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Thursday, November 4, 2010

Interactions Between the Social Security COLA and Medicare Part B Premiums

Jim Hahn
Analyst in Health Care Financing

Alison M. Shelton
Analyst in Income Security

On October 15, 2010, the Social Security Administration announced there will be no Social Security cost-of-living adjustment (COLA) in 2011. In addition, there was no Social Security COLA in 2010. The last positive Social Security COLA took effect in January 2009 and was 5.8% for all of 2009. Meanwhile, 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 for aged beneficiaries. 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 year when 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 of Part B enrollees (17.5%) 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.

As of the date of this report, Congress has not passed legislation to address this issue. Speaker of the House Pelosi has announced that she will ask the House to consider H.R. 5987, which would provide a one-time, $250 payment to Social Security beneficiaries (including persons on Social Security disability) and retired veterans and railroad workers, when Congress returns after the November elections. Senate Majority Leader Reid has announced he will ask the Senate to consider legislation to provide a one-time, $250 payment when Congress returns after the elections. On October 15, 2010, the White House press office announced that the President supports efforts to provide a $250 payment to seniors, veterans, and people with disabilities

Date of Report: October 29, 2010
Number of Pages: 18
Order Number: R40561
Price: $29.95

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