How Medicare Premiums are Calculated

January 27, 2015

If you’re currently on Medicare or reaching the age where you are considering Medicare, it’s important to understand the basics. Furthermore, you should consider how premiums are calculated in order to have an idea of what kind of premium you’ll be looking at. Here is a quick guide showing you what Medicare is, how Medicare premiums are calculated, and average rates to expect.

What is Medicare?How Medicare Premiums are Calculated

Medicare is the federal health insurance program for people who are 65 or older, certain younger people with disabilities, and people with End-Stage Renal Disease (permanent kidney failure requiring dialysis or a transplant).

Medicare coverage is broken down into different parts. These different parts include Medicare Part A (Hospital Insurance), Medicare Part B (Medical Insurance), Medicare Part C (Medicare Advantage Plans), and Medicare Part D (prescription drug coverage).

Each part of Medicare covers a specific service that range from inpatient hospitals stays to prescription drug coverage, and Medicare Medical Savings Account Plans to care in a skilled nursing facility. Knowing this, how are Medicare Premiums calculated?

How Are Medicare Premiums Calculated?

Many individuals are wondering how medicare premiums are calculated. Medicare Part A is free to most beneficiaries and covers hospital stays, care in skilled nursing facility, hospice care, and some health care. However, premiums for Part B and Part D depend on a beneficiary’s income.

In other words, beneficiaries with higher incomes pay higher premiums. It’s important to note that this affects less than five percent of Medicare beneficiaries. If a beneficiary has an income above $85,000 per year (for a single person) and above $170,000 per year (for a married couple), they will pay a higher part B Premium.

How is a Beneficiary’s Premium Determined?

The Social Security Administration reviews a beneficiary’s most recent federal tax information in order to determine what their premium will be. Based on the image below, the distribution of income among Medicare beneficiaries is represented by 50% with incomes below $23,500. And for those with incomes over $93,900, the beneficiary is required to pay a high premium. This adjustment is based on a sliding scale which is based upon the Modified Adjusted Gross Income (MAGI) and is the beneficiary’s total adjusted gross income and tax-exempt interest income.

Related: How to Calculate Modified Adjusted Gross Income

How Medicare Premiums are Calculated

Chart source - KFF

Medicare Premium Rates

Beneficiaries enrolled in Part B will generally see a premium of $104.90/month in 2014.  Medicare Part B premiums are calculated as a share of Part B program costs.

However, unlike Part B, actual premium amounts paid by higher-income Part D enrollees depend on which plan they choose and the premium charged for their plan.  The national average Part D premium in 2014 is $32.42/month. It is important to note that actual monthly premiums for stand-alone prescription drug plans (PDPs) vary across plans and regions. Actual premiums range from $12.50/month to a high of $174.70/month in 2014.

Part D income-related monthly adjustment amount is gathered in addition to the premium higher-income enrollees pay for their Part D plan. An income-related adjustment amount is withheld from the enrollee’s Social Security or Railroad Retirement benefit payments in the same manner that the Part B premium is withheld.

Beneficiary Premium Rates

Beneficiaries filing an individual tax return must pay a monthly premium of:

  • $146.90 with an income of $85,001-$107,000,

  • $209.80 with an income of $107,001-$160,000/year,

  • $272.70 with an income of $160,001-$214,000/year, and

  • $335.70 if their income is above $214,000.

If a beneficiary files jointly, the 2012 Part B monthly premium is:

  • $146.90 if their income is $170,001-$214,000/year,

  • $209.80 with an income of $214,001-$320,000/year,

  • $272.70 with an income of $320,001-$428,000/year, and

  • $335.70 if their income is above $428,000/year.

Beneficiaries who are married but file separate tax returns pay:

  • $272.70 with an income of $85,001-$129,000/year, and

  • $335.70 if their income is above $129,000/year.

What questions do you have about how medicare premiums are calculated? Comment below and let us know.

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