Budget Options
December 8, 2016

Mandatory Spending Health Option 8

Function 570 - Medicare

Increase Premiums for Parts B and D of Medicare

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Mandatory Outlays                        
  Increase basic premiums 0 -5 -12 -20 -30 -42 -47 -49 -54 -59 -67 -318
  Freeze income thresholds for income-related premiums 0 0 0 * -1 -2 -3 -4 -5 -7 -1 -22
  Both alternatives abovea 0 -5 -12 -20 -31 -43 -48 -52 -57 -63 -68 -331

The first and third alternatives would take effect in January 2018; the second would take effect in January 2020.

* = between –$500 million and zero.

a. If both alternatives were enacted together, the total effect would be less than the sum of the effects of each alternative because of interactions between them.

All enrollees in Medicare’s Part B (which covers physicians’ and other outpatient services) or Part D (the outpatient prescription drug benefit, which is delivered through private-sector companies) are charged basic premiums for that coverage. Under current law, the Part B premium is $121.80 per month, or about 25 percent of the average costs per enrollee over age 65. (Premiums can be higher or lower for enrollees who receive Part B benefits through Medicare Advantage, the private insurance option for Medicare beneficiaries.) Currently, the average monthly premium for a standard Part D plan is $34.10, which covers 25.5 percent of the average per capita costs of the basic benefit. Low-income enrollees and those with few assets receive subsidies to cover some or all of their premiums.

Enrollees with relatively high income pay an income-related premium (IRP) at an amount that is determined on the basis of the beneficiary’s modified adjusted gross income (adjusted gross income plus tax-exempt interest). In 2016, the combined monthly premiums range from $170.50 to $389.80 for Part B and from $46.80 to $107.00 for Part D. The amounts are set so that the basic premium and the IRP together will cover between 35 percent and 80 percent of an enrollee’s costs.

Under current law, the income thresholds for the higher premiums for Parts B and D are divided among four brackets, which are frozen through 2019. The lowest bracket is set at $85,000 for single beneficiaries or $170,000 for married couples filing joint tax returns. The thresholds will increase by about 2 percent in 2020 and will be indexed after that for general price inflation. (The Medicare Access and CHIP Reauthorization Act of 2015 lowered certain income thresholds for the IRPs, so more beneficiaries are affected by them. That law also changed the thresholds’ rate of increase starting in 2020.)

The Congressional Budget Office currently projects that the share of enrollees subject to income-related premiums will increase from 8 percent in 2016 to 9 percent in 2019, as income growth pushes more enrollees’ income above the thresholds. That share is projected to rise gradually from 9 percent in 2020 to 10 percent in 2026 as growth in income for affected enrollees slightly outpaces indexing of the thresholds.

This option would raise the premiums for Part B and Part D under one of three alternative approaches:

  • A first alternative would increase 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 each program’s costs. That increase would take effect over five years, beginning in January 2018. For Part B, the share of costs per enrollee covered by the basic premium would rise by 2 percentage points each year through 2022 and then remain at 35 percent. For Part D, that share would increase by 1.5 percentage points in the first year and by 2 percentage points each year from 2019 through 2022 and then remain at 35 percent. By 2026, basic premiums would reach $176 per month for Part B and $62 per month (the average premium for a standard plan) for Part D. Those changes would not affect the total premiums of enrollees paying the IRP. In all, this alternative would decrease net Medicare spending (total Medicare spending minus beneficiaries’ premiums and other offsetting receipts) by $318 billion between 2018 and 2026, CBO estimates.
  • A second alternative, which would take effect in January 2020, would add seven years to the current freeze on the income thresholds for determining the IRPs, extending that freeze through 2026. CBO estimates that, as a result, net Medicare spending would be reduced by $22 billion between 2020 and 2026, and the share of enrollees paying an IRP would rise from 9 percent in 2019 to 13 percent in 2026.
  • A third alternative would combine the first two, starting in January 2018 and continuing in January 2020. It would increase basic premiums for Parts B and D to 35 percent of costs per enrollee and freeze the income thresholds for income-related premiums. Those changes would reduce net Medicare spending by $331 billion through 2026, CBO estimates. (That amount is slightly less than the sum of the savings from the other two alternatives separately because of interactions between the two policies.) This alternative would raise premiums for most enrollees and would increase to 13 percent the share of enrollees paying an IRP in 2026.

One rationale in favor of this option is that it would reduce the pressure on the working-age population to pay for benefits being received by older groups. (Because of demographic changes, the number of Medicare beneficiaries per worker has been increasing substantially as the baby-boom generation retires, thus increasing that pressure.) Another rationale is that by absorbing a larger share of enrollees’ income, higher Part D premiums would increase competitive pressure in the market for prescription drug plans, thus giving enrollees a stronger incentive to choose less expensive plans. Such pressure could cause prescription drug plans to reduce their bids slightly, generally leading to lower premiums for those plans along with reducing the federal government’s costs and lowering the total cost of drugs for Medicare beneficiaries. Similar effects on costs for hospital care or outpatient services could accrue if enrollees sought out lower-cost Medicare Advantage plans, although such effects are not included in the estimates shown here.

A disadvantage of this option is that it would reduce many enrollees’ disposable income by increasing basic premiums and freezing all of the income thresholds. A growing share of enrollees would become subject to the IRP in later years because people’s nominal income tends to rise over time (even though their purchasing power might not increase). Although the disposable income of low-income enrollees whose Medicare premiums are paid by Medicaid would not decrease, another disadvantage of this option is that state Medicaid programs would face higher costs for some enrollees, such as certain low-income Part B enrollees who have limited assets.