What To Do About Increasing Medicare Premiums?
Since Medicare’s inception in 1966, the Part B premium had risen by an average of 7.7% per year. But in 2017 it increased nearly 28% for certain Medicare recipients. It turns out there is a way for you to limit those cost increases. The question is, should you?
Let’s start with a quick review of Medicare. Part A, also known as hospital insurance, covers in-patient hospital stays, surgeries, and post-hospital skilled nursing care. If you have contributed to Social Security (SS) for 40 quarters or more, you will be entitled to Medicare Part A coverage once you reach age 65 at no cost. You may also be entitled to Part A coverage without having to pay a premium through your spouse or based on other extenuating circumstances.
Part B, outpatient services, covers eligible medical costs such as doctor and clinic visits, as well as select pharmaceutical equipment, supplies, lab tests and medications administered on an outpatient basis. Unlike Part A, Part B does require a monthly premium, which is means-tested. That is, higher-income individuals are required to pay a surcharge on top of the standard premium.
Part D covers prescribed medications that are not administered in a doctor’s office. As with Part B, there are monthly premiums, again higher for higher-income individuals.
Newer additions to Medicare include Medigap plans, which cover some or all of the Part B out-of-pocket costs, and Medicare Advantage plans, designed for Health Maintenance Organizations (HMOs) like Kaiser. Such plans can reduce your total medical costs as well as cost uncertainty from year to year.
From 2016 to 2017 the Part B monthly premium rose from $105 to $134 for retirees on Medicare who had not yet signed up for SS. Why so much? It’s because the Social Security Administration (SSA) – which manages both programs – provides a break for people who are signed up for both and consequently have their Medicare premiums automatically deducted from their monthly SS payments. This provision, known as “hold harmless,” is designed to protect SS recipients from declining paychecks due to rising Medicare costs. More specifically it limits the increase in Part B costs each year to no more than that year’s SS cost-of-living adjustment (COLA). In 2017 the hold harmless provision resulted in a Part B increase of only $4/month for these combined Medicare/SS participants. Unfortunately, that meant that the other 30% of Medicare recipients – those not yet signed up for SS – were forced to absorb the remainder of the actual Part B cost increases for the year. Hence the 28% increase in their monthly premiums.
There is a way for you to take advantage of the hold harmless provision, and that is to sign up for SS at as soon as you sign up for Medicare (i.e. at age 65). But there are consequences to such an action. It would mean giving up the 8% per year increase in SS benefits you’d get by delaying SS until age 70.
What is the best strategy? The math makes it pretty clear. Since the Part B premium is still pretty small relative to a typical retiree’s SS income, it probably wouldn’t make sense for most retirees to trade off a reduction in SS income for an improvement in the much smaller Part B premiums. The value of delaying SS until age 70, with its concomitant future higher payouts, more than makes up for the higher Medicare premiums. So my advice is just to live with it. Unless of course politicians decide to make things worse.