Medicare Deductible and Coinsurance Reduction Act

Authorizes the Secretary of Health, Education, and Welfare to provide, through demonstration projects, payments to individuals who are receiving, or are eligible to receive, benefits with respect to post-hospital extended care services under Title XVIII (Medicare) of the Social Security Act or intermediate care facility services or skilled nursing facility services under Title XIX (Medicaid) of such Act, who do not require 24-hour nursing care or supervision, and who desire to establish a noninstitutional living arrangement which will meet their medical and other needs.

Requires payments received to be used to finance appropriate noninstitutional living arrangements which meet the medical and other needs of the individual.

Provides that such payments shall not be includable in gross income under the Internal Revenue Code.

Requires the Secretary to design demonstration projects for the purpose of determining: (1) the feasibility of transferring inpatients of skilled nursing and intermediate care facilities to noninstitutional living arrangements; (2) the types and percentage of such inpatients who could live effectively in a noninstitutional living arrangement; and (3) the types and percentages of such inpatients who would benefit economically and qualitatively from transferring to a noninstitutional living arrangement.

Directs that funds for such payments be made from the Federal Hospital Insurance Fund established under the Social Security Act and from funds appropriated for Medicaid.