Medicare Part B covers most doctors' fees, diagnostic tests, ambulance services, and certain other items. Enrollees pay a monthly premium that is calculated to cover 25 percent of the program's expenditures, with the remaining 75 percent coming from general governmental revenues. But starting in 2007, this cost-sharing ratio will be increased for retirees whose annual taxable income exceeds $80,000. This means-testing of Medicare was adopted in the mammoth 2003 Medicare Act that also provided coverage of prescription drugs and was accelerated by the Deficit Reduction Act that was enacted in February 2006. This article examines the decade-long policy debate about means-testing Medicare and explores the tax implications of the mechanism that was finally created. The article also analyzes concerns about the joint administration of this program by the Social Security Administration and the Internal Revenue Service, and discusses such financial ramifications for upper-income retirees as capped contributions from former employers and possible nonenrollment in Medicare Part B.


Law and Economics

Date of this Version

August 2006