Traditional Medicare OOP Cap Could Lower Costs, Raise Federal Spending

Although an annual out-of-pocket (OOP) spending cap for traditional Medicare (TM) may provide beneficiaries with financial protection and slow migration to Medicare Advantage (MA), it would increase annual federal Medicare spending by $39 billion to $96 billion, according to a microsimulation study published in JAMA Health Forum on October 2, 2026.¹

OOP Cap Could Narrow TM, MA Gap

More than half of Medicare beneficiaries are enrolled in MA, driven in part by supplemental benefits, cost-sharing protections, lower premiums, and the convenience of obtaining coverage through a single plan. Employers have also increasingly shifted retiree coverage from TM supplements toward employer-sponsored MA plans.

However, MA has limitations, including restricted provider networks, prior authorization and coverage denials, and supplemental benefits that may not match marketing claims. MA also creates a growing fiscal burden for the federal government, with Medicare payments to MA plans estimated to be higher than spending for similar beneficiaries in TM.

One policy proposal to make TM benefits more comparable to MA’s is to establish an annual OOP spending cap for Parts A and B of TM. Unlike MA, which requires an OOP cap for medical spending, TM currently has no such protection, leaving beneficiaries without supplemental coverage vulnerable to potentially substantial costs. Although an OOP cap could provide greater financial protection and potentially slow migration from TM to MA, researchers noted that it would shift financial risk from beneficiaries to the federal government and could affect beneficiary plan choices, health care use, and spending.

To better understand this impact, they conducted a study using a microsimulation model to estimate the financial and behavioral effects of implementing an OOP cap for Parts A and B in TM. The analysis examined how the policy would affect beneficiaries across the spending distribution and the broader fiscal implications for CMS.

Using a microsimulation model based on national Medicare and insurance data from 2020 to 2024, researchers projected the effects of introducing annual OOP caps for Parts A and B of TM through 2034. The analysis compared the current system with 3 OOP cap scenarios of $3000, $5000, and $10,000. It incorporated behavioral responses such as switching between TM and MA, changes in health care use, and changes in MA spending.

The study, therefore, assessed how each OOP cap would affect Medicare enrollment, beneficiaries’ annual OOP and premium spending, and total annual Medicare expenditures.

Lower Caps Increase Savings, Shift Enrollment

Between 2026 and 2034, mean annual beneficiary savings were estimated at $1568 under a $3000 cap, $1138 under a $5000 cap, and $707 under a $10,000 cap. Lower OOP spending accounted for about 68% of gross beneficiary savings, with reduced Medigap premiums making up the remaining 32%. However, higher Medicare spending would raise Part B premiums across both TM and MA by $164, $113, and $61 per member per year under the $3000, $5000, and $10,000 caps, respectively.

Enrollment effects were substantial at lower thresholds. Under a $3000 cap, TM enrollment was projected to exceed MA enrollment until the 2 programs reached parity in 2034. Under a $5000 cap, the programs grew at similar rates until 2030, after which MA pulled ahead. By contrast, MA remained larger throughout the study period under a $10,000 cap.

Those projections mark a departure from recent trends, as a study published in the September issue of The American Journal of Managed Care^® (AJMC^®) found that switching from MA back to TM became rare between 2016 and 2022.² Earlier AJMC research, published in 2024, linked the rise of MA in part to employers moving retirees away from TM supplemental coverage.³

Federal Medicare Costs Rise With Lower OOP Caps

The $3000, $5000, and $10,000 caps were projected to raise annual CMS expenditures by $96 billion (90% simulation uncertainty interval [SUI], $80-$114 billion), $70 billion (90% SUI, $55-$85 billion), and $39 billion (90% SUI, $29-$50 billion), respectively.¹ About 72% of the added spending occurred in TM, and the remaining 28% flowed to MA through higher benchmarks.

“OOP caps, especially at lower thresholds, would substantially shift beneficiaries from MA to TM,” the authors wrote.

Weighing the Future of OOP Caps in Medicare

Based on their findings, the researchers noted that OOP caps in TM would significantly affect enrollment patterns, federal Medicare spending, and beneficiary costs but could face legislative challenges because increases in mandatory Medicare spending generally must be offset under statutory pay-as-you-go rules. Implementing an OOP cap could therefore require substantial spending offsets or broader benefit and financing reforms, such as site-neutral payment reforms or reductions in MA overpayments.

OOP caps could also benefit clinicians and hospitals by reducing the administrative burden and payment uncertainty associated with collecting high OOP costs from beneficiaries, some of which ultimately become uncollected debt. The researchers suggested that a $10,000 cap could offer the best balance between beneficiary savings and federal costs.

At the same time, the researchers acknowledged the study’s limitations, one being that the model considered only the financial benefits to beneficiaries. The analysis also relied heavily on several assumptions about beneficiary behavior, Medigap premiums, and the relative costs of TM and MA.

Still, the results suggest that, although it would increase federal Medicare spending, introducing an OOP cap in TM could substantially reduce beneficiaries’ financial burden.

“These findings highlight the trade-off between improving financial protection for beneficiaries and the substantial federal costs of extending an OOP limit to [TM],” the authors concluded.

References

1. Ryan AM, Dixit MN, Maughan MM, Meyers DJ, Geng F. Financial effects of an out-of-pocket cap in traditional Medicare. JAMA Health Forum. 2026;7(10):e263386. doi:10.1001/jamahealthforum.2026.3386
2. Mackleby G, Liu A, Trish E. Plan switching among Medicare Advantage enrollees dually eligible for Medicaid. Am J Manag Care. 2026;32(9):487-490. doi:10.37765/ajmc.2026.90004
3. Marr J, Polsky D. Traditional Medicare supplemental insurance and the rise of Medicare Advantage. Am J Manag Care. 2024;30(5):218-223. doi:10.37765/ajmc.2024.89539