Fact Sheet

Summary 

The Medicare Part B monthly premium will be $88.50 in 2006, an increase of $10.30 from the current $78.20 premium. The 2006 premium is roughly the same as the CMS actuaries have been projecting since early this year. 

Though premiums are rising, most Medicare beneficiaries will see significantly lower out-of-pocket health care costs in 2006 because of the savings in drug costs from the new Medicare prescription drug benefit. Also, about one-fourth of beneficiaries can receive assistance that pays for their entire Part B premium, and about one-third of beneficiaries can receive assistance for their Part D premium.

Continued rapid growth in the intensity and utilization of Part B services is the primary reason for the premium increase. This growth is seen in physician office visits, lab tests, minor procedures, and physician-administered drugs.  It also includes rapid growth in hospital outpatient services.  Additionally, increased fee-for-service expenditures contribute to higher payment rates to Medicare Advantage health plans. Also, enrollment in Medicare Advantage plans is increasing as those plans have become much more widely available. These factors are leading to higher Medicare costs related to the Medicare Advantage program. It should be noted that Medicare Advantage plans result in average beneficiary savings of $100 a month.

In addition, part of the premium increase is necessary to increase assets that, for accounting purposes, are held in the Part B trust fund.   As the Medicare Board of Trustees noted in their March 23, 2005 report to Congress, a premium increase of 12 percent or more would be needed in 2006 to prevent a further decline in Part B trust fund assets and to help restore those assets to an adequate level. 

Premiums and Deductibles for 2006

Part A Premium: $393 (not paid by 99 percent of beneficiaries)

Part A deductible: $952

Part B premium: $88.50

Part B deductible: $124

Background

The Centers for Medicare & Medicaid Services updates the premiums, deductibles and co-payments made by Medicare beneficiaries each year.  These adjustments are made according to formulas set by statute.  By law, the monthly premium for Medicare Part B must be sufficient to cover 25 percent of the programfs costs, including the costs of maintaining a reserve against unexpected spending increases.  The federal government pays the remaining 75 percent.  Similarly, statutory formulas are used to determine the Medicare Part B deductible, the Part A deductible for hospital stays and other enrollee contributions.

Medicare Premiums and Beneficiary Out-of-Pocket Costs in 2006

The Medicare Part B premiums and deductibles apply to all Part B beneficiaries, but other factors including Medicarefs new prescription drug benefit will provide additional help with out of pocket costs in 2006.

Beneficiaries with incomes below 135 percent of poverty and limited resources are eligible for subsidies that pay for some or all of their Medicare premiums.   As a result, about one in four Medicare beneficiaries can get extra assistance that enables them to pay little or no premium for Part B, Part D, or both, next year.  This would include most beneficiaries living on incomes that come only from a monthly Social Security check.  Also, many beneficiaries with incomes between 135 percent and 150 percent of poverty can get partial assistance with their Part D premiums. Overall, about one-third of beneficiaries can qualify for Part D premium assistance.  

By law, the Medicare Part B premium increase may not exceed any beneficiaryfs cost of living adjustment in their Social Security check.  For the great majority of beneficiaries, the amount of the Social Security cost of living increase will be much greater than the additional premium they will pay.

In 2006, out-of-pocket costs for many Medicare beneficiaries will also be reduced significantly by the new Medicare prescription drug benefit. The average Part D monthly premium will be $32, about 14 percent lower than had been projected, with plans in virtually all areas of the country available for a premium of under $20 or even less. The drug benefit will provide help with prescription drug costs that for many beneficiaries will exceed the premium cost.   On average, the prescription drug benefit will reduce prescription drug costs for the beneficiaries who now have no drug coverage by many hundreds of dollars.

In addition, more beneficiaries than ever have Medicare Advantage plans available to them.  These plans will generally offer additional coverage at a lower cost than the standard Medicare drug benefit in 2006, as well as additional benefits and reduced copayments for Medicare-covered services.  On average, these plans save beneficiaries around $100 a month compared to enrollment in fee-for-service Medicare.

Information on these and other programs that can help beneficiaries lower their out-of-pocket costs is available at 1-800-MEDICARE (1-800-633-4227), and for hearing and speech impaired at TTY/TTD: 1-877-486-2048.

Reasons for Increase in Part B Premium

The new Part B premium is only slightly higher than what CMS actuaries predicted in the Medicare Trusteesf Report issued in March ($87.70 at that time).  In a subsequent March 31, 2005 letter to MedPAC, CMS noted that the actual 2006 premium might be slightly higher than the Trusteesf Report projection because more recent data on 2004 spending continued to indicate rapid growth in utilization and intensity of many types of Part B-covered services.  The table attached to this Fact Sheet summarizes the factors contributing to the premium increase.

The most important single factor, accounting for most of the 9.9 percent increase in total Part B benefit payments, is rapid growth in the volume and intensity of Part B services. The table below provides more information on why the growth in volume and intensity is having an important impact on Part B spending.   It shows the increases in the volume and intensity of services for the two largest components of Part B, physiciansf services and outpatient hospital services. Growth in spending for these two services account for most of the increase in total Part B benefit payments (spending growth for these services also contributes to the increase in Medicare Advantage payments, as noted below). 

                                                             Percent Increase in Volume/Intensity

                                                        2002    2003    2004    2005 (Est.)       2006 (Est.)

Physiciansf Services                             6.3%    4.6%    6.3%    5.6%                6.4%   

Outpatient  Hospital Services                 3.5%    2.5%    6.8%    6.6%                3.8%   

Because of the growth in volume and intensity of services, the 2005 estimates of the growth in volume and intensity of physician and hospital outpatient services are now 5.6 percent and 6.6 percent, respectively.  These estimated increases are greater than they were projected to be last year. Similarly, the rapid actual growth has led to higher projected utilization growth for 2006 than had previously been the case.  In turn, this results in higher expected Part B spending and higher premiums.

