Order Code RL32582
CRS Report for Congress
Received through the CRS Web
Medicare: Part B Premiums
September 14, 2004
Jennifer O’Sullivan
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Medicare: Part B Premiums
Summary
Medicare is the nation’s health insurance program for individuals aged 65 and
over and certain disabled persons. Medicare consists of four distinct parts: Part A
(Hospital Insurance [HI]); Part B (Supplementary Medical Insurance [SMI]); Part C
(Medicare Advantage [MA]); and Part D (the new prescription drug benefit added
by the Medicare Prescription Drug and Modernization Act of 2003 [MMA]). The
Part A program is financed primarily through payroll taxes levied on current workers
and their employers; these are credited to the HI trust fund. The Part B program is
financed through a combination of monthly premiums paid by current enrollees and
general revenues. Income from these sources is credited to the SMI trust fund.
Beneficiaries can choose to receive all their Medicare services through managed care
plans under the MA program; payment is made on their behalf in appropriate parts
from the HI and SMI trust funds. A separate account in the SMI trust fund will
account for the new Part D drug benefit which will be implemented beginning in
2006; Part D will be financed through general revenues and beneficiary premiums.
When Medicare began in 1966, the Part B monthly premium paid by
beneficiaries was set at a level to finance 50% of Part B costs; general revenues
financed the remainder. Legislation enacted in 1972 limited annual premium
increases. As a result, beneficiary contributions dropped to below 25% of program
costs by the early 1980s. Since the early 1980s, Congress regularly voted to set Part
B premiums at levels to cover 25% of program costs. The Balanced Budget Act of
1997 (BBA 97) permanently set the Part B premium at 25% of program costs.
Certain low-income beneficiaries are entitled to assistance in paying their Part B
premiums. Beginning in 2007, certain high income Medicare enrollees will pay a
higher percentage of their Part B premiums.
The 2004 monthly Part B premium is $66.60; the 2005 premium will be $78.20,
a 17.4% increase. The premium increase is attributable to increases in benefit costs
as well as increases needed to assure adequate trust fund reserves. This report will
be updated when the 2006 premium is announced.

Contents
Financing Medicare Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Premium Calculations for 2004 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
History of Part B Premium Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Annual Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Home Health Benefit Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Assistance for Low Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
MMA Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Premiums for High-Income Enrollees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Changes in 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Part B Deductible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
List of Tables
Table 1. Monthly Part B Premiums, 1966-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. Percentage of Part B Costs Paid by High-Income Beneficiaries . . . . . . . 8

Medicare: Part B Premiums
Financing Medicare Part B
Calculation
Medicare Part B is financed through a combination of beneficiary premiums and
federal general revenues. Beneficiary premiums equal 25% of estimated program
costs for the aged. (The disabled pay the same premium as the aged.) Federal
general revenues account for the remaining 75%.
The 2004 premium is $66.60, an increase of $7.90 (13.5%) over the 2003
premium. The 2005 premium will be $78.20, an increase of $11.60 (17.4%) over the
2004 amount. The increases reflect the increase in the costs of health care services
funded under Part B. Increases in premium costs are somewhat outpacing those in
the private health insurance market (estimated at 11.2% in 2004).
Individuals receiving social security benefits have their Part B premium
payments automatically deducted from their social security benefit checks; however,
an individual’s social security check cannot go down from one year to the next as a
result of the annual Part B premium increase.1 Social security payments are subject
to an annual cost-of-living adjustment or COLA; the 2004 increase of 2.1%
represents an average monthly increase of $19 per retired worker. (As of this writing,
the 2005 COLA increase has not been announced.)2
Premium Calculations for 2004 and 2005
Each year, Medicare actuaries estimate total per capita incurred costs for the
following year. These amounts are established prospectively. Actual spending for
the year maybe different; and, as a result, income for the year may not equal program
costs. Trust fund assets must be maintained at a level to cover a moderate degree of
variation between actual and projected costs. This is achieved through a contingency
margin adjustment. The following outlines the calculations for 2004 and 2005.
1 Specifically, the law provides that if the Part B premium increase is greater than the dollar
increase in the annual social security cost-of living adjustment, the premium owed by the
individual would be reduced to the amount needed to assure no reduction in the social
security cash payment.
2 The monthly social security check is rounded down to the next lowest multiple of $1 if it
is not already a multiple of $1. The Part B premium is deducted before rounding down the
monthly benefit payment.

