Medicare cost increases are not uncommon, but in 2016, they will have an uncommon effect. Thanks to quirks in the Social Security system, approximately 30% of Medicare beneficiaries are going to experience huge increases in their Medicare part B costs (up to 52%) while others are not affected in the same way.
Medicare has three elements of coverage: Part A that covers hospital visits and costs, Part B that covers such things as outpatient procedures, preventative care, and regular visits to doctor’s offices, and Part D that covers prescription drugs. (In case you are wondering what happened to Part C, those are the private healthcare plans known as Medicare Advantage.)
Part A is free to Medicare beneficiaries, while Part B and Part D payments are paid through their own separate premiums. For many retirees, Part B and Part D payments are paid by subtracting them from the Social Security benefits that they receive. Both Medicare premiums and Social Security are inflation-adjusted, but by different mechanisms and Medicare adjustments are usually higher.
For this year, there is no cost-of-living adjustment (COLA) to Social Security payments because the Consumer Price Index (CPI) showed no appreciable inflation. Medicare premiums, on the other hand, will rise. That combination shifts the entire premium increase for Medicare on an unlucky minority thanks to the “Hold Harmless” provision of the Social Security rules and the provision that Social Security COLAs can never go below zero and decrease beneficiaries’ payments.
The Hold Harmless rule keeps Social Security benefit payments from decreasing due to rising Medicare Part B premiums, thus premium increases are capped by the amount of the Social Security COLA. For the majority of retirees who have their Part B premiums deducted from their checks, this combination completely insulates them from Medicare increases — they have no COLA to absorb the premium increase. Low-income retirees who have their premium paid by the state are also unaffected — the state pays the increase.
Unfortunately, other retirees must bear the entire cost of the Medicare increase. According to AARP, some premiums could climb from $104.90 to $159.30 per month. There are four basic groups that fall into this category: Medicare recipients who are not yet drawing Social Security benefits, those who pay their Medicare premiums directly instead of having the premiums deducted from their benefits, new enrollees, and Medicare beneficiaries with higher incomes.
If you are in one of these groups, is there anything you can do to improve your situation? Higher-income beneficiaries are out of options, because the Medicare premium is based on the previous year’s income. However, if you have not enrolled in Medicare yet but are eligible, you could sign up now and have your premium deducted from your monthly payment, protecting you from financial loss. Otherwise, signing up during 2016 subjects you to the higher premium.
It may be better to absorb the higher premium if you were paying your premiums directly because you delayed your benefits for other economic reasons. You would have to calculate the tradeoff.
For details about these rules and whether or not you may be affected, you can read this summary. AARP offers a similar outline of who will be stuck with the premium increase.
If you are having trouble determining your best course of action, seek help from a financial planner or similarly qualified professional. They can help you determine the best course of action for your situation, and perhaps save you some money in the process.