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Medicare: Part B Premium Penalty

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Publication Date: June 2005

Publisher(s): Library of Congress. Congressional Research Service

Series: RS21731

Topic: Health (Health care financing)


Medicare is a nationwide health insurance program for the aged and certain disabled persons. Medicare consists of two distinct parts -- Part A (Hospital Insurance) program and Part B (Supplementary Medical Insurance) program. The Part A program is financed primarily through payroll taxes levied on current workers and their employers. Part B is financed through a combination of monthly premiums paid by current enrollees and general revenues. The 2005 premium is $78.20 per month.

Medicare Part B is a voluntary program. People generally enroll in Part B when they turn 65. Persons who delay enrollment in the program after their initial enrollment period are subject to a premium penalty. This penalty is a surcharge equal to 10% of the premium amount for each 12 months of delayed enrollment. There is no upper limit on the amount of the surcharge that may apply. Further, the penalty continues to apply for the entire time the individual is enrolled in Part B.

The Part B delayed enrollment penalty provision was included in the original Medicare legislation which was enacted in 1965. This provision was included to prevent adverse selection. Adverse selection occurs when only those persons who think they need the benefit actually enroll in the program. When this happens, per capita costs are driven up, thereby causing more persons (presumably the healthier, and less costly, ones) to drop out of the program. The intention was to encourage all persons to enroll. Since most persons over 65 are enrolled in Part B, the costs are spread over the majority of this population group. Per capita costs are less than would be the case if adverse selection had occurred.

This report discusses how the Part B premium penalty operates and reviews exceptions to the penalty (including those for certain military retirees). The report will be updated if legislative changes occur.