Increase the Premiums Paid for Medicare Part B

Background

Medicare is a federal health insurance program for people age 65 or older and for younger people with long-term disabilities or end-stage renal disease. In Part B of Medicare, which covers physicians' and other outpatient services, everyone who chooses to enroll is charged a basic premium. (Most people do not have to pay a premium for Part A, which mainly covers inpatient hospital care. People who enroll in Part A or Part B may choose to also enroll in Part D, the outpatient prescription drug benefit, which carries an additional premium that is subsidized for some enrollees.)

The Part B basic premium in calendar year 2023 is scheduled to be $164.90 per month, or about 25 percent of expected Part B costs per enrollee age 65 or older. Premiums can be higher or lower than the basic premium for enrollees who receive Part B benefits through the Medicare Advantage program. (In that program, private insurers assume the responsibility for, and the financial risk of, providing Medicare benefits.) Low-income enrollees with few assets can receive subsidies through Medicaid to cover their Part B premium.

In addition to the Part B basic premium, some enrollees pay an income-related premium (IRP) if their modified adjusted gross income (MAGI) exceeds a certain amount. (For the purposes of the IRP, MAGI is equal to taxpayers' adjusted gross income plus any tax-exempt interest they receive.) Enrollees who pay an IRP fall in one of five tiers, depending on their income. The amounts are set so that the basic premium and the IRP together are expected to cover between 35 percent and 85 percent of average Part B costs for enrollees age 65 or older (see the table below).

Income Thresholds and Total Monthly Premiums in 2023 for Enrollees Who Pay Income-Related Premiums for Medicare Part B
Income Range for Single Filers	Income Range for Married Couples Filing Jointly	Percentage of Expected Costs	Total Monthly Part B Premium
$97,001 – $123,000	$194,001 – $246,000	35	$230.80
$123,001 – $153,000	$246,001 – $306,000	50	$329.70
$153,001 – $183,000	$306,001 – $366,000	65	$428.60
$183,001 – $499,999	$366,001 – $749,999	80	$527.50
$500,000 or more	$750,000 or more	85	$560.50

The information in this table applies to calendar year 2023.

"Income" refers to modified adjusted gross income, which is adjusted gross income plus tax-exempt interest income.

Premiums are set to cover the specified percentages of expected costs for Medicare enrollees who are age 65 or older.

The income thresholds are indexed to the consumer price index for all urban consumers (CPI-U), except for the threshold for the highest income tier, which is frozen until 2028 and then indexed to the CPI-U thereafter. The share of Part B enrollees who are subject to IRPs is projected to increase from about 9 percent (approximately 5 million people) in calendar year 2023 to about 12 percent (approximately 9 million people) in calendar year 2032 as growth in income for affected enrollees slightly outpaces indexing of the thresholds.

Option

This option includes three alternatives for increasing the amount that Medicare enrollees pay in Part B premiums. Each alternative would take effect in January 2024.

• The first alternative would increase the basic premium from 25 percent to 35 percent of expected Part B costs per enrollee. The basic premium would increase by 2 percentage points at the beginning of each calendar year starting in 2024 until it reached 35 percent of expected costs in 2028 and then would remain at that percentage. By calendar year 2032, the Part B basic premium would reach $402.64 per month, the Congressional Budget Office estimates. The increase in the basic premium would not affect total premiums paid by enrollees who are subject to the IRP because their premiums would cover at least 35 percent of total expected costs, as they do under current law. Enrollees whose premiums are covered by Medicaid under current law would also be unaffected because that coverage would not change.
• The second alternative would freeze all the income thresholds for IRPs from 2024 to 2032.
• The third alternative would combine the changes in the first two alternatives: increasing the Part B basic premium to 35 percent of expected costs per enrollee and freezing the income thresholds for IRPs.

