Some Medicare Benefits To Be Means-Tested Starting In 2007

The 2003 addition of prescription drug benefits to Medicare is by now old news, though the program remains bewilderingly complicated to many Medicare beneficiaries. One little-discussed provision of the law, however, will begin to be felt next year by the wealthiest retirees. Though the immediate effect will be small, the shift in thinking about Medicare may well become more dramatic in future years.

Medicare’s Part B premium, currently set at $88.50 per month, is paid by every participant in the optional coverage for doctor’s visits and outpatient care. The premium cost is set by federal law at 25% of the actual cost of the benefit, so that means the Medicare program is effectively paying more than $250 per month for every Medicare Part B participant. In 2007, that calculus will begin to change, at least for the wealthiest Medicare beneficiaries—those with incomes of more than $80,000 per year (or $160,000 per year for married couples).

Starting January 1, 2007, the percentage of the premium paid by participants will begin to increase for those high-income Medicare beneficiaries. If the premium for most people were to stay at $88.50 (it won’t), that would mean that those earning $80,000 would pay just under $100; those with incomes over $200,000 would pay about $173 each month. The spread will increase each year until 2010, when high-income beneficiaries will be paying between 35% and 80% of the total premium cost.

Proponents of the changes made two primary arguments before adoption of the new means-testing of Medicare benefits. First, they reasoned, the change is necessary to ensure the fiscal soundness of Medicare in coming years. Their second argument: Medicare is already means-tested, since poorer beneficiaries receive various subsidies to allow them to secure coverage.

Both arguments are misleading. Existing subsidies for poor Medicare participants come from Medicaid money, and require the applicant to show eligibility for the subsidy program. In general, they operate to shift state-financed medical care to the federal government more than to provide additional services to those in poverty. The new provisions will take a radically different approach; every Medicare beneficiary will now have to affirmatively show that he or she earns less than the threshold amount.

More fundamentally, the changes will produce a tiny savings in the larger picture of Medicare costs. The Congressional Budget Office has predicted savings of about $13 billion over ten years. That amounts to about three-tenths of one percent of the cost of Medicare during that same period. The only real savings will be if budget-cutters manage to expand the means-testing to more Medicare benefits and/or to lower the thresholds, and that is the very danger opponents are worried about.

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