Three Ways to Put Medicare on Stronger Financial Footing

The Medicare system is on the verge of bankruptcy. By this time next decade, there will not be enough money in the system to pay full promised benefits. Without cost savings, America's $40 trillion national debt will get even bigger just to pay scheduled Medicare benefits to seniors.

Some of Medicare’s problems are rooted in the program’s basic design and will require broader reforms. But Congress can begin addressing the immediate budget problem with a relatively simple approach: asking higher-income seniors to pay more of the cost of their Medicare benefits.

Congress could do that through three changes to the Income-Related Monthly Adjustment Amount, or IRMAA. It could extend income-related premiums to Part A, permanently freeze the IRMAA income thresholds, and gradually increase the share of Medicare costs paid by higher-income beneficiaries.

Extend Income-Related Premiums to Part A

Medicare Part A primarily covers inpatient hospital care. Most beneficiaries do not pay a monthly Part A premium because they or their spouses accumulated sufficient Medicare-covered work history.

Medicare nevertheless already establishes a Part A premium for beneficiaries who do not have enough qualifying work history. That existing premium provides a straightforward basis for extending income-related premiums to Part A.

Congress could place Part A within the IRMAA framework and use the full Part A premium as the benchmark. Higher-income beneficiaries would then pay a portion of that amount based on the same income brackets used to determine their additional Part B and Part D premiums.

This would apply the same principle across Medicare’s major components. Higher-income beneficiaries who contribute more toward physician and prescription drug coverage would make a larger contribution toward hospital coverage as well.

Permanently Freeze the IRMAA Income Thresholds

Congress should also end inflation adjustments for the income thresholds that determine which beneficiaries pay IRMAA.

Under current law, those thresholds generally rise with inflation. As a result, the income levels at which beneficiaries begin paying higher Medicare premiums increase over time.

Freezing the thresholds would allow a gradually larger share of higher-income retirees to become subject to income-related premiums as nominal incomes rise. The change would take effect gradually rather than immediately expanding IRMAA to a much larger group of beneficiaries.

Congress has used this approach before. IRMAA thresholds were frozen for several years before inflation adjustments resumed.

Gradually Raise the IRMAA Percentages

The third reform would increase the portion of Medicare costs paid by beneficiaries subject to IRMAA.

Under the current Part B structure, beneficiaries in the income-related premium brackets pay premiums based on 35, 50, 65, 80 and 85 percent of average program costs, depending on income.

Congress could gradually increase those percentages to 50, 65, 80, 95 and 100 percent. Each bracket would rise by one percentage point per year for 15 years.

The long phase-in would prevent a sudden premium increase and give beneficiaries time to plan. Once fully implemented, beneficiaries in the highest income bracket would pay the full average cost of their coverage rather than receiving a federal premium subsidy.

Combined with a permanent freeze of the income thresholds, the change would steadily increase the contribution made by higher-income beneficiaries while leaving the basic Medicare benefit intact.

See How Far the Reforms Go

None of these changes would fix Medicare’s underlying design flaws. They would not change how the program purchases health care or address many of the incentives contributing to rising costs.

But they could make a substantial dent in Medicare’s budget problem using mechanisms that already exist.

The next step should be straightforward: model the three reforms together and see how far they go. Policymakers should determine how much of Medicare’s long-term financing gap could be closed by extending IRMAA to Part A, freezing the income thresholds and gradually increasing the premium percentages.

The answer could show that a significant portion of Medicare’s budget problem can be addressed before Congress moves on to more fundamental reforms.

CFE Takeaway

Medicare is rapidly approaching a financing crisis, and doing nothing will ultimately mean benefit cuts, more federal borrowing or both. Congress should start by extending IRMAA to Part A, permanently freezing its income thresholds and gradually increasing the share of Medicare costs paid by higher-income seniors. These changes will not fix Medicare’s underlying design flaws, but they could take a substantial bite out of its budget gap.