For physiciansf services, increases in utilization and intensity during 2004 were 6.3 percent, and are estimated to be 5.6 percent for 2005 and projected to be 6.4 percent for 2006.  These figures are much higher than the average utilization and intensity increase of about 1 percent per year between 1992 and 1999, and reflect an upward trend since 2000. This continued growth in the volume and intensity of physiciansf services has resulted in a high projected growth in spending for these services in 2006, which is a principal factor contributing to the increase in the 2006 Part B premium. As indicated in a letter from CMS to MedPAC on March 31 (http://www.cms.hhs.gov/physicians/medpac.pdf), the rapid growth in services administered in physician offices has resulted from rapid growth in intensity and utilization for office visits, lab tests, minor procedures, and physician-administered drugs.

For outpatient hospital services, the trend for 2002 and 2003 significantly increased over 2004 and 2005. The utilization and intensity projection for 2006, while lower than for 2004 and 2005, is in excess of the long-term trend.  Many other types of Part B services, which account for smaller shares of Part B spending, also have had rapid growth in volume and intensity.

Some of these increases in use of services are unquestionably related to improvements in the quality of health care. However, as noted in the MedPAC letter and in subsequent analysis by CMS and other groups, much of the spending increase cannot easily be explained by changes in treatments based on new medical evidence and valuable new technologies. 

As CMS has said repeatedly, the rapid growth in utilization of services shows that Medicare needs to move away from a system that pays simply for more services, regardless of their quality or impact on beneficiary health. Medicare payments should provide better financial support to doctors and other health professionals in their efforts to achieve better health outcomes for Medicare beneficiaries at a lower cost. CMS is working closely with medical professionals and Congress to increase the effectiveness of how Medicare compensates physicians and other health care providers. CMS is also conducting demonstrations and pilot programs that pay providers more for better quality, better patient satisfaction, and lower overall health care costs.

Other factors have also contributed to the projected premium.  First, the scheduled statutory reduction of 4.4 percent in the physician fee schedule rates means that the projected premium increase is significantly lower than would otherwise be the case.  If physician payment rates were held constant (physician price change of 0.0 percent rather than -4.4 percent), with no other changes to help reduce Medicare spending, Medicare Part B spending would be approximately $2.4 billion higher in 2006.

Second, outpatient hospital services, physician-administered drugs, and certain other Part B covered services will have price increases of generally around 3 percent. These price increases are determined by law.

Third, payments to Medicare Advantage (MA) plans are projected to be higher. A main reason is that the payments to MA plans are tied by statute to the payments in fee-for-service Medicare.  Consequently, as fee-for-service expenditures rise, so do Medicare Advantage payments. Another reason for higher MA spending is that more beneficiaries are projected to enroll in MA plans in 2006. More MA plans offering additional benefits that reduce beneficiary out-of-pocket costs, including more generous prescription drug coverage, will be available in more regions of the country than ever before – including 49 states and many new rural areas of the country.  MA payments are also being adjusted increasingly for the health risks of their beneficiaries.  These risk scores result in a gbudget neutrality adjustmenth to plan payments, which was set along with the 2006 plan payment rates in April 2005.

Fourth, adjustments to Part B greservesh to increase the level of Federal assets held in the Part B trust fund account for roughly 30 percent of the premium increase. (The Part B Trust Fund is an accounting system that, by law, must have Federal general revenues and premium payments credited to it in order to pay for Part B services.)   The adjustments are needed because the financial assets counted in the SMI trust fund are currently well below the levels considered actuarially appropriate for contingency reserve purposes. This situation has arisen primarily due to faster than expected expenditure growth along with the enactment of the Consolidated Appropriations Resolution in February 2003 and the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) in December 2003.  Each of these two legislative packages increased Part B spending, for example by increasing physician payment rates, after the Part B premiums had been set for 2003 and 2004, respectively. 

Additional Details on Other Announced Premiums and Deductibles

Part B Deductible background: The Part B deductible was increased to $110 in 2005 and was subsequently indexed to the increase in the average cost of Part B services for aged beneficiaries, as part of the Medicare Modernization Act.  The reason for the increase in the average cost of Part B services was described above.  In 2006, the Part B deductible will be $124, compared to $110 in 2005.

Part A Deductible background: Medicare Part A pays for inpatient hospital, skilled nursing facility and some home health care. The $952 deductible, paid by the beneficiary when admitted as a hospital inpatient, is an increase of $40 from $912 in 2005.  The Part A deductible is the beneficiaryfs only cost for up to 60 days of Medicare-covered inpatient hospital care in a benefit period.  Beneficiaries must pay an additional $238 per day for days 61 through 90 in 2006, and $476 per day for hospital stays beyond the 90^th day in a benefit period.  This compares with $228 and $456 in 2005.

Part A Premium background:   About 99 percent of Medicare beneficiaries do not pay a premium for Part A services, since they have at least 40 quarters for Medicare-covered employment.  However, other seniors and certain people under age 65 with disabilities who have fewer than 30 quarters of coverage may obtain Part A coverage by paying a monthly premium set according to a statutory formula.  This premium will be $393 per month for 2006, an increase of $18 from 2005.  In addition, seniors with 30 to 39 quarters of coverage, and certain disabled persons with 30 or more quarters of coverage, will pay a premium of $216 in 2006, compared to $206 in 2005.

View the Analysis of 2006 Part B Premium Rate Increase: http://www.cms.hhs.gov/media/press/files/2006PartBpremiumanalysistable.pdf