Medicare Program Takes on More Income-Related Features

When Medicare was enacted in 1965 it was financed in a manner similar to Social Security. Workers and employers were required to pay the same tax rate for Medicare Part A (Hospital Insurance), up to the Social Security wage base, and beneficiaries paid the same premium for Medicare Part B (Supplemental Medical Insurance), when opted. All beneficiaries received the same benefits. Legislation in 1988 eliminated the first of these commonalities: The Qualified Medicare Beneficiary (QMB) program covers Medicare cost sharing and Part B premiums for anyone with income below the poverty level. In 1990, legislation created a separate, higher, cap on the amount of income to be taxed for financing Part A. The cap was eliminated entirely in 1994. Legislation enacted in 2003 (the Medicare Prescription Drug, Improvement and Modernization Act), which added a prescription drug benefit, also moved away from the principal of commonality as it eliminated the flat Part B premium for all beneficiaries. Today, the highest-paid workers pay higher payroll taxes and starting in 2007 the highest-income beneficiaries will pay a higher Part B premium. Otherwise, all Medicare beneficiaries will have access to the same benefits, regardless of income. This latest change has received very little attention since it only affects the highly paid, but it may be indicative of changes that will become necessary in the future to keep Medicare solvent. The issue of Medicare changes that require higher payments by higher income workers and retirees is a potentially thorny one that cuts in ways that often seem counterintuitive. Regardless of the politics of particular retiree health issues, the combination of the erosion of retiree health benefits and limited benefits from Medicare means that beneficiaries at all income levels should expect to pay a significant amount of money for health insurance and health care services. The PDF for the above title, published in the May 2004 issue of EBRI Notes, also contains the fulltext of another May 2004 EBRI Notes article abstracted on SSRN: "Retirement Accounts and Wealth, 2001."