November 13, 2013

Mandatory SpendingOption 9

Function 570 - Medicare

Increase Premiums for Parts B and D of Medicare

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Mandatory Outlays                        
  Increase basic premiums 0 -4 -10 -16 -25 -35 -40 -44 -49 -52 -55 -274
  Freeze income thresholds for income-related premiums 0 0 0 0 0 0 -3 -4 -6 -7 0 -20
  Both of the above policiesa 0 -4 -10 -16 -25 -35 -42 -46 -52 -56 -55 -287

Note: The first and third alternatives would take effect in January 2015; the second alternative would take effect in January 2020.

a. If both policies were enacted together, the total effects would be less than the sum of the effects for each policy because of interactions between the approaches.

All enrollees in Part B of Medicare (which covers physicians’ and other outpatient services) or Part D (which covers prescription drugs) are charged basic premiums for that coverage. Those premiums are currently $104.90 per month for Part B and $31.17 per month for Part D. When the Part B program began, in 1966, the basic premium was intended to cover 50 percent of Part B costs per enrollee over age 65, with the rest of those costs funded by general revenues. Later legislation reduced that share, however, and collections of Part B premiums declined to less than 25 percent of those costs. The Balanced Budget Act of 1997 set the Part B premium at about 25 percent of Part B costs per enrollee over age 65. Part D, which began in 2006, covers prescription drugs not covered by Part B; the Part D benefit is delivered by private insurers. On average, premiums cover 25.5 percent of the per capita costs of the basic Part D benefit. Enrollees with low income and few assets receive subsidies to cover some of their Part D premiums and cost-sharing payments.

Enrollees in Parts B and D who have relatively high income pay a higher premium known as the income-related premium (IRP). The amount of the IRP depends on an enrollee’s modified adjusted gross income, or MAGI (the total of adjusted gross income and tax-exempt interest). The MAGI thresholds established for income-related premiums create four income brackets and premiums that correspond to them. For enrollees who pay IRPs, total monthly premiums in 2013 range from $146.90 to $335.70 for Part B and from $42.80 to $97.80 for Part D. Those amounts are set to cover 35 percent to 80 percent of costs per enrollee in Part B and in Part D.

Changes over time in the thresholds for income-related premiums affect the number of Medicare enrollees who pay IRPs and the premiums they pay. Between 2008 and 2011, the thresholds for the Part B IRPs rose in line with increases in the consumer price index for urban consumers. The Affordable Care Act established IRPs for Part D beginning in 2011, and it froze through 2019 the income thresholds at which IRPs begin for both Parts B and D—at $85,000 for single beneficiaries and $170,000 for married couples who file joint tax returns. Under current law, the income thresholds will revert in 2020 to the levels they would have reached had they been indexed for inflation since 2007. The Congressional Budget Office projects that the percentage of enrollees subject to income-related premiums will increase from 5 percent now to 10 percent in 2019, as income growth pushes more enrollees’ income above the fixed thresholds. That percentage is projected to drop to 7 percent in 2020 (as the thresholds revert to the amounts they would have reached with indexing) and then increase gradually over time, reaching 8 percent in 2023, as the growth of income outpaces the overall growth of prices.

This option would raise the premiums for Parts B and D of Medicare in various ways:

  • The first alternative would increase the basic premiums from 25 percent of Part B costs per enrollee and 25.5 percent of Part D costs per enrollee to 35 percent of both programs’ costs; that increase would occur gradually over a five-year period beginning in 2015. For Part B, the percentage of costs per enrollee covered by the basic premium would rise by 2 percentage points a year through 2019 and then remain at 35 percent. For Part D, that percentage would increase by 1.5 percentage points in the first year and 2 percentage points a year from 2016 through 2019 and then remain at 35 percent. By 2023, basic premiums would rise to $200 a month for Part B and $63 a month for Part D under this alternative. Those changes would have no effect on the total premiums of enrollees paying income-related premiums. In all, this alternative would decrease net Medicare spending (total Medicare spending minus beneficiaries’ premiums and other offsetting receipts) by $274 billion between 2015 and 2023, CBO estimates.
  • The second alternative would freeze through 2023 all of the income thresholds for income-related premiums, extending the current freeze by four years. Under this alternative, CBO estimates, net Medicare spending would be reduced by $20 billion between 2020 and 2023, and the share of enrollees paying income-related premiums would rise from 10 percent in 2019 to 13 percent in 2023.
  • The third alternative would combine the changes in the first two: increasing basic premiums for Parts B and D to 35 percent of costs per enrollee and freezing the income thresholds for income-related premiums. Those changes would reduce net Medicare spending by $287 billion through 2023, CBO estimates (slightly less than the sum of the savings from each alternative alone because of the ways in which the two policies would interact). The combined changes would raise premiums for most enrollees in Parts B and D and would increase the share of enrollees paying IRPs to 9 percent in 2023.

One rationale for raising premiums is that it would shift some costs currently borne by all taxpayers to Medicare enrollees. Another rationale is that higher premiums for Part D would increase competitive pressure in the market for prescription drug plans by absorbing a larger share of enrollees’ income and thus giving enrollees a stronger incentive to choose less expensive plans. Such pressure could cause prescription drug plans to lower their bids, which would generally lead to reductions in the premiums for those plans, in the federal government’s costs, and in the total cost of drugs for elderly people. (Such effects, however, are not included in the estimates shown here.)

A disadvantage of this option is that it would reduce disposable income for most Medicare enrollees—although not for low-income enrollees whose Medicare premiums are paid by Medicaid or for higher-income enrollees who pay income-related premiums. However, state Medicaid programs would face higher costs for those Medicare enrollees whose premiums are paid by Medicaid, such as enrollees in the Part D low-income subsidy program (22 percent of Medicare beneficiaries) and certain low-income Part B enrollees with limited assets (about 17 percent of Medicare beneficiaries). Also, because people’s income tends to rise over time, freezing all of the income thresholds (as in the second and third alternatives) would cause a growing share of enrollees to become subject to income-related premiums in later years.