Means-Testing Would Undermine the Medicare Program

by Jessica Schieder, 8/16/2013

President Obama has proposed increasing "means-testing" within the Medicare program as a way to reduce the federal budget deficit; in other words, higher-income seniors would pay more for their health care under the program. This is one of the worst ways to achieve savings through cuts to Medicare and could impose significant costs on middle-income seniors, reduce health care coverage, and undermine political support for the effective program.

What's Wrong with Asking Higher-Income Seniors to Pay More?

There are two ways this approach could impact seniors. Both would reduce Medicare's public funding. First, eligibility requirements could be changed so that fewer seniors are eligible to participate, making the program more like Medicaid. Second, a larger proportion of seniors could be asked to pay even more for their health care services than they do now. In either case, means-testing Medicare would be damaging for at least two reasons:

  • It would undermine political support for Medicare: When Medicare was signed into law in 1965, costs and benefits were kept equal for all seniors, regardless of their income levels or assets. Signing the bill, President Lyndon Johnson said, "Charity is indignity when you have to have it." Johnson believed that a universal program that benefited all Americans would be more politically sustainable than one that was seen as a welfare program for the poor. Programs that provide equal benefits to citizens regardless of income are more likely to retain much broader popular support over time than means-tested programs.

  • It could produce gaps in health care coverage and increase per-capita costs: If program participants are required to pay a larger proportion of the costs of Medicare, some middle-income participants could be forced to drop medical or prescription drug coverage. As participation declines, the per-capita costs for those who remain in the Medicare program may increase, particularly if those who opt out are younger and healthier than those who stay in the program.

President Obama's Proposals

Medicare is divided into four parts: Part A covers hospital insurance, Part B covers medical insurance for doctors, Part C is a market plan referred to as Medicare Advantage, and Part D covers prescription drugs.

Parts A, B, and D already have modest means-testing, but this is a recent development. Medicare premiums were not tied to income until 2007. Currently, Medicare Part B participants who can afford it are asked to pay a modestly higher monthly premium, but this affects less than five percent of participants, generally the wealthiest retirees. In 2010, income-related premiums were extended to prescription drug coverage under Medicare Part D.

In his latest budget request, President Obama proposed extending means-testing within Medicare significantly. Specifically, he recommended:

  • Asking 25 percent of Medicare beneficiaries to pay higher Part B premiums (up from just five percent today);

  • Introducing a higher deductible for prescription drugs (Part D of the program) starting in 2017, leaving seniors to pay more for drugs out of pocket before reimbursements kick in;

  • Introducing co-payments for home health care, which could discourage seniors from requesting needed medical attention or force them to inefficiently over-utilize hospital care; and

  • Penalizing seniors for using supplementary (Medigap) insurance policies, which help beneficiaries afford co-payments, deductibles, and other out-of-pocket costs.

Supporters argue that increasing means-testing within Medicare is a necessary evil, but the president's proposal would affect working-class seniors as well as the affluent. Seniors with incomes as low as $40,000 (in today's dollars) would be forced to pay extra premiums.

During their working years, higher-income beneficiaries paid higher payroll taxes. Increasing the taxes they pay once they are retired – and reliant on a fixed income – is unfair and punishes Americans who saved responsibly for their retirement. For this reason, Paul Krugman has called means-testing of Medicare "a badly designed, unfair form of taxation."

Adding additional costs through means-testing would exacerbate a disturbing trend. As the chart below shows, out-of-pocket health costs for seniors as a percentage of income increased by over a third between 1997 and 2006.

Medicare Beneficiaries and Out-of-Pocket Costs
Source: Kaiser Family Foundation

Further burdening Medicare beneficiaries will make it more difficult for seniors, even affluent seniors, to afford health care. And by increasing the cost of health insurance, seniors may be discouraged from seeking needed treatment early, leading to more serious and costly health interventions later on.

"The problem is that with seniors already using 20 to 40 percent of their income on health care and you're just going to pile on these additional costs, you know they're going to have to be choosing and picking between what they can afford to buy and what they can't," explained Dan Adcock of the National Committee to Preserve Social Security and Medicare.

In some cases, wealthier beneficiaries may decide that income-based premiums for medical care (Part B) and prescriptions (Part D) within Medicare outweigh the program's benefits completely. Beneficiaries with the ability to rely on private insurance programs may drop parts of their Medicare coverage, and beneficiaries without alternative insurance options may forgo coverage, risking paying for physician visits and prescriptions without insurance.

The Proposed Changes Garner Only Modest Savings

Altogether, the president's proposals for mean-testing within Medicare would reduce the federal deficit by approximately $50 billion over 10 years. This represents less than 12 percent of the approximately $400 billion in Medicare, Medicaid, and other health care savings the president has proposed over the next decade.

Other proposals put forward by the president do not increase the burden on seniors and provide more savings. These include:

  • Lowering subsidies for pharmaceutical companies within Medicare Part D for low-income seniors ($123 billion over 10 years);
  • Adjusting payments for certain health care providers ($50 billion over 10 years); and
  • Scaling down Medicare's commitments to reimburse hospitals for bad debt ($25 billion over 10 years).

Together, these three proposals would save almost four times more than means-testing. Pharmaceutical companies, health care providers, and hospitals are more able to make adjustments to these changes than middle-income seniors.

As Lyndon Johnson noted, Medicare was passed to ensure that illness during old age in America would not reduce elderly Americans to paupers and undermine their dignity. Most of America's elderly live on fixed incomes. Forcing middle-class seniors to pay more for health care could leave more of them struggling to make ends meet at the end of their lives. It is a sad commentary on the state of our politics that this way of reducing the deficit is viewed as more "realistic" than imposing a Wall Street sales tax, returning inheritance tax rates to those of earlier eras, or taxing overseas profits.

Editor's Note: This article has been updated since its original publication date to clarify that seniors would pay higher premiums under a Medicare Part B proposal.