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How Medicare premiums are calculated

Written by: Josh Miner
October 16, 2020 at 8:07 AM

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?

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 specific services that range from inpatient hospital stays to prescription drug coverage to Medicare Medical Savings Account Plans for care in a skilled nursing facility.

How are Medicare premiums calculated?

Medicare Part A is free to most beneficiaries and covers hospital stays, care in a 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. For 2020, if a beneficiary has a MAGI (Modified Adjusted Gross Income) above $85,000 per year (for a single person) and above $170,000 per year (for a married couple), they will pay higher premiums for Part B (medical insurance) and Part D (if you elect for Part D).

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.

How Medicare Premiums are Calculated

Chart source - KFF

Medicare Premium Rates

Most beneficiaries enrolled in Part B in 2020 will have a premium of $144.60/month. Medicare Part B premiums are calculated as a share of Part B program costs.

For higher income enrollees in 2020, Part B premiums ranged from $202.40/month for enrollees with income of $109,000/single and $218,000/married to $491.60 for enrollees with income of $500,000/single and $750,000/married

Part D, as noted, is free for those below the higher income bracket. Those in the higher income brackets must pay a monthly Income-Related Monthly Adjustment Amount (or IRMAA). For 2020 these amounts range from $12.20/month for enrollees with income of $109,000/single and $218,000/married to $76.40 for enrollees with income of $500,000/single and $750,000/married. This 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.

It’s important to note that these rates were frozen from 2011-2019, but will be adjusted for inflation from 2020 on.

Beneficiary Premium Rates

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

  • $202.40 with an income of $87,001-$109,000,
  • $289.20 with an income of $109,001-$136,000/year,
  • $376.00 with an income of $136,001-$163,000/year
  • $462.70 with an income of $163,001-$500,000/year
  • $491.60 if their income is above $500,000

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

  • $202.40 with an income of $174,001-$218,000,
  • $289.20 with an income of $218,001-$272,000/year,
  • $376.00 with an income of $272,001-$326,000/year
  • $462.70 with an income of $326,001-$750,000/year
  • $491.60 if their income is above $750,000

Beneficiaries who are married but file separate tax returns pay:

  • $462.70 with an income of $87,001-$413,000/year
  • $491.60 if their income is above $413,000

This post was originally published January 27, 2015. It was last updated October 16, 2020.

Topics: Medicare, Premiums

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