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Friday, October 8, 2010

The Effect of No Social Security COLA on Medicare Part B Premiums

Jim Hahn
Analyst in Health Care Financing

Alison M. Shelton
Analyst in Income Security

The Social Security Administration announced on October 15, 2009, that there was to be no Social Security cost-of-living adjustment (COLA) in 2010. Current projections indicate that there will be no COLA in 2011, either. Over the past five years, Medicare Part B program costs have increased an average of 8.3% per year and are expected to continue to grow. By statute, Part B premiums, which are automatically deducted from Social Security checks for those who receive Social Security, must cover 25% of projected Part B costs. The Social Security Act includes a provision that holds most Social Security beneficiaries harmless for increases in the Medicare Part B premium: affected beneficiaries’ Part B premiums are reduced to ensure that their Social Security checks do not decline from one year to the next. In a typical year, the hold harmless provision affects a small fraction of beneficiaries and has a limited impact on program finances. However, in a scenario where Medicare Part B premiums increase but Social Security benefits do not, the effects of the hold harmless provision are larger and more complex.

The absence of a Social Security COLA affects Medicare Part B premiums in two ways under current law. For about three-quarters of Part B participants, the hold harmless provision prevents their Part B premiums from increasing and so the amount of their Social Security checks remains flat, all other things being equal. Under current law, the only way to collect the 25% of Part B costs that are required to be covered by beneficiary premiums is to increase Part B premiums on beneficiaries who are not protected by the hold harmless provision. The one-quarter of beneficiaries who are not held harmless therefore shoulder the entire beneficiary share of the increase in Part B costs. In other words, their collective premium increase can be nearly four times greater than if there were no hold harmless provision.

The one-quarter of Part B enrollees to whom the hold harmless provision does not apply can be divided into three groups: (1) low-income beneficiaries whose Part B premiums are not withheld from their Social Security benefits but instead are fully paid by the Medicaid program (currently about 17.5% of Part B enrollees, expected to increase); (2) high-income beneficiaries who are subject to income-related Part B premiums (about 5% of Part B enrollees); and (3) beneficiaries for whom there is insufficient history of Social Security payments with corresponding deductions for the Part B premium (about 5% of Part B enrollees), which would include both new enrollees to either Social Security or Medicare and Part B enrollees who do not participate in Social Security.

The substantial majority (17.5%) of those not held harmless in 2010 were low-income beneficiaries whose Part B premiums are paid by Medicaid. As a result, in the absence of any intervention by Congress, most of the cost of the increase in Part B premiums in 2010 and 2011 will be paid by the federal-state Medicaid program, not directly by beneficiaries. About 5% of 2010 Part B enrollees—those enrollees who pay income-related premiums—saw higher Part B premiums and a corresponding decline in their Social Security benefit amounts compared with the previous year. An additional 5% (new enrollees to either Social Security or Medicare in 2010, and Part B enrollees who do not participate in Social Security who voluntarily elect Part B) paid premiums that are higher than they would have been but for this unusual situation.

As of the date of this report, Congress has not passed legislation to address this issue.

Date of Report: September 30, 2010
Number of Pages: 15
Order Number: R40561
Price: $29.95

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