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The monthly premium for 2004 was calculated as follows. Total monthly
benefit costs of $347.50 were reduced by $68.60 for required beneficiary cost-
sharing. The resulting amount of $278.90 was increased by $6.52 for administrative
expenses and reduced by $3.58 for interest earnings. This total of $281.84 was
further reduced by $15.44 for the contingency margin adjustment; this adjustment
had the effect of drawing down the reserves. Twenty-five percent of the resulting net
per capita amount of $266.40 yielded a 2004 premium amount of $66.60. 3, 4
The monthly premium for 2005 was calculated as follows. Total monthly
benefit costs of $368.64 were reduced by $70.84 for required beneficiary cost-
sharing. The resulting amount of $297.80 was increased by $6.68 for administrative
expenses and reduced by $4.00 for interest earnings. This total of $300.48 was
further increased by $12.30 for the contingency margin adjustment; this has the effect
of increasing the reserves. Twenty-five percent of the resulting net per capita amount
of $312.78 (rounded) yields a 2005 premium amount of $78.20.
The premium increase from 2004 to 2005 is attributable to a number of factors
including projected changes in the costs of services. Increases in spending for
physicians services and managed care are the major factors contributing to the
increase in service costs. Total per capita monthly spending (including beneficiary
cost-sharing) for physicians services increased from $148.94 to $153.56 (3.15%).
Total per capita monthly spending for managed care increased from $45 to $52.82
(17.4%); this increase reflects increases in costs of covered services as well as higher
payments for Medicare Advantage plans required by MMA. Overall, total incurred
costs, including administrative costs increased from $285.42 to $304.50 (6.7%). This
resulted in an increase in the base Part B premium amount (before adjustments for
interest and the contingency reserve) of $4.77.
A key change in the calculation from 2004 to 2005 is that for the contingency
reserve. For several years, CMS has been reducing the otherwise applicable premium
to draw down an anticipated surplus. However, the actuaries now anticipate the
reserves are insufficient to cover contingencies; therefore an amount needs to be
added to the otherwise applicable premium amount. As was noted in the 2004
trustees report,5 Medicare actuaries feel that a reserve ratio of 15% - 20% is sufficient
to protect against unforseen contingencies.6 The ratio was at 20% or above through
3 Note that the figures appearing in the Federal Register Notice are the per capita monthly
actuarial rates; by law the monthly actuarial rate is equal to 50% of per capita program costs
for the aged. The beneficiary premium equals one-half of the monthly actuarial rate or 25%
of program costs.
4 U.S. Department of Health and Human Services, Centers for Medicare and Medicaid
Services, Medicare Program; Medicare Part B Monthly Actuarial Rates, Premium Rate,
and Annual Deductible Beginning January 1, 2005
, 69 Federal Register Notice, Sept. 9,
2004.
5 Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Insurance Trust
Funds, 2004 Annual Report of the Boards of Trustees, Federal Hospital Insurance and
Federal Supplementary Insurance Trust Funds
, Communication, Mar. 23, 2004.
6 The reserve ratio is defined as the ratio of excess of assets over liabilities to the following
year’s total incurred expenditures.

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the end of 2002. However, at the end of 2003, the level was at 12%. The actuaries
estimated that it would drop to 10% in 2004.
CMS primarily attributes the change in direction of the contingency adjustment
to two pieces of legislation: the Consolidated Appropriations Resolution (CAR, P.L.
108-7) and the Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 (MMA, P.L. 108-173). CAR increased physician payments for 2003 and
MMA increased physician payments for 2004.7 Both bills were enacted after the
premiums for those years were announced. In addition, actual spending for 2003 was
slightly higher than had been projected; thus further reducing the reserves.
The contingency adjustment to the 2004 premium was a minus $3.90 ($3.86
rounded to the nearest $0.10). If this adjustment had not been made, the premium
amount for 2004 would actually have been $3.90 higher or $70.50 (instead of
$66.60). Because of the projected shortfall, the adjustment was made in the other
direction for 2005. This adjustment represents $3.08 (26.6%) of the $11.60 increase
in the 2005 premium amount.
Comparing the actual 2004 premium amount for 2004 and 2005 shows a
difference of $11.60. This includes an increase of $4.77 in benefits, a decrease of
$0.11 for interest adjustment and a shift of $6.94 (minus $3.86 for 2004 and plus
$3.08 in 2005) in the contingency margin. It should be noted that the actuaries
project that the 2005 contingency adjustment is only half of that needed to place the
trust fund assets at a truly adequate level; a similar increase can be anticipated for
2006.
It should also be noted that current projections are based on the requirements
of current law. It is estimated that application of the current physician payment
formula will result, beginning in 2006, in a year-to-year reduction in the conversion
factor (i.e., the dollar amount that converts the relative value for a physician’s service
under the fee schedule to a payment amount). It is expected that the Congress will
address this issue. If payment reductions are not allowed to go into effect, this will
have the effect of further increasing Part B costs, and, by extension, Part B premiums.
History of Part B Premium Calculation
Annual Update
When the program first went into effect in July 1966, the Part B monthly
premium was set at a level to finance 50% of Part B program costs. Legislation
enacted in 1972 limited the annual percentage increase in the premium to the same
percentage by which Social Security benefits were adjusted for changes in cost-of-
living (i.e., COLAs). Under this formula, revenues from premiums soon dropped
from 50% to below 25% of program costs. This was because Part B program costs
7 For a discussion of these payment increases, see CRS Report RL31199, Medicare
Payments to Physicians
, by Jennifer O’Sullivan.