Effects on the Budget

CBO estimates that the first alternative—increasing the basic premium to 35 percent of expected costs per enrollee—would decrease the deficit by $406 billion between 2024 and 2032. CBO estimates that the second alternative—freezing the income thresholds for IRPs—would reduce the deficit by $57 billion between 2024 and 2032 and increase the share of enrollees who pay an IRP from 9 percent to almost 10 percent in 2024 and from 12 percent to 17 percent in 2032. The third alternative—combining the first two alternatives—would reduce the deficit by $448 billion between 2024 and 2032. That amount is slightly less than the sum of the savings from the other two alternatives (if implemented separately) because those alternatives would affect overlapping groups of enrollees. Some people with income near the lowest IRP threshold would have their premium increased to 35 percent under either of the first two alternatives, and the government would receive additional premium income from that group only once if both policies were implemented together.

CBO's estimates are based on its assessment of how many people would pay a higher Part B premium under each of the alternatives, and how much higher those people's premiums would be. That assessment—particularly as it pertains to the freezing of IRP thresholds—is derived in part from the agency's analysis of the distribution of income for all people age 65 or older. (The agency estimates that very few Medicare enrollees under the age of 65 would satisfy the criteria to be subject to an IRP.) CBO's analysis of the increase in the basic premium under the first and third alternatives accounts for increased Medicaid spending on the approximately 20 percent of Part B enrollees whose premiums are paid by that program.

The estimates reflect CBO's expectation about the way current and future Medicare enrollees would respond to each of the three alternatives. Increases in premiums (basic or income-related) discourage enrollment. CBO anticipates that, if implemented, all of the alternatives would result in an increase in the number of people who would delay enrollment in Medicare Part B by maintaining coverage through a current or former employer. CBO expects that people without such coverage would be unlikely to delay enrollment and that current enrollees would be unlikely to disenroll from Part B for two reasons: First, Part B basic premiums would probably be lower under the option than most private insurance premiums, as they are under current law; and second, people whose Part B coverage was postponed or interrupted and who had no other qualifying health insurance coverage would face permanent penalties if they later enrolled or reenrolled in that program.

If the basic premium increased by a smaller amount, to ultimately cover less than 35 percent of expected costs, the budgetary savings from the option would change in approximate proportion to the change in the premium increase. If the basic premium increased by a larger amount, to cover more than 35 percent of costs, the resulting savings could increase more than proportionally. As long as lawmakers specified that enrollees in the lowest IRP tier would have to pay the higher basic premium instead of their current 35 percent total premium, the premium increase would apply to more enrollees and thereby produce additional savings. However, larger premium increases would also induce more people to delay enrollment in or potentially disenroll from Medicare Part B. That behavioral effect could either increase or decrease the savings that would result from the option, because both premium receipts and Medicare spending would be reduced, and it is unclear which reduction would be larger. For instance, the people who expected to use the fewest Part B–covered services (resulting in the least Part B spending) might be the most likely to disenroll or delay enrollment in Part B if the basic premium increased. In that case, the decrease in premium receipts would be larger than the decrease in spending, and the savings from the option would be reduced.

Uncertainty About the Budgetary Effects

CBO's estimates rely in part on its projection of the income distribution of Medicare enrollees. That projection is uncertain, in part, because a relatively large share of income for that group comes from sources that are less predictable, such as dividends and capital gains. That uncertainty in the projection of the income distribution leads, in turn, to uncertainty in CBO's estimate of the number of Medicare enrollees who would pay higher premiums under the option.

Another source of uncertainty is the projection of the basic premium for Part B. The premium could be lower than CBO projects, for example, if per-enrollee spending grew more slowly than anticipated. If the premium was lower than projected, the option (which would increase each affected enrollee's premium by a specified percentage) would result in less savings because each affected enrollee's premium would increase by a smaller dollar amount. Conversely, if the premium was higher than projected, the savings from the option would be greater.

