Should Traditional Medicare Have an Out-of-Pocket Cap?

If you're enrolled in Original Medicare — the traditional fee-for-service program run directly by the federal government — you are living with a financial exposure that most people don't fully appreciate until a serious diagnosis arrives. Unlike virtually every other form of health insurance in the United States, traditional Medicare has no annual out-of-pocket maximum. There is no ceiling. If you have a bad year medically, your costs can keep climbing with no limit in sight. A new analysis from the Urban Institute takes a hard look at what it would mean — for beneficiaries and for the federal budget — if Congress were to change that.

To understand why this matters so much, start with the numbers. In 2025, Medicare Part A charges a hospital deductible of $1,676 per benefit period — not per year, but per benefit period, which means you could theoretically owe it more than once in a calendar year if you're hospitalized, discharged, and then readmitted after 60 days. After 60 days in the hospital, you owe $419 per day in coinsurance. After 90 days, that jumps to $838 per day. On the Part B side, you pay a $257 annual deductible and then 20% of all covered outpatient services — with no cap on that 20%. If you're receiving chemotherapy, dialysis, or frequent specialist visits, that 20% can add up to staggering sums over the course of a year.

According to CMS.gov data, approximately 35 million people were enrolled in traditional fee-for-service Medicare as of 2023, representing roughly 40% of all Medicare beneficiaries. The remaining 60% are in Medicare Advantage plans, which by law must include an out-of-pocket maximum — set at no more than $9,350 for in-network services in 2025. That structural difference is one of the most significant and least-discussed divides in American health coverage for seniors. The people most likely to remain in traditional Medicare tend to be older, sicker, and living in rural areas where Medicare Advantage plan options are limited — which means the people with the least protection from catastrophic costs are often the ones who face the highest medical bills.

The Urban Institute's research modeled several scenarios for adding an out-of-pocket cap to traditional Medicare, examining caps set at different thresholds — ranging from roughly $3,500 to $7,500 annually. The findings reveal a fundamental tension in health policy: the beneficiaries who would gain the most financial protection are those with the highest medical spending, but protecting them costs money, and that cost has to come from somewhere. Under most modeled scenarios, adding a cap without any accompanying changes to cost-sharing structure would increase federal Medicare spending, because the government would be absorbing costs that currently fall on beneficiaries or their supplemental insurance.

Here's where it gets nuanced for individual beneficiaries. Most people in traditional Medicare who can afford it already buy a Medigap supplemental insurance policy — also called Medicare Supplement insurance — to cover the gaps that Original Medicare leaves open. Medigap Plan G, the most popular option for new enrollees since 2020, covers the Part A deductible, all Part A coinsurance, all Part B coinsurance after the Part B deductible, and foreign travel emergency care. In practical terms, Plan G functions as an out-of-pocket cap, because once you pay the Part B deductible ($257 in 2025), your Medigap policy picks up virtually everything else. The average monthly premium for a Medigap Plan G policy for a 65-year-old non-smoking woman ranges from roughly $100 to $200 per month depending on the state and insurer, according to data compiled by the American Association for Medicare Supplement Insurance.

But here's the catch: not everyone can get Medigap, and not everyone can afford it. If you missed your Medigap Open Enrollment Period — the six-month window that begins the month you turn 65 and enroll in Part B — insurers in most states can deny you coverage or charge you higher premiums based on your health history. This is called medical underwriting, and it means that someone who develops cancer or heart disease before they try to buy a Medigap policy may find themselves locked out of the very coverage that would protect them. This is precisely the population that a federal out-of-pocket cap would help most: people in traditional Medicare who are too sick to qualify for Medigap at standard rates, or who cannot afford the premiums.

Thirteen states have enacted their own protections that go beyond federal rules. If you live in California, Idaho, Illinois, Kentucky, Louisiana, Maine, Maryland, Missouri, Nevada, New Jersey, New York, Oklahoma, or Oregon, you may have access to what's called the birthday rule — a 30-day window each year around your birthday during which you can switch Medigap plans without medical underwriting. New York and Connecticut go even further, requiring guaranteed issue for Medigap year-round regardless of health status. If you live in one of these states and you're currently in a Medigap plan that no longer fits your needs, or if you've been unable to get Medigap coverage due to health conditions, it's worth contacting your state insurance department to understand your rights.

The Urban Institute analysis also examined what would happen if a spending cap were paired with changes to Medicare's cost-sharing structure — for example, replacing the current patchwork of deductibles and coinsurance rates with a single unified deductible and a flat coinsurance rate up to the cap. This kind of restructuring could actually reduce federal spending compared to the current system in some scenarios, because it would eliminate the open-ended 20% Part B coinsurance that currently has no ceiling. The tradeoff is that some beneficiaries who currently have low medical spending would pay slightly more in the early part of the year, while those with catastrophic costs would be protected from financial ruin.

For beneficiaries trying to make practical decisions right now, the policy debate in Washington matters less than the choices available during enrollment periods. If you are in Original Medicare without any supplemental coverage, you are in the most financially vulnerable position possible. The Annual Enrollment Period, which runs from October 15 through December 7 each year, allows you to switch from Original Medicare to a Medicare Advantage plan, which would give you an out-of-pocket maximum. However, switching to Medicare Advantage means accepting a network of providers and prior authorization requirements that traditional Medicare does not impose — a tradeoff that many beneficiaries, particularly those with established specialist relationships, are unwilling to make.

If you want to stay in Original Medicare but add financial protection, your options depend heavily on when you're reading this and what state you live in. If you're within your initial Medigap Open Enrollment Period, apply for a Medigap plan immediately — Plan G offers the most comprehensive coverage for new enrollees, and Plan N offers lower premiums in exchange for copays of up to $20 for office visits and $50 for emergency room visits. If you're past your Open Enrollment Period and live in a state without guaranteed issue protections, you may need to apply and answer health questions, but you should still apply — insurers make individual underwriting decisions, and some conditions that feel disqualifying may not be.

A Data Snapshot worth noting: according to CMS.gov data from the 2024 Medicare & You handbook and CMS enrollment reports, approximately 13.4 million Medicare beneficiaries were enrolled in a Medigap policy as of 2022 — meaning roughly 38% of traditional Medicare enrollees had supplemental coverage through Medigap, while the remainder relied on employer retiree coverage, Medicaid dual eligibility, or had no supplemental coverage at all. That last group — Original Medicare enrollees with no supplemental coverage — is estimated at several million people, and they represent the population most exposed to catastrophic out-of-pocket costs and most likely to benefit from a federal spending cap.

The political path to adding an out-of-pocket cap to traditional Medicare is uncertain. The Medicare Modernization Act of 2003 created Medicare Part D and introduced the concept of a drug cost cap, which was eventually strengthened by the Inflation Reduction Act of 2022 — which capped out-of-pocket drug costs at $2,000 per year starting in 2025. That precedent shows that Congress can and does act on catastrophic cost exposure when the political will exists. Whether the same logic will be applied to medical services under Parts A and B remains an open question, but the Urban Institute's modeling provides a policy roadmap that advocates and lawmakers can use.

For now, the most important thing you can do is not wait for Washington. Review your current coverage before the next Annual Enrollment Period. If you're in Original Medicare without Medigap, get quotes — you can compare Medigap plans at Medicare.gov or by calling your State Health Insurance Assistance Program (SHIP), which provides free, unbiased counseling. If you're in a Medicare Advantage plan, check whether your plan's out-of-pocket maximum has changed for the coming year — plans can and do raise their caps annually, and a plan that capped costs at $5,000 last year may cap them at $7,500 this year. The protection you think you have may not be the protection you actually have.