Raising Medicare Premiums for Higher-Income Beneficiaries: Assessing the Implications
By Juliette Cubanski, Tricia Neuman, Gretchen Jacobson, and Karen E. Smith
Kaiser Family Foundation, January 2014
As policymakers consider ways to slow the growth in Medicare spending as part of broader efforts to reduce the federal debt or offset the cost of other spending priorities, some have proposed to increase beneficiary contributions through higher Medicare premiums.
Modifications to Medicare’s current income-related premiums have been proposed recently by several policymakers and groups, including the Obama Administration as part of the President’s Fiscal Year (FY) 2013 and FY 2014 budgets, the Bipartisan Policy Center (BPC), the Center for American Progress (CAP), and the Moment of Truth Project (headed by Erskine Bowles and Alan Simpson, co-chairs of the National Commission on Fiscal Responsibility and Reform).
Some recent proposals to address concerns about federal spending have included recommendations to reduce the growth in Medicare spending by increasing beneficiaries’ contributions towards their health care costs. These include proposals to increase the share of beneficiaries who would pay Medicare’s Part B and Part D income-related premiums and increase the portion of program costs they would pay.
Part of the appeal of requiring higher-income beneficiaries to pay a greater share of Medicare costs is that these higher costs would only be imposed on those beneficiaries who arguably have greater financial means to bear the additional expenses. In the context of current federal budget discussions, some consider an approach that includes this type of progressive financing to be preferable to one that imposes higher premiums or cost sharing across the board, without regard to beneficiaries’ incomes. There is some concern, however, that the income thresholds used to trigger the imposition of higher premiums for higher-income Medicare beneficiaries ($85,000/individual, $170,000/couple) are substantially lower than the thresholds often used to define higher-income individuals in other policy discussions. For example, the ACA imposed higher Medicare Part A payroll taxes on individuals with income of $200,000 and couples with income of $250,000.
For many higher-income beneficiaries, the proposed increase in Medicare premiums might not be a financial hardship. However, if the income thresholds are frozen over a longer period of time relative to current law, then a growing share of elderly and disabled people who would not be considered high income by today’s standards would face higher premiums, and as the income-related premium amounts increase over time, they would consume a larger share of income. In addition, there is some possibility that such changes could lead some higher-income beneficiaries to drop out of Medicare Part B and instead self-insure, which could result in higher premiums for all others who remain on Medicare if the dropout group is large and relatively healthy.
Amid ongoing concerns about the nation’s debt and the future financial stability of Medicare, policymakers are likely to continue their discussion of alternative Medicare savings proposals. In light of the financial vulnerability of many people on Medicare and the difficulty they may have paying for rising health care costs on limited budgets, the proposal to require higher-income beneficiaries to pay more in Medicare premiums, rather than raise premiums for all beneficiaries, would protect those with relatively modest incomes. Yet, given the relatively low incomes of most people on Medicare, a significant amount of savings from this proposal is only possible by going relatively far down the income scale to reach a sizeable share of beneficiaries—at which point the affordability of these additional costs could be called into question.
We already require higher-income individuals to pay larger premiums for Medicare Part B (physician services) and Part D (drugs), and now there are serious proposals to increase those amounts in order to reduce federal spending on Medicare. Is this wise?
In order to have more than a negligible impact on the federal budget both the numbers of individuals paying higher premiums and the increase in the premiums would have to be significant.
This report shows that lowering the income threshold at which higher premiums would be assessed would include individuals who would find paying the premium to be a hardship, simply because there are not enough seniors with very high incomes.
So suppose instead we increase even more the premiums that higher-income individuals would pay. Since there are so few of them, the premium increases would have to have to be significant to have any real impact on the federal budget. What would happen then? It is likely that many of those who are financially secure and relatively healthy would drop out of the Medicare B and D programs and simply self-insure. The premiums that these healthier individuals would have paid will instead be paid by higher premiums for those staying in the program and by a greater contribution from general tax revenues.
Some have suggested that deductibles also be increased for higher-income individuals. This would surely anger our wealthy citizens – those who have the greatest political influence – and undermine support for Medicare. That would risk us eventually ending up with an underfunded, austere Medicare program, while the wealthy could continue to buy all the care that they would want.
No. We need to have the full support of the wealthy for a high quality system that would serve them well, while serving all of us well. We need to eliminate premiums, deductibles and other cost sharing so that the system provides us all with equal access based on medical need rather than ability to pay. The wealthy could still have access to luxurious suites and other amenities that they might prefer and be willing to pay for.
We still need progressive financing, but we can do that easily by using equitable taxes to fund Medicare – Improved Medicare for All, that is.