Additionally, uncertainty exists about the number of people age 65 or older who would choose to delay enrollment in Medicare, as well as the amount of money that Medicare would spend on their Part B–covered services if they remained enrolled. CBO expects that, if IRP thresholds were frozen, the small percentage of people who continued to work, maintain insurance coverage through their employer, and delay enrollment in the Medicare program to avoid paying the IRP would increase. That increase could be larger or smaller than CBO anticipates, depending on how many people would be subject to the IRP on the basis of their income, how many of them would have access to employment-based coverage, and how many would choose to maintain that coverage in order to avoid paying the IRP.

Distributional Effects

Because this option would affect the Medicare-enrolled population, it would primarily affect people age 65 or older, as well as people under 65 with long-term disabilities. In CBO's baseline projections of the distribution of income, income includes Social Security and Medicare benefits. As a result, people age 65 or older are slightly more likely than others to be in higher-income households. None of the alternatives would affect Medicare enrollees whose Part B premiums are covered by Medicaid because those enrollees do not pay their own premiums out of pocket.

Increasing the Part B basic premium (the first and third alternatives) would affect all enrollees except those whose premiums are paid by Medicaid and those near the top of the income distribution. Specifically, enrollees would face a higher premium if their income was not high enough to pay an IRP but their income or assets were too high to qualify for subsidies through Medicaid. Some Medicaid-eligible enrollees would also face higher premiums either because they had Medicaid coverage but did not qualify for a premium subsidy or because they did not participate in Medicaid despite qualifying to do so. Premiums would increase by the same dollar amount for every affected enrollee. As a result, the increase in premiums would equal a larger share of income for lower-income households than for higher-income households.

Freezing the IRP thresholds (the second and third alternatives) would affect a smaller and higher-income population than would increasing the basic premium. People whose income fell slightly below the current-law IRP thresholds in 2024 and subsequent years would pay a higher premium if those thresholds were frozen. In particular, enrollees would pay a higher premium if their income exceeded one of the 2023 IRP thresholds—which would remain in force under the option—but did not exceed the values that the threshold would have grown to under current law. Because the lowest of the 2023 IRP thresholds is $97,000 for single filers and $194,000 for married couples who file jointly, most people facing higher premiums would be in the middle or near the top of the income distribution. The number of people who would face higher premiums under the second and third alternatives would grow over time.

Economic Effects

In addition to having the behavioral effects reflected in conventional budget estimates, such as the ones shown above, increasing the premiums paid for Medicare Part B would also affect people's incentives to save and work. If the basic premium was increased, as under the first and third alternatives, most enrollees would have to spend more money out of pocket for their coverage every month. As a result, most Medicare enrollees who currently pay the basic premium would reduce their consumption and draw down their savings more rapidly.

Changes in the labor supply of current Medicare enrollees would be mixed. Faced with higher premiums, some enrollees would choose to work more hours, perhaps by taking a part-time job or by working more hours at an existing job if they were employed. However, certain enrollees with relatively low income might choose to work fewer hours in order to become eligible for Medicaid, which could cover the Part B premium. Additionally, the labor supply of younger people who were not yet enrolled in Medicare would probably also increase, and they would most likely reduce their consumption in order to save more money to cover their expected future Medicare premiums. On net, the premium increase would probably increase total hours worked and reduce total saving economywide. However, because the premium increase would be modest relative to the average income of affected enrollees, the macroeconomic effects would probably be small.

Freezing the IRP thresholds (the second and third alternatives) would have more muted effects on the economy than increasing the basic premium. One reason for that outcome is that freezing the thresholds would affect considerably fewer people between 2024 and 2032 than would increasing the basic premium, so any response by affected enrollees would have a smaller effect on the overall economy. Additionally, in most cases, the premium increase for enrollees affected by freezing IRP thresholds would represent a smaller percentage of their (higher) income than would be the case for enrollees affected by an increase in the basic premium.

Other Considerations

Increasing the basic premium for Medicare Part B would increase costs for state Medicaid programs. States' costs would increase because Medicaid covers Part B premiums for most people enrolled in both Medicare and Medicaid, and states share in the costs of providing Medicaid benefits.