Mandatory Spending

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 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-
Change in Outlays  
  Increase basic premiums 0 -7 -16 -27 -38 -52 -55 -60 -64 -69 -89 -389
  Freeze income thresholds for income-related premiums 0 * -1 -2 -3 -4 -5 -7 -8 -11 -5 -40
  Both alternatives abovea 0 -8 -17 -28 -40 -54 -59 -64 -70 -77 -93 -418

This option would take effect in January 2020.
* = between -$500 million and zero.
a. If both alternatives were enacted together, the total of their effects would be less than the sum of the effects for each alternative because of interactions between the approaches.


All enrollees in Medicare Part B (which covers physicians' and other outpatient services) and 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 in 2019 is scheduled to be $135.50 per month, or about 25 percent of the average cost per enrollee age 65 or older. (Premiums can be higher or lower for enrollees who receive Part B benefits through Medicare Advantage, the private insurance option for Medicare beneficiaries.) The monthly premium for someone choosing a standard Part D plan with average projected costs in 2019 is scheduled to be $33.19, which is expected to cover 25.5 percent of the average per capita cost of the basic benefit. Low-income enrollees and those with few assets receive subsidies through the low-income subsidy (LIS) program to cover some or all of their premiums.

Enrollees with relatively high income pay an income-related premium (IRP) that is determined on the basis of the beneficiary's modified adjusted gross income, or MAGI (adjusted gross income plus tax-exempt interest).For enrollees who pay an IRP for Part B, the combined premium for 2019 ranges from $190 per month to $461 per month under current law. For Part D, enrollees are scheduled to pay between $46 and $111 in monthly premiums for a standard plan that is projected to have average costs per enrollee in 2019. The amounts are set so that the basic premium and the IRP together are expected to cover between 35 percent and 85 percent of an enrollee's costs.

Under current law, the income thresholds for the higher premiums for Parts B and D are divided among five brackets. The highest (or fifth) income bracket is frozen until 2028 whereas the rest are frozen through 2019. The Bipartisan Budget Act of 2018 added a fifth income bracket for the IRPs so that individual filers with income greater than or equal to $500,000 or married couples who file joint returns and have combined incomes greater than or equal to $750,000 pay a higher premium percentage. The lowest bracket is set at $85,000 for single beneficiaries or $170,000 for married couples filing joint tax returns. The thresholds are scheduled to increase by about 2 percent in 2020 and after that to be indexed by the consumer price index for all urban consumers.

The share of Part B enrollees subject to income-related premiums is projected to increase from about 10 percent in 2019 to about 12 percent in 2028 as growth in income for affected enrollees slightly outpaces indexing of the thresholds. Everyone subject to the IRP for Part D is also subject to it for Part B.


This option would raise the premiums for Parts B and D under one of three alternative approaches. Each alternative would take effect in January 2020:

  • The 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. For Part B, the share of costs per enrollee covered by the basic premium would rise by 2 percentage points each year through 2024 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 2021 through 2024 and then remain at 35 percent. By 2028, basic premiums would reach $281 per month for Part B and $77 per month for Part D. Those changes would not affect the total premiums of enrollees paying the IRP because the premiums are already expected to cover at least 35 percent of costs.
  • The second alternative would extend the current freeze on income thresholds through 2028.
  • The third alternative would combine the first two. 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.

Effects on the Budget

The Congressional Budget Office estimates that the first alternative would decrease net Medicare spending (total Medicare spending minus beneficiaries' premiums and other offsetting receipts) by $389 billion between 2020 and 2028. This alternative would not affect the total premiums of enrollees paying the IRP. For the second alternative, CBO estimates that net Medicare spending would be reduced by $40 billion between 2020 and 2028 and that the share of enrollees paying an IRP would rise by 0.4 percentage points in 2020 and by 5.5 percentage points in 2028. The third alternative would reduce net Medicare spending by $418 billion between 2020 and 2028. (That amount is slightly less than the sum of the savings from the other two alternatives—if implemented separately—because of interactions between the two approaches.) All estimates are derived from the following: CBO's analysis of the distribution of income for all people age 65 or older (the agency estimates that Medicare enrollees under the age of 65 would not satisfy the criteria to be subject to an IRP); and CBO's expectation regarding those who would delay enrollment in Medicare Parts B and D or drop coverage altogether.

CBO's analysis of the first and third alternatives accounts for the fact that federal savings from the higher basic premiums for Parts B and D would be partially offset by higher federal payments to states for Part B premiums for dual-eligible beneficiaries (people who are enrolled in both Medicare and Medicaid) and by higher subsidies for LIS enrollees in Part D. CBO anticipates that, if implemented, all of the alternatives would result in an increase in the number of people who would delay enrollment in Medicare Parts B and D. The savings would be higher if the increase in the basic premiums was larger or if the income thresholds were frozen. The savings would be smaller if the proposed increase in the basic premiums was smaller, the income thresholds were not frozen (for the highest income bracket), or those thresholds were indexed to grow at a slower rate than that in effect under current law (for all other income brackets).

A large source of uncertainty in the estimate over the next 10 years is the unpredictability of basic premiums because, in part, they are directly linked to CBO's baseline projections of enrollment and total spending for Parts B and D. Those projections are used to establish costs per beneficiary, a key part of determining premium amounts. Another large source of uncertainty is the income distribution for Medicare enrollees. It is hard to project changes in the distribution of income—and therefore in how much of Medicare enrollees' income falls within each income bracket.

Additionally, there is uncertainty surrounding the percentage of people age 65 or older who would choose to delay enrollment in Medicare. When premiums (basic or income-related) increase, current enrollees might choose to stay in, disenroll from, or go on and off of ("churn through") the program, whereas potential new enrollees might choose to delay their enrollment in the program. CBO expects that Medicare basic premiums would be lower than most private insurance premiums under current law and the option. As a result, CBO anticipates that an increase in the basic premiums for Parts B and D would have minimal effects on the number of beneficiaries who would choose to disenroll from those programs. However, CBO expects that if income-related premiums increased, the small percentage of people between the ages of 64 and 70 who continued to work, maintain creditable coverage through their employer, and delay enrollment in the Medicare program to avoid paying the IRP would increase. Because both Parts B and D of the Medicare program assess a permanent penalty for delayed (late) enrollment in the absence of other creditable health care coverage, CBO does not expect an increase in the percentage of people who would disenroll from Parts B and D; also, those penalties make it unlikely that higher income-related premiums would increase the number of people who would churn through the Medicare program.

Other Effects

One argument 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 members of the baby-boom generation retire, thus increasing that pressure.) Another argument 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 (although their purchasing power might not increase). Another disadvantage of this option: Even though the disposable income of low-income enrollees whose Medicare premiums are paid by Medicaid might not decrease, state Medicaid programs would face higher costs for some enrollees, such as certain Part B enrollees who have low income and limited assets.