accounts for this demand response but not for the effect of an OOP cap on the decision to switch between TM and MA or the decision to enroll in SI.

Ways to set the level of the out-of-pocket cap

Many different benchmarks have been proposed for setting an OOP maximum.

Here, we consider a health care burden benchmark, a Medicare Advantage benchmark, and an Affordable Care Act (ACA) benchmark.

Regardless of the benchmark chosen, the cap could be set to increase mechanically with inflation.

Either it could be tied to the consum er price index (CPI), or it could be set based on the average increase in covered Medicare services for the previous year, similar to Part D.

Health care burden benchmark

One reason an OOP cap is important in the first place is that it helps prevent catastrophic levels of spending, which can lead to debt, impoverishment, and worse health outcomes.

Therefore, it may be reasonable to benchmark an OOP cap to a “health care burden” standard, which takes income, assets, cash savings, or consumption into account.

The th ree charts below, adapted from KFF data for 2024, give a sense of the distribution of income and savings among Medicare beneficiaries.

This data makes clear that an OOP cap set at a single level for all beneficiaries is likely to be regressive.

This occurs because the cap is more likely to affect well-off beneficiaries, who may spend more on coverage they can afford, but less likely to be binding for low-income beneficiaries.

A single cap at $7,000, for instance, would, on average, reduce total OOP spending for those with incomes of $40,000 or more, but not for those with incomes less than $40,000.

Affordable Care Act benchmark

Another option is to set the traditional Medicare OOP cap in line with the Affordable Care Act.

Even though the populations served are quite different, applying the ACA’s OOP standard to TM helps ensure that federal policy is consistent across programs.

The ACA made OOP limits a nearly ubiquitous part of health insurance plans, and it provides a clear benchmark.

In 2026, the basic ACA cap was $10,600 for an individual.

Such a cap would affect a small percentage of TM beneficiaries each year.

If applied by a TrOOP standard, this would likely affect a single–digit percentage of beneficiaries and, using KFF estimates as an upper bound, would likely cost less than $3 billion per year (perhaps much less).

However, the ACA also incorporates an income-related cost-sharing cap, with cost–sharing reductions set out in section 1402 (c), that applies to ACA Marketplace silver plans.

The exact OOP maximum for a given plan varies, but an example of a typical structure is presented in Table 6.

Medicare Advantage and guaranteed issue

Currently, there is a six-month Medigap open enrollment period for beneficiaries over 65 who are enrolling in Medicare Part B for the first time.

Unfortunately, it can be extremely difficult for those enrolling after the initial six-month window to obtain a Medigap plan because insurers, after the window period, are allowed to use medical underwriting to deny a policy or charge higher premiums.

Guaranteed issue protection could allow those in Medicare Advantage plans to enroll in TM plans without being subject to medical underwriting.

This reform is different from the other SI reforms listed here because it would likely increase, rather than curb, enrollment in Medigap plans.

This means it is important to combine guaranteed issue with the other reforms proposed above.

If combined with a tax or Medigap restriction, then on balance, the reforms could still reduce SI enrollment, and savings would still be seen.

The argument for guaranteed issue protection in the context of the overall reform project is that some portion of enrollees would benefit from the large range of options in TM, but they are currently locked into MA plans because of concerns about cost.

This is a special problem for those experiencing negative health shocks who might benefit from the flexibility of TM.

Indeed, the population of switchers appears to be sicker on average, and they cost more than the typical TM enrollee.

Experiencing a negative health shock is associated with transitioning from MA to TM.

Guaranteed issue can empower enrollees, both sick and healthy, to make the choice that is right for them.

The bottom line is that guaranteed issue protection is unlikely to be a significant drag on the budget.

It is even possible that it is a budgetary positive if beneficiaries who move from MA to TM with Medigap are less costly to insure under TM.

Regardless, guaranteed issue is quite likely to increase Medigap premiums for the entire pool of Medigap beneficiaries.

This probably should not be a major concern since Medigap plans are currently priced too low given their externalities.

The introduction of an OOP cap may make switching between MA and TM more likely, even without guaranteed issue, but guaranteed issue is a reasonable way to try to accelerate the process and is not incompatible with Medigap restrictions or taxation.

