Increase the Basic Premium for Medicare Part B to 35 Percent of the Program's Costs

Medicare Part B allows beneficiaries to obtain coverage for physicians' and other outpatient services by paying a monthly premium. When the program began in 1966, the premium was intended to finance 50 percent of Part B costs per aged enrollee, with the remainder funded by general revenues. Subsequent legislation, however, reduced that share, and premium collections fell to less than 25 percent of program spending. The Balanced Budget Act of 1997 permanently set the Part B premium at about 25 percent of Part B spending per aged enrollee. General revenues still fund the remainder of Part B spending. (These calculations are based on costs for enrollees age 65 and older and do not include costs for people who qualify for Medicare before age 65 because of a disability.)

The basic monthly Part B premium increased from $96.40 in 2009 to $110.50 in 2010. However, the majority of beneficiaries who enrolled prior to 2010 were not affected by that increase, because there was no cost-ofliving adjustment (COLA) to Social Security benefits for 2010 and a "hold-harmless" provision protects beneficiaries from a drop in their monthly net Social Security payment if an increase in the Part B premium exceeds the Social Security COLA. Since January 2007, higher- income enrollees have faced greater premiums for Part B than other enrollees have, but the basic premium of 25 percent still applies to about 95 percent of enrollees. The Patient Protection and Affordable Care Act (Public Law 111-148) froze, through 2019, the thresholds at which income-related premiums begin--at the 2010 levels of $85,000 for single beneficiaries and $170,000 for couples. Thus, the share of enrollees that will be subject to income-related premiums will increase over time owing to growth in beneficiaries' incomes.

This option would gradually raise the basic Part B premium from 25 percent to 35 percent of the program's costs for enrollees ages 65 and older over a five-year period, beginning in 2012. The premium share would increase by 2 percentage points per year through 2016 and then remain at 35 percent, preserving the thresholds at which income-related premiums begin as specified in current law. Also, the hold-harmless provision would be preserved; that provision would apply to more enrollees in 2012 because of the initial increase in premiums under this option. This option, the Congressional Budget Office projects, would result in estimated savings of about $71 billion over the 2012-2016 period and about $241 billion over the 2012-2021 period.

One rationale for this option is that it would ease the budgetary pressures posed by rising costs in the Part B program, which will climb faster as members of the baby- boom generation reach age 65. Even under this option, the public subsidy for most Part B enrollees--65 percent when fully phased in--would be greater than the 50 percent that was intended at the program's outset. Also, because Medicaid pays the premiums for certain low- income Part B enrollees with limited assets, about 18 percent of Medicare beneficiaries would be unaffected.

An argument against this option is that it would reduce disposable income for many Part B enrollees. Also, higher premiums might lead to a decline in Part B enrollment; if such an effect materialized, however, it would most likely be small because the subsidy would remain quite large. In addition, expenditures by states would rise because states would pay higher premiums for people eligible for coverage through both Medicare and Medicaid.