Even Higher Income-Related Premiums are Bad for Beneficiaries, and Bad

Even Higher Income-Related Premiums are Bad for Beneficiaries, and Bad

The Medicare program requires higher-income individuals to contribute more toward the cost of the program than the general population. When enrolled in Medicare, people with incomes of $85,000 (or $170,000 for couples) pay higher premiums for Medicare Part B (doctors’, other health care professionals’, and outpatient services) and Part D (prescription drugs) coverage, including if they have a Medicare Advantage plan. Over time, the proportion of people with Medicare who pay higher premiums for Medicare Part B and Part D has grown significantly.

Unfortunately, Congress is once again asking Medicare beneficiaries to pay even more, as a way to offset congressional spending on non-Medicare programs. Raising premiums on higher-income seniors, often referred to as “income-related premiums”, is bad policy. Shifting more costs onto this group of older Americans ignores how much they’ve already contributed to Medicare throughout their working lives, as well as how much they continue to contribute to Medicare through additional taxes. Furthermore, this change could drive these beneficiaries – who help contribute to the overall health of Medicare – out of the Medicare program. Congress already raised income-related premiums in 2015, and that increase will be taking effect in 2018. Asking Medicare beneficiaries to pay for non-Medicare benefit changes again will make it even harder to finance improvements and address long-term challenges in the Medicare program.

The Medicare program is already heavily income related. Currently, approximately 7 percent of beneficiaries are subject to the higher-income premiums for Part B, and approximately 6 percent of beneficiaries are subject to the higher income premiums for Part D. The higher income premium rises with income, with the highest premium – over 3 times the premium for the typical retiree – beginning at $160,000 (single) and $320,000 (couple) in 2018. While a typical senior will pay over $2,000 annually in premiums for Part B and D coverage, a high-income senior can be expected to pay over 3 times that amount – more than $6,400 annually. The income-related premium, in essence, is a premium tax on higher income seniors.

Second, higher income beneficiaries have already paid more into the system in the form of higher payroll taxes – unlike Social Security, all wage income is subject to the Medicare payroll tax without a cap. A 1.45% payroll tax is levied on both employers and employees; thus, 2.9% of total wages goes to Medicare. A typical worker earning $50,000 contributes (both employer and employee share) about $1,450 a year (2.9%). A person earning $85,000 – the threshold for income-related premiums – contributes $2,465 per year. While someone at $214,000 – the top threshold for income related premiums – contributes $6,206. In addition, for those earning wages above $200,000 (single) and $250,000 (couple), an additional 0.9% tax applies on amounts above those thresholds that goes to Medicare.

Given higher payroll taxes and current income-related premiums, we should not further single out higher income beneficiaries for higher premium payments. Shifting more and more costs onto higher-income beneficiaries could cause them to leave the Medicare program. If the beneficiaries in the highest income groups are asked to pay an even greater share of their Medicare premium, they could decide not to enroll in Medicare and seek alternative sources of insurance. This would worsen the Medicare risk pool, leaving more costly beneficiaries in the Medicare program, raising costs for everyone else.

Third, higher income seniors also pay higher taxes on their Social Security benefits for Medicare. For seniors with incomes above $34,000 (single) and $44,000 (couple), an additional 35% of Social Security benefits are subject to the income tax, with the revenue dedicated to Medicare. A typical Social Security benefit of $16,320 – with 35% of it taxed at the 28% rate – would pay another $1,600 per year into Medicare.

Finally, income-relating in the Medicare program hurts new Medicare enrollees. When determining who is subject to the income-related premium, the Medicare program relies on the beneficiary’s tax return from the prior year (which reports income made from the year before) – which means income data are at least 2 years old. Thus, new retirees (whose income may have dropped precipitously from their working years) are subject to higher income-related premiums based on their previous wages, not their current financial situation.

Additional income-relating of premiums is the wrong solution for addressing Medicare’s long-term financial challenges, and asking Medicare beneficiaries to fund non-Medicare changes will only make it more difficult to address Medicare’s own financial issues. Any contribution from Medicare beneficiaries should be used to strengthen and improve the Medicare program.

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Changing Medicare into a “Premium Support” Program Would Reduce—Not Increase—Choices for Individuals

Changing Medicare into a “Premium Support” Program Would Reduce—Not Increase—Choices for Individuals

The budget blueprint recently passed by the House proposes to redesign Medicare—the program that nearly all Americans ages 65 and older and millions of younger people with disabilities rely on for health coverage. The proposal would transform Medicare into what’s termed a “premium support” or “voucher” program. This change would have a huge impact on people with Medicare today and in the future.

Premium support would be a dramatic change from the current Medicare design. Today, if you want to enroll in traditional Medicare, you would pay the same premium for Part B (which covers doctors’ visits), and typically have no premium for Part A (which covers hospital services) regardless of where you live.  In addition, you could choose traditional Medicare or enroll in one of the private health plans (called Medicare Advantage plans) available in your location.

With premium support, however, you would instead get a specified dollar amount (or voucher) to use toward buying health coverage. You would have to choose between competing plans—which would include private health plans and traditional Medicare coverage—each with its own price. The amount you pay will be the difference between the price of the plan and the voucher, so if you choose a higher-priced plan, you would pay more than if you choose a lower-priced plan.

In addition, you would likely have fewer choices under a premium support program—and the available options would differ dramatically depending on where you live. While proponents argue that premium support would enhance opportunities for people with Medicare to choose a coverage option that matches their preferences, a new AARP-funded research report by the Urban Institute challenges this claim. As shown in the report (and AARP Public Policy Institute summary), premium support would reduce—not increase—options for individuals, compared with what they have now:


  • Many people who prefer traditional coverage—the option that most people with Medicare choose today—would see steep increases in their premiums. As a result, many would have to either pay much more for their preferred option or choose something else.


  • In some locations, the premiums for traditional Medicare would be so expensive that it would be unaffordable for most people and thus not a real option for them.


  • In other places, private plans—which are now available in nearly all locations and chosen by about one-third of people with Medicare—would be more expensive than traditional Medicare. In some markets, private plans would not be able to attract enough enrollees to be successful, so individuals living in those places would no longer have this option.


The current combination of Medicare Advantage and traditional Medicare promotes private plan competition and offers individuals a choice of options. In contrast, premium support would place a large burden on the vulnerable Medicare population and force many people into a plan based on affordability. Under premium support, traditional Medicare’s current wide choice of physicians, hospitals, and other providers would likely only be available to higher-income people in some locations, while private plans would cease to exist in others.


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