What To Do About Increasing Medicare Premiums?

Since Medicare’s inception in 1966, the Part B premium has risen by an average of 7.7% per year.  That’s pretty consistent with the overall inflation rate for medical care in this country but more than twice the inflation rate for all other goods & services over that period.  There is actually a way for you to limit that growth.  The question is, should you?

Let’s start by reviewing the primary components of Original Medicare: Part A, Part B, and Part D.

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.  (How’s that for a good deal?)  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 such as dialysis treatments. 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 is the prescription drug plan portion of Medicare. It covers the 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.

One of the primary drivers in recent years of the skyrocketing Part B premiums has been specialty drug costs.  The problem is that Congress refused to allow Medicare to negotiate prices with pharmaceutical manufacturers the same way that private insurers do.  As a result, Americans covered under Medicare end up having to pay a significantly higher percentage of those costs.  (Wouldn’t you like to know the names of those politicians who created this situation?)  

For individuals enrolled in Medicare and in Social Security (which administers both programs), there is a provision known as “hold harmless,” designed to protect Part B premiums from rising at a faster rate than Social Security’s cost-of-living adjustment (COLA).  Here’s an example of how it works:  From 2016 to 2017 the Part B monthly premium rose from $105 to $134 for retirees on Medicare but not yet signed up for Social Security. But for those on both Medicare and Social Security, the premium rose only to $109, limited by the small increase in the COLA this year.  In fact, the reason the premium for the non-SS recipients increased so much was because the hold harmless benefit, which covered as many as 70% of all Medicare enrollees, forced  Medicare to bump up the premiums much higher for the rest in order to cover its escalating expenses.

What should you do? If you sign up for SS at full retirement age, you’ll end up with lower Medicare Part B premiums than if you had waited until reaching age 70.  But that is generally not the best strategy.  When you consider that the Part B premium represents less than 10% of a typical retiree’s SS income, and that delaying SS until age 70 increases the much larger SS income benefit by 8% per year, the math makes it clear: don’t trade off a reduction in the higher benefit for an improvement in the smaller one.  The value of delaying SS until age 70, with its concomitant future higher payouts, more than makes up for the higher Medicare premiums.  (At least for now!)