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Medicare Is Already Means-Tested

Top lawmakers have been talking recently about means-testing Medicare — that is, making high-income people pay more or get less.

As Congressional Quarterly reported, “momentum is again building to link Medicare premiums to income.  House Speaker John A. Boehner, R-Ohio, endorsed the idea last week, and House Minority Whip Steny H. Hoyer, D-Md., said he would consider it.”

In assessing means-testing proposals, we should remember that Medicare has always had means-tested features and has gradually added more, including income-tested premiums.

From its beginning in 1965, three-quarters of Medicare’s Supplementary Medical Insurance (or SMI, the part that pays doctor bills) has been financed by general revenues, that is, mainly by personal income taxes.  Since the personal income tax is progressive, upper-income people pay a larger share of their income in taxes for SMI.

Since 2007, high-income beneficiaries have been required to pay higher SMI premiums.  The standard SMI premium is $115.40 a month, but beneficiaries with incomes above $85,000 (twice that amount for couples) must pay an extra amount that ranges from $46.10 to $253.70 a month.

Starting this year, high-income beneficiaries must also pay more for their Medicare prescription drug benefit.  The thresholds are the same as for the income-tested SMI premium, and the additional premium amounts range from $12.00 to $69.10 a month.

Medicare’s Hospital Insurance (HI) portion is financed mainly by a payroll tax of 2.9 percent on covered earnings (split equally between employers and employees).  Since 1994, the HI payroll tax has been levied on all covered wages and self-employment income without a limit.  As a result, the higher a person’s earnings, the more he or she pays for HI.

Starting in 2013, an additional HI payroll tax of 0.9 percent will be imposed on covered earnings above $200,000 for an individual and $250,000 for a couple.  Taxpayers also will pay an additional Medicare contribution of 3.8 percent of unearned income, such as dividends and capital gains, above the same thresholds.

Here’s the bottom line:  while Medicare coverage is nearly universal among people age 65 and older and all beneficiaries are eligible for the same services, high-income beneficiaries already pay much more for those benefits.