Concluding observations

This paper reviewed options to improve TM across three design domains, with the intention of maintaining TM as a good choice for Medicare beneficiaries.

The most fundamental change we consider would involve capping beneficiary OOP costs.

That reform stems directly from the basic principles of insurance—the most valuable forms of coverage protect against large losses, and currently TM does not provide that protection.

A well-designed catastrophic cap would both improve efficiency in risk–bearing and strengthen TM’s competitive position relative to MA.

While a range of caps is plausible, a cap of $5,000, roughly the average currently imposed by MA plans, would achieve these efficiency and competitive goals.

Estimates of the cost of a cap at this level range from about $20 to $40 billion per year.

The establishment of an OOP cap should be accompanied by a redesign of Medicare’s cost–sharing provisions and reform of the supplemental insurance market.

Current cost–sharing in TM is complex, and its design, which particularly targets inpatient treatment, is generally inconsistent with the areas where concerns about overuse are greatest.

There is little downside to unifying the deductible for Medicare Parts A and B into a single annual deductible for all Part A and B spending.

This would substantially reduce complexity.

The design of cost–sharing above the deductible, and in particular, whether there should be constant coinsurance or a schedule of copayments, involves a trade-off between complexity and policies that promote the use of higher–value services.

Given the limited evidence o n the effectiveness of service-specific cost-sharing and the need for continuous updates of this design, it may be more straightforward to adopt simple coinsurance rates.

Most, though not all, TM beneficiaries have supplemental insurance, either by purchasing Medigap coverage or through employer retiree plans.

One reason people choose this coverage is to cap OOP payments—but that is not the only reason.

Supplemental insurance reduces cost-sharing for beneficiaries, providing people with risk and convenience protection, but it also substantially increases Medicare spending.

Eliminating supplemental insurance altogether would generate considerable savings for Medicare, but even if coupled with an OOP cap and redesigned cost-sharing in TM, it would disadvantage many current purchasers.

A middle ground would be to tax all sources of supplemental insurance and to use the funds to enhance the TM program, further reducing the demand for supplemental insurance.

At the same time, it would make sense to make regulatory reforms to the supplemental insurance market.

Currently, in most states, people who seek to enroll in supplemental insurance after the initial enrollment window closes face underwriting, intended to limit adverse selection into supplemental coverage.

Difficulties with enrolling in supplemental insurance may impede MA beneficiaries from returning to TM.

Evidence from states that have guaranteed issue for Medigap coverage suggests that while guaranteed issue is likely to raise Medigap premiums somewhat, adverse selection will not destroy this market.

Requiring guaranteed issue for Medigap coverage would make transitions from MA to TM easier and would provide people with serious health conditions valuable protection.

Appendix

Table 2.

Overview of supplemental insurance reform options

Table 3.

Specifics of various supplemental insurance reform proposals

Table 4.

Out-of-pocket health spending, Social Security income, and spending as a share of Social Security income among Medicare beneficiaries

Table 5.

Out-of-pocket cap consistent with 10% or 20% of Social Security benefits among Medicare beneficiaries

Table 6.

Out-of-pocket cap levels based on the cost-sharing reductions in the Affordable Care Act

Table 7.

Level of combined traditional Medicare deductible required to hold Medicare program spending constant in 2011, plus the impact on out-of-pocket spending among Medicare beneficiaries

Table 8.

Characteristics of traditional Medicare beneficiaries by type of supplemental coverage

Table 9.

Summary of the cost impacts of different Medigap reform options

Acknowledgements and disclosures

The authors gratefully acknowledge financial support from the Commonwealth Fund and Arnold Ventures.

The authors thank Michael Chernew, Gretchen Jacobson, and Wendell Primus for their comments on earlier drafts.

The authors also thank Shivaek Venkateswaran for fact-checking assistance and Rasa Siniakovas for editorial and web posting assistance.

Footnotes

Throughout the paper, numbers noted as inflation-adjusted are adjusted to 2025 dollars by the core consumer price index.

Brookings Institution is committed to quality, independence, and impact.

We are supported by a diverse array of funders.

In line with our values and policies, each Brookings publication represents the sole views of its author(s).

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