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increased much faster than inflation as measured by the Consumer Price Index on
which the Social Security COLA is based.
From the early 1980s, Congress regularly voted to set Part B premiums at a level
to cover 25% of program costs, in effect, overriding the COLA limitation. The 25%
provisions first became effective January 1, 1984. General revenues covered the
remaining 75% of Part B program costs. Congress took this general approach again
in the Omnibus Budget Reconciliation Act of 1990 (OBRA 90). However, OBRA
90 set specific dollar figures, rather than a percentage, in law for 1991-1995. These
dollar figures reflected Congressional Budget Office (CBO) estimates of what 25%
of program costs would be over the five-year period. Program costs grew more
slowly than anticipated, in part due to subsequent legislative changes. As a result,
the 1995 premium of $46.10 actually represented 31.5% of program costs.
Omnibus Budget Reconciliation Act of 1993 (OBRA 93) extended the policy
of setting the Part B premium at a level to cover 25% of program costs for 1996-
1998. As was the case prior to 1991, a percentage rather than a fixed dollar figure
was used. This meant that the 1996 premium ($42.50) and the 1997 premium
($43.80) were lower than the 1995 premium ($46.10).
BBA 97 permanently set the premium at 25% of program costs. If Part B costs
increase or decrease, the premium rises or falls accordingly. (See Table 1 for a
history of Part B premiums.)
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA, P.L. 108-173) increases the Part B premium percentage for high income
enrollees, beginning in 2007. (See discussion, below.)
Table 1. Monthly Part B Premiums, 1966-2005
Monthly
Effective
Year
premium
date
Governing policy; Legislative authority
1966
$3.00
7/66
Fixed dollar amount; Social Security Amendments (SSA)
of 1965
1967
$3.00
Fixed dollar amount; SSA of 1965
1968
$4.00
4/68
Fixed dollar amount through March; Medicare
Enrollment Act of 1967. Beginning April: 50% of costs;
SSA of 1965
1969
$4.00
50% of costs; SSA of 1967
1970
$5.30
7/70
50% of costs; SSA of 1967
1971
$5.60
7/71
50% of costs; SSA of 1967
1972
$5.80
7/72
50% of costs; SSA of 1967
1973
$6.30
9/73
50% of costs; SSA of 1967 (COLA limit, added by SSA
of 1972, could have applied, but was not needed).
Limitations imposed by Economic Stabilization program
set 7/73 amount at $5.80 and 8/73 amount at $6.10.
1974
$6.70
7/74
50% of costs; SSA of 1967 (COLA limit, added by SSA
of 1972, could have applied, but was not needed)

