It’s a Medicare reform idea that seems pretty straightforward, and for proponents on both sides of the political aisle, a fair-minded approach to solving the entitlement program’s funding woes -- make more financially well-heeled Medicare beneficiaries foot more of the bill for their care.

During the current budget deficit reduction talks, and in the fiscal cliff discussions last December, policymakers proposed more “means-testing” as one of the measures to help control government spending on Medicare.

However, there are consequences to expanding means-testing in Medicare.

Tying an increasing amount of Medicare beneficiaries’ income to their share of costs for health care services will likely hurt middle-class seniors and, ultimately, those with much lower income, experts say.

“I don’t see any way that the middle class won’t have to make sacrifices,” said Jagadeesh Gokhale, senior fellow at the Cato Institute and member of the Social Security Advisory Board.

Related FAQ: What Is Means Testing?
Related FAQ: How Could Proposed Changes to Means-Testing Impact Medicare Beneficiaries?
Related FAQ: What Has Been Proposed to Expand Medicare Means-Testing?

In addition, as premiums rise for wealthier seniors, they could opt out of the program in favor of buying a policy on the private market, said Max Richtman, president and CEO of the National Committee to Preserve Social Security & Medicare.

“It’s a slippery slope,” Richtman said. “You’ll leave the sicker, poorer patients to pay more for the program.”

Medicare Costs and Means-Testing to Save the Government Money

Deficit reduction is driving the focus now, but more means-testing has been under consideration for years in the talks on how to reform Medicare.

It’s among several proposals lawmakers and the president have put on the table to help constrain the rising cost of Medicare, which is driven largely by enrollment growth as the baby boomers retire  and by growth in demand for health care services.

Other proposals include raising the eligibility age, paying providers for performance, or reducing services, among other options.

In 2011, Medicare spent a total of $549.1 billion in health care coverage for 48.7 million beneficiaries, according to the 2012 annual Medicare Trustees Report. This amount accounted for roughly 15 percent of the national budget and 21 percent of overall U.S. health care spending.

According to the Trustees Report, Traditional Medicare Part A is expected to become insolvent by 2024. At that point, if no changes have been made, revenue from payroll taxes will cover only 90 percent of its estimated expenses.

Medicare Part B and Prescription Drug Plans (Part D) are funded in a different way from Part A in that both are financed by general tax revenue appropriated by Congress and from monthly premiums.

For Part B, in 2012, beneficiaries paid $58.8 billion, or 25 percent, of its total estimated cost of $230.9 billion, according to the 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

Due the current economic climate, some policymakers are seeking to ask beneficiaries to share even more of the burden to pay for Part B. Current proposals to expand means-testing are estimated to save the government $30 billion over 10 years (2013–2022).

Gokhale, who supports more means-testing in Medicare to curb the country’s debt, said additional means-testing is a way to further reduce government subsidies to wealthy seniors.

“We know that today, all kinds of subsidies to the health care sector are taking resources from other sectors,” he said. “If you’re going to limit the subsidies, who would you reduce it for first? The poor or the well-off?”

The appeal for greater means-testing is obvious, said Richard L. Kaplan, professor of law at the University of Illinois College Of Law.

It is a way to bring in more money without raising taxes, he said.

“It gets people in the program to pay more for the program,” Kaplan said. A general tax increase gives the government an opening to spend the money elsewhere.

How Medicare Currently Conducts Means-testing

While some politicians give the impression that means-testing is a new concept, it’s been a policy for almost a decade.

Premiums for Part B and Part D are already tied to beneficiaries’ income levels.

Today, seniors who file individual income tax returns (income from Social Security benefits, employment, interest from tax-exempt bonds, etc.) with incomes of $85,000 or less, and couples with incomes of $170,000 or less, pay a monthly premium of $104.90 for Part B. That payment tops out at $335.70 for seniors and couples with an income above $214,000 and $428,000, respectively. Premiums are based on the percentage amount set for beneficiaries. For example, individuals who make $85,000 or less pay 25 percent of Part B costs and Medicare pays the other 75 percent. Those making above $214,000 pay 80 percent of the total Medicare cost.

Part B Premiums by Income in 2013

If yearly income in 2011 was:

File individual tax return

File joint tax return

2013 premiums

$85,000 or less

$170,000 or less

$104.90

above $85,000 up to $107,000

above $170,000 up to $214,000

$146.90

above $107,000 up to $160,000

above $214,000 up to $320,000

$209.80

above $160,000 up to $214,000

above $320,000 up to $428,000

$272.70

above $214,000

above $428,000

$335.70

Source: Medicare.gov

The costs of different Part D plans vary by monthly premiums, yearly deductibles, co-payments and costs in the coverage gap (also known as “donut hole”). In addition, those who meet certain income requirements (both high and low) will have different plan costs.

Although more indirectly, Part A is also means-tested because it is financed by a 2.9 percent payroll tax imposed on all working Americans. In other words, those who earn higher wages pay more into Medicare than those who earn less simply because they pay more taxes. What’s more, starting in 2013, individuals who earn an annual income of $200,000 and married couples with an annual income above $250,000 will pay an additional 0.9 percent Medicare tax.

