V I E W P O I N T

Means-Testing Of the Medicare Part B Premium

The Medicare Modernization Act of 2003 (MMA) is known for establishing Medicare Part D, a prescription drug benefit managed by private insurance and drug companies. However, the MMA also made far-reaching changes to other parts of Medicare that are not as well known or understood. These changes will have dramatic long-term impacts on how the program operates, and on its relationship to the millions of seniors who depend on the universal, affordable health insurance coverage Medicare provides. As one example, for the first time in the program's history, Medicare Part B premiums were subjected to means testing in 2007. Over time, linking premium levels to beneficiaries' incomes erodes the social insurance nature of the Medicare program, resulting in increased costs for all seniors.

Background

In 2007, 1.6 million Medicare Part B beneficiaries paid significantly higher premiums than all other seniors. This change was the direct result of a provision in the Medicare Modernization Act of 2003 (MMA) establishing means-testing under Medicare Part B. Prior to 2007, all Medicare beneficiaries paid a premium equal to about 25 percent of the Part B program's average per beneficiary costs. The remaining 75 percent of average per beneficiary costs were financed through general revenues. The Medicare Modernization Act, however, altered this formula by linking premium amounts to income. As a result, wealthier seniors now pay disproportionately higher premiums than other beneficiaries. As of 2009 the means-testing provisions are fully phased-in, and higher income seniors pay premiums ranging from 35 to 80 percent of average per beneficiary cost depending on their income levels. This translates into premiums that are double or triple the amount of the standard premium paid by the majority of beneficiaries.

Monthly Medicare Part B premiums will be determined based on the income reported on previous tax returns . Seniors are not required to file new paperwork to determine their Medicare Part B premium amount. Rather, the Social Security Administration (SSA) automatically determines the amount of the Medicare Part B premium using tax records filed with the Internal Revenue Service two or three years previously. This means all seniors enrolled in Medicare Part B have their income tax returns reviewed to determine whether they are above the income thresholds. Each fall, seniors should receive a written notice from SSA explaining how much they will pay in monthly Part B premiums the following year based on the review of their income. The notice will also explain how to appeal SSA's determination. Seniors can request a new determination if they believe their current income is lower than previously reported. In this instance, seniors must provide SSA with an updated tax return or with evidence that a major life-changing event significantly reduced their income (i.e., the death of a spouse, marriage, divorce, retirement, or the loss of pension income). For more detail on how to challenge an income related premium adjustment see the NCPSSM fact sheet titled " Appealing the Medicare Part B Premium Means Testing Decision ".

Higher-income seniors will pay monthly Part B premiums that are double or triple the amount of the standard Part B premium. The means-testing provisions in the MMA were phased-in over a three year period. As of 2009, the phase-in period is complete, and higher-income beneficiaries will pay the full disproportionate share of Part B per beneficiary costs through higher premiums. The chart below illustrates the differences in Part B premium amounts by income category.

Chart: Projected Monthly Part B Premium Amounts Based on Income

Source: NCPSSM calculation based on data from The Annual 2009 Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds .

Note: Income thresholds are indexed to the Consumer Price Index.

National Committee Position

Means-testing undermines the social insurance nature of the Medicare program, ultimately raising costs for middle and lower-income seniors who are dependent on it.

Over the years, Medicare has developed a large risk pool by providing benefits that are equally available to all beneficiaries. These benefits have attracted all seniors regardless of age, health or income status. Means-testing will dismantle this successful risk pool by making the program increasingly unfair for wealthier beneficiaries - who often tend to be healthier and younger. Eventually, many higher-income beneficiaries could opt out of Part B because they find lower premiums in the private market. The exodus of wealthier seniors from the Medicare Part B program will increase overall costs and threaten public support for the program. Medicare was never intended to be a welfare program. Driving healthier, younger and higher-income seniors away from Medicare will change the program from one providing universal coverage to all beneficiaries to a welfare program with increasingly unsustainable costs.

Means-testing raises premiums for those who have paid the most into the program. By the time they retire, higher-income seniors have already paid a greater share of Medicare's cost compared to low- and middle-income seniors. For example, higher-income seniors contribute more in Medicare payroll taxes since there is no income cap, as there is in the Social Security program. Higher-income seniors also pay more income tax which helps to finance the majority of Part B and Part D costs. Finally, these seniors are subject to higher income taxes on their Social Security benefits, which are used to strengthen Medicare's Hospital Insurance Trust Fund.

The flawed means-testing formula could have harmful effects on seniors and their families.

Implementation of the means-testing provision means higher-income seniors will pay more in Part B premiums regardless of their expenses. Seniors with identical incomes can have substantially different financial obligations. For example, some seniors may decide to keep working so that they can afford to purchase food and housing for multiple generations of family members, pay for high medical bills, or support a spouse with long-term care needs - costs which are irrelevant to the imposition of the higher premiums. Seniors with such obligations would certainly have difficulty paying overly-inflated Part B premiums.

Means-testing could apply to middle-income seniors over time.

According to the MMA, seniors with incomes higher than $85,000 in 2009 will be required to pay higher Part B premiums. Each year, that $85,000 threshold is scheduled to rise with inflation. According to the Kaiser Family Foundation, means testing hit 1.6 million seniors with higher premiums in 2007, Moreover, the Congressional Budget Office estimates that even with an adjustment for inflation, means testing will affect at least 2.8 million - or six percent of current beneficiaries - by 2013. This problem would be further exacerbated if the inflation adjustment were eliminated, which former President Bush proposed in his FY 2008 and 2009 budgets and others have supported. Such a change would mean that over time, more and more middle-income seniors would be required to pay higher Part B premiums.  A similar problem has occurred with the Alternative Minimum Tax (AMT). The AMT was originally designed to prevent high-income taxpayers from using loopholes to avoid paying their fair share of taxes. However, over time more middle-income workers have found themselves unfairly subject to the AMT because the income thresholds were never indexed. Although former President Bush is no longer in office, elimination of inflation adjustments is still a very real threat to the program.

In addition, it is not unreasonable to speculate that Congress set the income thresholds at such relatively high levels in order to minimize opposition to what would otherwise be considered a dramatic change in the program's nature. Because the number of Medicare beneficiaries with income levels above the means-testing thresholds represents a relatively small percentage of the overall population of beneficiaries, the provision as enacted does not raise much money. However, now that the structure of means-testing is in place, lowering the thresholds provides a relatively simple mechanism for raising funds, providing a great temptation for future Congresses to lower the point at which the income test begins, thereby affecting many more moderate-income seniors.

Now that Medicare is means-tested, Social Security could be next.

Our country has begun a journey down a slippery slope designed to undermine the strength of our social insurance programs. Means-testing will transform both Social Security and Medicare from universal insurance programs into welfare programs with increasingly unsustainable costs. From a public policy standpoint, it is imperative that we remove the means-testing provisions from the Medicare program, while at the same time working to protect Social Security from the same fate.

Government Relations and Policy, July 2009