The Impact of Means-Tested Medicare Part B Premiums on Retirement

Historically, Medicare Part B coverage has been available to all eligible persons on the same terms, with premiums set at 25% of Part B program costs. This philosophy changed in 2003, when the Medicare Prescription Drug, Improvement and Modernization Act (MMA) introduced means-tested premiums on coverage for professional services (Part B) for the first time. Beginning in 2007, higher income households were required to pay higher premiums for Part B coverage equal to 35%, 50%, 65% or 80% of total costs. While this change in policy currently affects only a small proportion on enrollees (approximately 4% of enrollees), the number of beneficiaries facing higher premiums is expected to grow over time. Indeed, the Affordable Care Act of 2010 included provisions that will increase the number of Medicare beneficiaries facing higher income-related premiums to 14 percent by 2019.  Means testing could increase revenues without significantly restricting access to health care services. On the other hand, means testing could lead to high income retirees dropping coverage which would exacerbate the adverse selection problem, since higher income individuals are typically healthier.

In this study, we examine the impact of higher Part B premiums on retirement decisions. The shift toward means-testing, raises the price of Medicare relative to employer-based insurance, which could influence labor force participation decisions of Medicare age-eligible persons. By increasing the relative price of Medicare, means-tested premiums might induce some individuals to continue working in order to keep access to ESHI. Higher Medicare premiums may affect the decision to work and, conditional on working, the number of hours that an individual chooses to work. Additionally, an increase in premiums decreases future disposable income and thereby creates an incentive for some individuals to postpone retirement so that they may accumulate enough wealth to live comfortably after retiring.

We use data from the 1992 through 2010 Health and Retirement Study (HRS) to examine the impact of means tested Part B premiums on the labor force participation decisions of the older adults. Since Medicare premiums are set by statute, they are assumed to be exogenous to individual labor supply decisions. We use linear probability models (LPM) to estimate the impact of Medicare premiums on the probability of being fully retired and on the decision to delay retirement beyond the full retirement age. The full retirement age is the age at which an individual is eligible for full Social Security benefits. In order to assess the robustness of our results, we estimate several specifications that control for an extensive set of variables, including measures of health, wealth and other sources of health insurance. We find that higher premiums have a significant, negative effect on the probability of retiring. Higher premiums induce older adults to delay retirement beyond their full retirement age. We discuss the implications of our findings to Medicare revenues and the labor market implications of lower retirement rates.