Medicare Premium Issue Makes a Return

The recent announcement of a 0.3 percent cost-of-living adjustment (COLA) for Social Security beneficiaries does not just affect those on the program; it will affect Medicare enrollees as well. Like last year, the relatively small COLA (or in last year's case, no COLA) means that the majority of Medicare beneficiaries will receive only a small increase in Part B premiums, but others will receive a large hike over last year's premiums. Further, all beneficiaries face a large jump in their Part B deductible. Last year, this issue was resolved in a fiscally responsible way and should be resolved that way again.

Premiums and deductibles are threatening to jump next year because of a clause known as the "hold harmless provision," which protects about 70 percent of Medicare beneficiaries from premium increases that exceed the dollar amount of their Social Security COLA but leaves the remaining 30 percent exposed to large premium increases.

Normally, the hold harmless provision does not take effect because the COLAs exceed the Medicare premium increases. This year, however, because the COLA is small, 70 percent of Medicare beneficiaries will receive a more limited premium increase (about $4.30 per month for someone receiving the average Social Security benefit) than they otherwise would. But since Medicare premiums must cover one-quarter of the cost of Part B, the remaining 30 percent of beneficiaries are tasked with making up the difference, leading to a large premium increase for them. The Medicare Trustees, working off the assumption that the COLA would be 0.2 percent, estimated that the monthly premium for the unprotected 30 percent would increase from $121.80 to $149, an annual increase of $325. For high-income beneficiaries who pay higher premiums, their annual increase will range from $457 to $1,044. These increases will be a little bit smaller in reality since the actual COLA is slightly higher than the Trustees assumed.

The groups of people who will be subject to this large premium increase include:

  • High-income beneficiaries who pay higher premiums at 35-80 percent of program costs (one-fifth of this group);
  • Beneficiaries who first join Medicare or Social Security in 2017 (one-sixth of this group);
  • Beneficiaries who are not currently receiving Social Security or pay premiums directly to Medicare (one-tenth of this group); and
  • Low-income beneficiaries who have their premiums paid by Medicaid (two-thirds of this group);
Beneficiaries Affected by the Hold Harmless Provision
  Number of Beneficiaries (2016) Share of Part B Beneficiaries
Held Harmless 36.7 million 70%
Not Held Harmless 15.5 million 30%
Premiums Paid by Medicaid 10 million 19%
High-Income Enrollees 3.1 million 6%
New Enrollees 2.6 million 5%
Premiums Paid Directly 1.6 million 3%

Source: Congressional Research Service
Note: Numbers do not add up in non-held harmless population since there is overlap among the different categories.

Since the Part B deductible is linked to premium growth, it will also jump a sizeable amount for all beneficiaries from $166 to $204 – a nearly one-quarter increase.

This issue came up last year when there was no COLA, and premiums for those not protected by the hold harmless provision were projected to jump by more than half. Lawmakers ultimately prevented this in the Bipartisan Budget Act of 2015 (BBA) by limiting the premium increase to the amount that would have occurred if the hold harmless provision did not apply, which reduced the premium increase by about 70 percent. This $7.5 billion cost was offset by increasing monthly premiums by $3 in future years until the cost of the reduced premiums was paid back. The BBA included a provision that would implement the same solution if necessary in 2017, but only if there was no COLA, not if there was a small one as is the case this year.

Since the premium increase is not as steep this year as it was projected to be last year, it is possible that lawmakers would be willing to accept it this time; for example, they allowed a 15 percent premium increase to take effect in 2010 when there was no COLA that year. Further, most of the people who will actually be affected are those in the top 5 percent of income, new beneficiaries who weren't paying Part B premiums before and may be better off relative to their previous insurance, and low-income beneficiaries whose premiums are paid by Medicaid. Lawmakers may want to act, though, to take the stress off state budgets, to protect the other groups of beneficiaries subject to the premium increase, or to prevent the jump in the deductible.

The cost of preventing the large premium/deductible increase is likely smaller than the $7.5 billion it was last year, so it should be easy to offset if lawmakers choose to go that route. One possibility is simply to do what they did in 2015: increase premiums by a small amount in later years to make up the difference. Policymakers could also undertake more long-lasting policies that would produce savings over the long term. They could freeze the income thresholds for the higher premiums paid by high-income beneficiaries for an additional three years to 2022 or increase the Part B deductible in future years for new beneficiaries, both of which are policies in the President's budget that would fully offset the cost and reduce longer-term deficits. There are also several changes to provider payments and prescription drug policies that could provide savings for both the federal government and beneficiaries.

Options to Offset Premium Changes
Policy Ten-Year Savings
Freeze means-tested premium thresholds for 3 years through 2022 ~$10 billion
Increase Part B deductible for new beneficiaries $7 billion
Encourage generic drug use by low-income beneficiaries $18 billion
Accelerate discounts in the Part D "donut hole" $12 billion
Reduce indirect medical education cost reimbursement $12 billion
Increase Medicaid drug rebates $8 billion
Encourage more efficient use of physician-administered drugs $7 billion
Accelerate development of generic drug equivalents $6 billion
Limit Medicaid DME reimbursement to Medicare rates $4 billion

Source: Congressional Budget Office

Lawmakers may also want to fix the hold harmless provision permanently as they attempted to do for 2017 in the BBA. They should ensure that any change also applies it to low-COLA years that would trigger the hold harmless provision and prevent this change from adding to deficits using the same mechanism they did in the BBA (or an equivalent alternative). That would provide more certainty for Medicare beneficiaries in low- or no-COLA years and obviate the need for lawmakers to scramble the next time the issue arises.

If lawmakers choose to blunt the premium and deductible increases, they should follow the precedent they set last year and do it in a fiscally responsible manner.