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Effect of a Zero Social Security COLA on Part B Premiums in Medicare

 

Your Medicare Part B Premium is deducted from what you receive in Social Security each month. A zero Social Security COLA would have significant implications for the premiums charged to enrollees in Medicare Part B. 

Part B of the Medicare program covers physician services and outpatient care, including durable medical equipment, laboratory services, some physical and occupational therapists’ services, and some home health care.  Most beneficiaries pay a monthly Part B premium that is set to cover about 25 percent of the costs of Part B, with the balance coming from the general fund of the Treasury. 

Hold Harmless Provision.  Most Medicare enrollees have their Part B premium withheld from their monthly Social Security benefit. For those individuals, a “hold-harmless” provision guarantees that a benefit check will not decrease as a result of an increase in the Part B premium. The dollar increase in the Part B premium for a year is compared to the dollar increase in the Social Security monthly benefit. If the dollar increase in the premium is larger than the dollar increase in the Social Security benefit, then the increase in the Part B premium paid by the beneficiary is limited to the dollar increase in the Social Security benefit.

The hold-harmless provision does not apply to about one-quarter of Part B enrollees:

  • New enrollees in Part B (because they did not have the premium withheld from their Social Security benefit in the prior year),
  • Higher-income enrollees who are subject to an income-related premium, and
  • Individuals who do not have the Part B premium withheld from their Social Security benefit, nearly all of whom have their premiums paid by Medicaid.

The Role of Part B Premiums in Medicare Trust Fund Financing. The major components of income to the Part B trust fund account are premiums and a matching contribution that is transferred from the general fund of the Treasury. For aged enrollees, that matching contribution is $3 for every $1 in premium collections; there is a similar matching contribution for enrollees who are under 65.

The amount of the monthly premium is set so that total annual revenue to the Part B trust fund account (from premiums, matching contributions, and interest) is sufficient to cover annual expenditures from the trust fund and to maintain a contingency reserve of about two months of spending. Under normal circumstances, the premium is set to cover about 25 percent of the average cost per enrollee of Part B benefits (because the matching contribution covers the remainder). 

However, because almost three-quarters of Part B enrollees will be subject to the hold-harmless provision, the increase in premium revenue needed to draw matching contributions sufficient to cover the growth in annual spending and maintain the contingency reserve will have to be collected from the one-quarter of enrollees who are not eligible for the protection of the hold-harmless provision. As a result, the current-law increase in the monthly Part B premium for those individuals will be nearly four times the increase that would be required if no enrollees were subject to the hold-harmless provision.

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