Means-testing Proposals and Their Impact

Given all the means-testing, currently only 5 percent of all seniors pay the higher premiums for Part B.

Under Obama’s proposed FY 2013 budget, according to the Kaiser Family Foundation, by freezing the current income, the number of seniors paying the higher premiums (up to 25 percent) would increase over time. Republicans in the House of Representatives proposed a similar proposal in 2011.

However, beneficiary advocates and health and economic policy experts say these proposals simply seek to shift the cost from the government to seniors, affecting primarily the middle-class.

This includes Chuck Austin, 71, and his wife Jess, 70, who lives in Lake Orion, Mich., a suburb north of Detroit.

“I’ve been very frugal and have saved money. But we continue to ask, ‘Are we going to have enough for the rest of our lives?’” Austin said. “(More means testing) is just one more thing…that could make sure we won’t have enough.”

Chuck Austin worked as an engineer for Chrysler for 40 years before retiring. His wife worked part-time as a bookkeeper but was mostly a homemaker. The couple has 5 children, and now 7 grandchildren.

In recent years, the couple has seen their health care costs increase from less than $3,000 a year to $11,000, citing increasing costs in co-payments, Medigap premiums, and prescription drugs. Jess Austin has hereditary high cholesterol.

“We’re doing everything we can to make it to (age) 90,” Austin said, saying the couple remains active and stays in relatively good health. “I was very careful to plan ahead and tried to make sure I have enough money if I live as long as my aunt and uncle (about 90), but new costs are piling up that we didn’t plan for.”

The Austins have a combined yearly income of about $95,000 from their pension, Social Security benefits and by selling their IRA bonds. This means, for their Part B, they pay the lowest premiums. However, under current proposals, they and similar other middle-class retirees would ultimately fall in a higher bracket and pay about 50 percent more for their premiums.

By freezing the income thresholds over a longer period of time until 25 percent of beneficiaries are paying higher premiums, a growing share of elderly and disabled people who are not considered high income by today’s standards would face higher premiums in the future.

According to the Urban Institute, under current law, only 7 million of the 78.3 million Part B enrollees in 2035 will pay higher premiums. Proposed plans increase that number by an additional 13 million of beneficiaries paying higher premiums by 2035. 

Under the proposed plans, 20.2 million would be paying higher premiums by 2035; adjusting for inflation, the individual income threshold would be the equivalent of approximately $47,000 today. In other words, individuals making $47,000, or couples making $94,000, today would be paying the higher premiums by 2035.

“Means-testing doesn’t save a lot of money unless you go down to the less wealthy people,” said Max Richtman, president and CEO of the National Committee to Preserve Social Security & Medicare.

Likelihood of Expansion

Despite recent openness by some Democrats in Congress to this idea, Gokhale and Richtman agree that the likelihood of expanding means-testing for Medicare is low.

Means-testing for Part B began four years after the Medicare Modernization Act, the prescription drug law, which passed in 2003. The law included a provision that called for about approximately 5 percent of all Medicare beneficiaries to pay higher Part B premiums.

“I don’t see any chance of (more means-testing) going through any time soon,” Gokhale said. “We have a liberal president. It’s a party that supports entitlement programs.”

Based on the tone of the president’s second-term inaugural address, Richtman said he hopes the president has changed his mind on considering additional means-testing.

“It depends on the president and how strong he is when starts facing (budget-related) deadlines that have to be met,” he said.

Kaplan said to remember that the idea of means-testing Part B took nearly a decade to implement. While there is support for more means-testing from both political parties, others remain skeptical.

Some Republicans compare more means-testing to a backdoor tax and a way to penalize success. Some Democrats are worried that with more means-testing, Part B might be vulnerable to cuts if its characteristics become too similar to a welfare program.

Richtman added that if wealthier Americans are forced to pay ever-increasing premiums, they may opt out of Part B and purchase private insurance, leaving the poorer—who tend to be less healthy and thus more costly—seniors to pay for the programs.

Meanwhile, seniors are a powerful voting bloc, especially during the primary elections.

Similar to the 2003 prescription drug law, any proposal to expand means-testing will likely need to be attached to a more encompassing health care reform or budget legislation. A straight forward bill to expand means-testing would probably fail, Kaplan said.

“If it was a slam dunk, it would have been done a long time ago,” he said. “It’s one of those political (dilemmas), it’s easy to do something that affects only 5 percent of the people, but then you don’t make a lot of money. Increase the number of people, then you’re affecting the middle-class and the political impact is greater.”

However, given the economic situation and the continuing rising costs of Medicare, it wouldn’t be a surprise if more seniors are asked to pay more for Part B, Kaplan said.

“(More) means-testing is a way to reduce the cost of government spending,” he said, adding it could happen in the next budget cycle.

 “It’s already in the law, making it an easier sale,” said Kaplan. “Now it’s just turning the dials.… It’s about deciding where that threshold will be.”

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