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Monthly
Effective
Year
premium
date
Governing policy; Legislative authority
1975
$6.70
Technical error in law prevented updating
1976
$7.20
7/76
COLA limit; SSA of 1972
1977
$7.70
7/77
COLA limit; SSA of 1972
1978
$8.20
7/78
COLA limit; SSA of 1972
1979
$8.70
7/79
COLA limit; SSA of 1972
1980
$9.60
7/80
COLA limit; SSA of 1972
1981
$11.00
7/81
COLA limit; SSA of 1972
1982
$12.20
7/82
COLA limit; SSA of 1972
1983
$12.20
Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA) had set 25% rule for updates in 7/83 and 7/84.
However, SSA of 1983 froze premiums 7/83-12/83 and
changed future updates to January.
1984
$14.60
1/84
25% of costs; TEFRA, as amended by SSA of 1983
1985
$15.50
1/85
25% of costs; TEFRA, as amended by SSA of 1983
1986
$15.50
1/86
25% of costs; Deficit Reduction Act (DEFRA) of 1984
1987
$17.90
1/87
25% of costs; DEFRA of 1984
1988
$24.80
1/88
25% of costs, Consolidated Omnibus Budget
Reconciliation Act of 1985
1989
$31.90
1/89
25% of costs, OBRA 87, plus $4 catastrophic coverage
premium added by Medicare Catastrophic Coverage Act
of 1988
1990
$28.60
1/90
25% of costs; OBRA 89. Medicare Catastrophic
Coverage Repeal Act of 1989 repealed additional
catastrophic coverage premium, effective 1/90
1991
$29.90
1/91
Fixed dollar amount; OBRA 90
1992
$31.80
1/92
Fixed dollar amount; OBRA 90
1993
$36.60
1/93
Fixed dollar amount; OBRA 90
1994
$41.10
1/94
Fixed dollar amount; OBRA 90
1995
$46.10
1/95
Fixed dollar amount; OBRA 90
1996
$42.50
1/96
25% of costs; OBRA 93
1997
$43.80
1/97
25% of costs; OBRA 93
1998
$43.80
1/98
25% of costs; OBRA 93 and BBA 97
1999
$45.50
1/99
25% of costs; BBA 97
2000
$45.50
1/00
25% of costs; BBA 97
2001
$50.00
1/01
25% of costs; BBA 97
2002
$54.00
1/02
25% of costs; BBA 97
2003
$58.70
1/03
25% of costs; BBA 97
2004
$66.60
1/04
25% of costs; BBA 97
2005
$78.20
1/05
25% of costs; BBA 97
Source: Various Annual Reports. The 2003 Annual Report of the Board of Trustees of the Federal
Hospital Insurance and Federal Supplementary Medical Insurance Trust Fund, 108th Cong., 1st sess.,
Mar. 2003, 69 Federal Register 54674, Sept. 9, 2004.

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Home Health Benefit Transfer
BBA 97 made a change which had the effect of increasing the Part B premium
over time. Prior to BBA 97, both Parts A and B of Medicare covered home health
services. Payments were made under Part A, except for those few persons who had
no Part A coverage. In order to extend the solvency of the Part A (hospital
insurance) trust fund, BBA 97 gradually transferred coverage of some home health
visits from Part A to Part B. Beginning January 1, 2003, Part A covers only post-
institutional home health services for up to 100 visits, except for those persons with
Part A coverage only, who are covered without regard to the post-institutional
limitation.
Assistance for Low Income
Certain low-income beneficiaries are entitled to assistance in paying their Part
B premiums. Eligible persons fall into one of the following three coverage groups:
! Qualified Medicare Beneficiaries (QMBs). QMBs are aged or
disabled persons with incomes at or below the federal poverty level.
In 2004, the monthly level is $796 for an individual and $1,061 for
a couple8 and assets below $4,000 for an individual and $6,000 for
a couple. QMBs are entitled to have their Medicare cost-sharing
charges, including the Part B premium, paid by the federal-state
Medicaid program. Medicaid protection is limited to payment of
Medicare cost-sharing charges (i.e., the Medicare beneficiary is not
entitled to coverage of Medicaid plan services) unless the individual
is otherwise entitled to Medicaid.
! Specified Low-Income Medicare Beneficiaries (SLIMBs). These
are persons who meet the QMB criteria, except that their income is
over the QMB limit. The SLIMB limit is 120% of the federal
poverty level. In 2004, the monthly income limits are $951 for an
individual and $1,269 for a couple.9 Medicaid protection is limited
to payment of the Medicare Part B premium (i.e., the Medicare
beneficiary is not entitled to coverage of Medicaid plan services)
unless the individual is otherwise entitled to Medicaid.
! Qualifying Individuals (QI-1). These are persons who meet the
QMB criteria, except that their income is between 120% and 135%
of poverty. Further, they are not otherwise eligible for Medicaid. In
8 The annual HHS poverty guidelines for 2004 are $9,310 for an individual and $ 12,490 for
a couple; the monthly figures are $776 for an individual and $1,041 for a couple. The
qualifying levels are higher because, by law, $20 per month of unearned income is
disregarded in the calculation. The 2005 poverty guidelines will not be issued until Feb. or
Mar. 2005.
9 This is calculated the same way as the QMB level. See preceding footnote.

