THE BLOG
03/05/2013 02:20 pm ET Updated May 05, 2013

Medicare Means Tested -- Who Knew?

Rich people have paid more for Medicare coverage since the program began in 1966. Subsequent changes have regularly increased the extra amount those with high incomes must pay for coverage. That history often seems totally forgotten into today's Medicare reform debate about whether the program should be means tested (if you know what I mean; see endnote if you don't) so as to require upper income people to pay more.

In fact, that's been a basic component of the program from the start, which makes the current debate so distracting and confusing. The real question is how much extra the rich should pay.

Part A, which pays for hospital care, is financed by a mandatory tax imposed on all workers. It has always been a flat percentage - currently 2.9% -- of wages. Initially the amount taxed was capped when income hit the ceiling for Social Security taxation ($6600 in 1966 when Medicare began rising to $57,600 in 1993). Since 1993, there has been no cap on wage income subject to the Medicare tax, leading to a situation where some high earners pay Medicare taxes exceeding their Social Security retirement taxes.

Obamacare increased the burden on high earners a bit more by imposing an extra 0.9% tax on individual earnings exceeding $200,000 ($250,000 for a couple). So over time the Medicare tax went from being regressive (pre-1993 when the rich paid a smaller percentage of income than low-income earnings) to being somewhat progressive (in that those at the very top pay a higher percentage of their income).

But high earners have always paid more for the same package of hospital coverage that covers everyone over 65 who paid the tax for at least ten years.

Until 20 years ago nearly everyone eligible for Medicare coverage who opted for Part B outpatient coverage paid the same premium, now roughly $100 monthly. From the start, though, some low-income beneficiaries also eligible for medicaid got a government subsidy to help pay their premium. Since the beginning, Medicare Part B has been structured so these premiums pay 25% of the costs, with the remainder paid from general Federal revenues.

In 1993 the program was modified to raise premiums - and lower the subsidy--for the richest beneficiaries. Now the richest five percent pay more with those at the top asked to pay more than triple the rate most pay - or more than $300 monthly, which comprises 80% of the cost of their coverage.

When Congress created Part D, the drug coverage program, in 2003, it followed the revised Part B regime, so the richest participants are now required to pay $69 more monthly for coverage than less affluent beneficiaries.

The richest beneficiaries now pay substantially more for all elements - Parts A, B and D - for Medicare coverage. Reformers somes argue that the rich be required pay more for the same coverage, the reality is that they already do. The real issue whether their extra payments should be expanded and, if so, by how much.

For different political reasons, both parties have a shared interest in ignoring this reality. Liberal Democrats argue in favor of a one-size-fits-all program that doesn't link medical treatment, which they think should be a basic right, to income. Conservative Republicans like the image of a big government program that provides subsidized care for all irrespective of their need. Both sides project the threat or promise of a train that's about to leave the station. In fact, it is far down the track.

More can be done to raise more money from rich Medicare beneficiaries, albeit at the risk of jeopardizing their support as the program's worth to them is steadily reduced. The existing fees can be increased. Or they could be asked to pay more for the care received. Both changes would, of course, make the program more complex and difficult to understand.

Historically, there have been few bruising public political battles about increasing the burden on more affluent beneficiaries. The added tax included in Obamacare was never an issue and removal of the tax cap in 1993, raising taxes on those with six or seven figure salaries generated almost no public discussion. Perhaps things are different now, but there's no need to debate whether the rich should be asked to shoulder more of the burden of financing Medicare because they already do. The question of the moment is how much more.

(Finally, in an effort to avert a potential technical spat among wonks, let me provide the explanation of means-tested threatened in the first paragraph. There are some who argue that mean's testing suggests a binary situation where those whose income exceeds a threshold are simply ineligible for benefits. Food stamps are like that. They argue that the correct phrase to describe programs like Medicare is income-related, which is to say that benefits never disappear, but simply become less generous as income rises. They've yet to educate the public - or me - to make that distinction.)

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