Effect of a Zero Social Security COLA on Part B Premiums in Medicare

April 23, 2009

In yesterdays blog,I discussed CBOs projection that the recent decline in consumer prices and low expected inflation during the next few years will mean no COLAs in Social Security benefits until 2013.A zero Social Security COLA would havesignificant implications for the premiums charged to enrollees in Medicare Part B.

Part B of the Medicare program covers physician services and outpatient care, including durable medical equipment, laboratory services, some physical and occupational therapists services, and some home health care. Most beneficiaries pay a monthly Part B premium that is set to cover about 25 percent of the costs of Part B, with the balance coming from the general fund of the Treasury.

Hold Harmless Provision. Most Medicare enrollees have their Part B premium withheld from their monthly Social Security benefit. For those individuals, a hold-harmless provision guarantees that a benefit check will not decrease as a result of an increase in the Part B premium. The dollar increase in the Part B premium for a year is compared to the dollar increase in the Social Security monthly benefit. If the dollar increase in the premium is larger than the dollar increase in the Social Security benefit, then the increase in the Part B premium paid by the beneficiary is limited to the dollar increase in the Social Security benefit.

The hold-harmless provision does not apply to about one-quarter of Part B enrollees:

  • New enrollees in Part B (because they did not have the premium withheld from their Social Security benefit in the prior year),
  • Higher-income enrollees who are subject to an income-related premium, and
  • Individuals who do not have the Part B premium withheld from their Social Security benefit, nearly all of whom have their premiums paid by Medicaid.

In most years, the hold-harmless provision has very little impact. For example, a 2 percent increase in a Social Security benefit of $1,000 per month results in a $20.00 benefit increase. (The average Social Security benefit for a retired worker is about $1,150 per month.) A 7 percent increase in the Part B premium (similar to benefit growth in recent years), applied to the current premiumof $96.40, would increase the premium by $6.75well under that benefit increaseand the hold-harmless provision would have no effect.

Undercurrent law, however, CBO projects no benefit increase for Social Security beneficiaries from 2010 through 2012. As a result, by CBO's estimate, almost three-quarters of Part B enrollees will have their premiums limited by the hold-harmless provision each year during that period.

The Role of Part B Premiums in Medicare Trust Fund Financing. The major components of income to the Part B trust fund account are premiums and a matching contribution that is transferred from the general fund of the Treasury. For aged enrollees, that matching contribution is $3 for every $1 in premium collections; there is a similar matching contribution for enrollees who are under 65.

The amount of the monthly premium is set so that total annual revenue to the Part B trust fund account (from premiums, matching contributions, and interest) is sufficient to cover annual expenditures from the trust fund and to maintain a contingency reserve of about two months of spending. Under normal circumstances, the premium is set to cover about 25 percent of the average cost per enrollee of Part B benefits (because the matching contribution covers the remainder).

However, because almost three-quarters of Part B enrollees will be subject to the hold-harmless provision, the increase in premium revenue needed to draw matching contributions sufficient to cover the growth in annual spending and maintain the contingency reserve will have to be collected from the one-quarter of enrollees who are not eligible for the protection of the hold-harmless provision. As a result, the current-law increase in the monthly Part B premium for those individuals will be nearly four times the increase that would be required if no enrollees were subject to the hold-harmless provision.

Projected Part B Premiums in 2010 and Subsequent Years. CBO estimates that the Part B trust fund account will require about $220 billion in income from premium collections and matching contributions in 2010 to cover expenditures and maintain a contingency reserve, with larger premium collections required in subsequent years. CBO estimates that the hold-harmless provision, in conjunction with the zero COLAs projected for Social Security benefits, will result in the monthly Part B premium for beneficiaries not subject to the hold-harmless provision increasing to $119 in 2010, $123 in 2011, and $128 in 2012 (see note below). Without the hold-harmless provision, CBO estimates that the monthly premium would be $103 in 2010 and would grow to about $109 in 2012, so the interaction of the hold-harmless provision and projected zero COLAs for Social Security will add significantly to the increases called for under current law.There is no effect on Part D premiums because there is no hold-harmless provision in Part D.

CBOexpects that monthly premiums will be lower than $128 for a few years after 2012, as the number of beneficiaries subject to the hold-harmless declines.We estimate that the monthly Part B premium will decline to $114.50 in 2016 and then rise in subsequent years, reaching $135 in 2019.

Note:Under current law, Medicares payment rates for physicians services are scheduled to be reduced by 21 percent in 2010 and by about 6 percent a year for several years thereafter. CBOs premium projections assume that the premium for 2010 will be set to maintain an adequate contingency reserve in 2010 in the event that legislation to eliminate that 21 percent reduction is enacted after the premium is announced. (The premium for 2010 will be announced in September 2009.) The projections also assume that the reductions in payment rates for physicians services that are scheduled for 2010 and subsequent years will go into effect, and that premiums in 2011 and subsequent years will reflect those reductions in payment rates.