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 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Outlays  
  Increase basic premiums 0 -8 -18 -30 -43 -58 -62 -67 -72 -76 -99 -435
  Freeze income thresholds for income-related premiums 0 * -1 -1 -2 -3 -5 -7 -9 -11 -4 -39
  Implement both alternativesa 0 -8 -19 -31 -45 -60 -66 -72 -78 -83 -103 -462

This option would take effect in January 2022.
* = 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 individual effects 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. Those premiums are set to cover 25 percent of expected Part B costs and 25.5 percent of expected Part D costs. Enrollees with relatively high income pay an income-related premium that is determined on the basis of the beneficiary’s modified adjusted gross income (adjusted gross income plus tax-exempt interest). The thresholds established for income-related premiums create five income brackets with corresponding premiums. The highest income threshold is frozen through 2027 and will be adjusted annually by the consumer price index for all urban consumers (CPI-U) starting in 2028, whereas the rest are indexed annually by the CPI-U.

This option consists of three alternatives that would raise the premiums for Parts B and D of Medicare. 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 over a five-year period beginning in 2022. For Part B, the percentage of costs per enrollee covered by the basic premium would rise by 2 percentage points a year through 2026 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 2023 through 2026 and then remain at 35 percent. The second alternative would freeze all the income thresholds for income-­related premiums from 2022 to 2030. 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. (All years mentioned in this option are calendar years.)

The option would affect enrollees differently depending on their income. The alternatives that would increase the basic premiums would raise premiums for beneficiaries who are not required to pay income-related premiums and who have less modified adjusted gross income. However, beneficiaries who have the lowest income tend to have their premiums paid by premium assistance programs. The alternatives that would freeze income thresholds for income-related premiums would increase premiums for beneficiaries with relatively higher income.