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2004 the monthly income limit for QI-1 for an individual is $1,068
and for a couple $1,426. Medicaid protection for these persons is
limited to payment of the monthly Medicare Part B premium. The
program is slated to expire September 30, 2004, though extensions
are possible.10
MMA Changes
MMA added a new drug benefit to Medicare Part D. It should be emphasized
that the cost of this drug benefit is accounted for separately and has no effect on the
Part B premium. MMA did, however, include two provisions directly affecting the
Part B premium calculation; an additional provision affects the calculation of the Part
B deductible.
Premiums for High-Income Enrollees
Since the inception of Medicare, all Part B enrollees have paid the same Part B
premium, regardless of their income level. For a number of years, proposals have
been offered to increase the share of Part B costs borne by higher income individuals.
Many observers suggested that it is inappropriate for taxpayers to pay (through
general revenue financing) three-quarters of Part B costs for these persons. They
point out that low income and middle income working persons may be subsidizing
higher income elderly persons.
MMA increases the Part B premiums for higher income enrollees beginning in
2007. In 2007, individuals whose modified adjusted gross income (AGI) exceeds
$80,000 and couples whose modified AGI exceeds $160,000 will be subject to higher
premium amounts. The increase will be phased-in over five years. When fully
phased-in, higher income individuals will pay total premiums ranging from 35% to
80% of the value of Part B (See Table 2). The term modified AGI means adjusted
gross income as defined under the Internal Revenue Code (determined without regard
to specified exclusions), increased by tax-exempt interest. In general, the taxable
year to be used is that beginning in the second calendar year preceding the year
involved. Under certain circumstances, an individual may request to have the
determination made for a more recent year.
The current law provision which specifies that a beneficiary’s check can not go
down from one year to the next as a result of the Part B premium increase will not
apply to persons subject to an income-related increase in their Part B premiums.
10 In general, Medicaid payments are shared between the federal government and the states
according to a matching formula. However, expenditures under the QI-1 program are paid
for 100% by the federal government (from the Part B trust fund) up to the state’s allocation
level. A state is only required to cover the number of persons which would bring its
spending on these population groups in a year up to its allocation level. Any expenditures
beyond that level are paid by the state. Total allocations are $300 million for Jan. 2004-
Sept. 2004. The program was initially slated to terminate Dec. 31, 2002, but was extended
through Sept. 31, 2004.

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Table 2. Percentage of Part B Costs Paid by
High-Income Beneficiaries
(in percent)
Income Category*
Year
Single
Couple
2007
2008
2009
2010
2011
$80,001- $100,000
$160,001-$200,000
27
29
31
33
35
$100,001- $150,000
$200,001- $300,000
30
35
40
45
50
$150,001- $200,000
$300,001- $400,000
33
41
49
57
65
more than $200,000
more than $400,000
36
47
58
69
80
* Beginning in 2008, the income levels are increased by the increase in the consumer price index for
urban consumers, rounded to the nearest $1,000.
The Congressional Budget Office (CBO) estimates that 1.2 million persons (3%
of beneficiaries) will pay higher premiums in 2007; and 2.8 million persons (6% of
beneficiaries) will pay higher premiums in 2013. CBO further estimates that the new
provision will reduce federal outlays by $13.3 billion over the 2007-2013 period. It
should be noted that while some persons have labeled this premium change as means
testing, the same Part B benefits will be available to all enrollees regardless of
income.
Changes in 2010
MMA also requires the Secretary to establish a six-year program, beginning in
2010, for the application of comparative cost adjustment (CCA) in CCA areas. The
CCA program will introduce competition between traditional FFS Medicare and local
private plans. As a result, an individual residing in a CCA area who is enrolled in
Part B of Medicare, but not enrolled in a managed care plan, can have an adjustment
to his or her Part B premium, either as an increase or a decrease. No premium
adjustment will be made for certain low-income persons. The annual adjustment for
a year, can not exceed 5% of the amount of the monthly Part B premium, as
otherwise determined.
Part B Deductible
The Part B deductible has been set at $100 since 1991. MMA raises it to $110
in 2005. In subsequent years, it will be increased by the same percentage used to
update the Part B premium.

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Legislation
The size of the 2005 increase in the Part B premium has received considerable
attention. As noted, an individual’s social security check cannot go down from one
year to the next as a result of the increase. However, some observers have suggested
that beneficiaries should not face the prospect of losing a large portion of their cost-
of-living (COLA) increase. For example, the Social Security COLA Protection Act
of 2004 (S. 2754, Daschle, et al. and HR. 4910, Herseth et al.) would specify that the
premium increases for both Part B and the new Part D could not exceed 25% of a
beneficiary’s COLA increase in a year. It should be noted that any premium costs not
paid by beneficiaries would be paid from federal general revenues, thereby increasing
overall federal Medicare costs.
As of this writing, it is not clear if any attempt will be made this year to roll
back any portion of the premium increase or to otherwise adjust the calculation.