Stealth-Taxing Non-Wealthy Medicare Beneficiaries

Christopher Conover, PhD

Remember how candidate Barack Obama made a “firm pledge” to Americans in families under $250,000 income that “you will not see any of your taxes increase one single dime?” This pledge was repeated again, again, and again. Tell that to elderly and disabled Medicare beneficiaries with incomes well below that amount who will be paying a total of $36 billion more into Medicare thanks to the new health law.

Starting this year, the health law made two important changes to Medicare. The first provision increases over time the number of beneficiaries subject to income-related Part B premiums, by eliminating the index on income. Part B covers doctors’ services, outpatient care, home health services, and other non-hospital medical services, including preventive care.

Although it is voluntary, 94 percent of Medicare beneficiaries opt to have it since the premiums charged to participate are set by law to cover only 25 percent of the actual cost of Part B benefits. However, higher-income beneficiaries must pay a premium that covers anywhere from 35 to 80 percent of Part B costs, depending on income. This year, beneficiaries must pay higher Part B premiums once their income reaches $85,000 for an individual or $170,000 for a couple. Since 2007, these income thresholds have been inflation-indexed so that only about 5 percent of beneficiaries are subject to higher Part B premiums. But since the new health law no longer permits these thresholds to rise with inflation, the number of beneficiaries subject to higher premiums will grow to 14 percent by 2019 (and will keep rising indefinitely thereafter).

The second change is that for the first time, beneficiaries with Part D coverage also must pay income-related premiums using the identical Part B income thresholds. Part D covers prescription drugs. Again, because premiums are set to cover only about one fourth of the actual cost of standard Part D benefits, 90 percent of beneficiaries elect some sort of prescription drug plan. This change will affect about 3 percent of Part D beneficiaries in 2011, but this will rise to 9 percent by 2019.

All told, by 2019, unless the health plan is repealed, these changes will require higher premium payments for 3.5 million Part B beneficiaries and 4.2 million Part D beneficiaries. The vast majority of these individuals have incomes far below the $200,000 (individual)/$250,000 (family) threshold that was repeatedly used by President Obama as the dividing line between those whose taxes should increase and everyone else.

Some might argue these are premiums, not taxes. But those with the highest incomes must pay premiums more than three times as large as those not classified “higher-income.” Actuarial considerations play no role in determining where such premiums are set. These individuals are paying higher premiums simply because their income is higher, not because their expected medical expenditures are higher. Indeed, the empirical evidence suggests that Medicare spending is higher among those who are poor rather than those who have high incomes. Thus, it is difficult conceptually to distinguish between an income-related premium and a tax on income.

Perhaps higher-income people should pay more for Medicare. But candidate Obama never ran on such a platform. And the higher taxes (euphemistically called “premiums”) on Medicare beneficiaries are flagrantly inconsistent with the president’s assurances about which individuals would face higher taxes under his administration.

Moreover, if income-related premiums are warranted, their justification should be to save Medicare, which currently faces unfunded liabilities that in today’s terms exceed the nation’s entire net worth. Instead, however, the $36 billion in higher taxes imposed on Medicare beneficiaries was used to mask the size of a massive new entitlement–one that we might have decided was not affordable had Democrats allowed rational discussion of the matter. These taxes were part of the now well-known “smoke and mirrors” used to make it appear as if health reform would reduce the deficit, even though any honest scoring of the plan shows quite the opposite. This is just one more example of the stealth taxes and broken promises that permeate Obamacare.

Conover is a research scholar in the Center for Health Policy and Inequalities Research at Duke University.

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