A report by the nonpartisan Medicare Payment Advisory Commission, or Medpac, recommended a new 20 percent charge for the 90 percent of Medicare beneficiaries who buy supplemental insurance to cover medical costs that Medicare Part A and Part B do not cover.

Medpac, which advises Congress about Medicare, also proposed a series of other innovations including a new $5,000 upper limit for annual out-of-pocket expenses to protect senior citizens from the astronomically high cost of catastrophic illnesses.

Medicare, started in 1965, is the U.S. government's health insurance program for the elderly and disabled. The $549 billion-a-year program and its $429 billion sister program for the poor, Medicaid, are widely seen as major drivers of the U.S. debt and deficit because of a continuous rise in healthcare costs that has been pushing program spending higher for decades.

The main thrust of Friday's proposals is to make beneficiaries shoulder more costs to control Medicare's growth, a task that has largely fallen on the shoulders of physicians and other healthcare providers up to now in the form of payment cuts.

"While much of the commission's work focuses on providers and their payment incentives, how beneficiaries view the Medicare program and how they make decisions about their health care are vital to the program's success," Medpac said.

Lawmakers of both parties have voiced support for similar ideas in the past, though none of the recommendations are likely to become law any time soon. But they go to the heart of a hotly contested election-year battle between Republicans and Democrats over how to reform Medicare while keeping the support of senior citizen voters in the November election.

Advocates for Medicare beneficiaries warned that the changes proposed by Medpac would mean costlier coverage.

"For most people with Medicare, this will increase expenses," said Judith Stein, executive director of the nonprofit Center for Medicare Advocacy. "It's a bad scenario for relatively older and disabled people."

The Medpac report is addressed to Vice President Joe Biden, as president of the Senate, and House Speaker John Boehner. But congressional aides say major healthcare initiatives, particularly involving sensitive issues including Medicare, are unlikely to make much progress until after a new Congress is installed in 2013.

Supplemental insurance plans enable about 90 percent of traditional Medicare beneficiaries to avoid many of the program's out-of-pocket costs, including a 20 percent cost-sharing requirement for physician care and outpatient services, Medpac said.

As a result, beneficiaries have few financial incentives to avoid the use of costly and unnecessary procedures, and Medpac's recommendation would seek to lower spending by increasing the upfront costs for seniors and the disabled.

If such a policy were implemented today, it could affect about 33 million people who receive traditional Medicare and have supplemental coverage through a former employer, a so-called medigap insurance plan and other sources.

But the report said the cost of health coverage would not change for beneficiaries in the aggregate, because of the new cap on out-of-pocket expenses and other innovations.

The Medpac report also calls for new $500 deductibles for Part A hospital and Part B physician and outpatient services, replacing a current system that charges higher deductibles for hospital visits and lower costs for doctors and clinics.

The commission also recommended giving U.S. Health and Human Services Secretary Kathleen Sebelius the authority to develop a new fee-for-service design that would incorporate the recommended changes.

(Reporting by David Morgan; editing by Matthew Lewis, Bernard Orr)

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