Making Sense of the New Medicare Premiums
The budget deal recently adopted by Congress and signed by the president includes, among other things, a provision that affects Medicare premiums in 2016 and possibly 2017. Essentially, it makes the Medicare premiums smaller than they otherwise would have been, but larger than they are now, for some Medicare beneficiaries. The Centers for Medicare & Medicaid Services (CMS), which administer Medicare, has recently announced these new premiums.
Read on to find out why this was necessary, and whom it will affect.
This all started when we learned in mid-October that the annual cost-of-living adjustment to Social Security will be zero in 2016, because consumer prices – especially gasoline — have fallen over the past year. So what does that have to do with Medicare? First, let’s establish that we are talking about premiums for Medicare Part B, also known as Supplemental Medical Insurance. This is different from Medicare Part A (known as Hospital Insurance). Part A pays for hospital stays, and requires no premiums. The costs of Part A are covered by the Medicare taxes that we all pay.
Part B, on the other hand, pays for physicians’ services – outpatient services, lab tests, and the like. Those who are eligible for Medicare can, and usually do, sign up for Part B and have to pay monthly premiums for it.
The costs of Part B are covered from two sources. The premiums, by law, cover a quarter of the costs, and the other three quarters are covered from general tax revenue.
Since most people who are eligible for Medicare are over 65 years old, the vast majority of them are also receiving Social Security. For convenience, Medicare Part B premiums are usually deducted from Social Security checks. This is why there is a connection between the annual cost-of-living adjustment to Social Security and Medicare premiums. Medicare premiums are not permitted to rise by a larger dollar amount than the increase in Social Security checks. In practice this means that if the cost-of-living adjustment to Social Security is zero, Medicare premiums have to stay fixed – the hold harmless provision.
This all sounds good, but how do we reconcile the fact that Medicare premiums must cover a quarter of the Part B’s costs (which tend to increase over time) with the requirement that premiums do not increase if the cost-of-living adjustment to Social Security is zero? This is exactly the situation we will face in 2016. Medicare costs are expected to rise substantially, but the cost-of-living adjustment to Social Security is zero, making it impossible to raise Medicare premiums for the vast majority of Medicare beneficiaries.
This dilemma is solved by the fact that the hold harmless provision does not protect everyone. It only keeps constant the next year’s Medicare premiums of those people who received Social Security and paid Medicare premiums this year. Premiums for everyone else can be adjusted, and they are adjusted to make sure that total premiums cover the quarter of the total costs of Medicare Part B.
Several categories of people are not covered by the hold harmless provision:
- People who will sign up for Medicare for the first time in 2016 (they have no current premiums to be kept constant)
- People who are currently enrolled in Medicare but are not yet receiving Social Security (they have no “Social Security payment net of premiums” to be kept constant)
- People who are eligible for both Medicare and Medicaid (they do not pay their Medicare premiums, Medicaid does it for them)
- People with higher incomes (above $85,000 per person); they pay income-based Medicare premiums, which are much higher than the standard premiums
In the absence of the Bipartisan Budget Act, all these people, who collectively constitute about 30 percent of Medicare beneficiaries, would have to pay about $159.30 per month for Medicare in 2016, with higher-income beneficiaries paying even more. This would have been a very large increase from the current standard monthly premium of $104.90.
The same situation happened in 2010 and 2011. Back then, Social Security’s cost-of-living adjustment was also zero, and Medicare premiums differed substantially for people who were and were not covered by the hold harmless provision (see Table). But in 2012, when the cost-of-living adjustment to Social Security was positive, premiums for everyone were equalized.
Nobody wanted to see an over-50-percent increase in Medicare premiums, even if it only applies to 30 percent of Medicare beneficiaries. So, the budget deal changes it. It sets the new 2016 basic Part B premium at what it would have been for all beneficiaries in 2016, had the hold-harmless provision in current law not applied. CMS has determined this premium to be $121.80 per month. This is still an increase from the current premium of $104.90, but not quite as large as it otherwise would have been.
But this change created a problem: Total premiums would no longer cover the quarter of the Part B costs, as required by law. To solve this problem, there will be a loan from the general revenue fund of the Treasury to the Supplemental Medicare Insurance Trust Fund, which funds Part B of Medicare. To repay this loan, everyone who benefitted from this limit on the premium increase will have to pay a $3-per-month surcharge until the loan is paid off.
Furthermore, the budget act provides that, should Social Security’s cost-of-living adjustment be zero again in 2017 (which is quite possible), this limit on premium increases would apply again. If there is a positive cost-of-living adjustment to Social Security in 2017, then premiums for everyone will become the same (just like they did in 2012, see Table), but the $3-per-month surcharge will continue to apply until the loan is paid off, likely for years.
If you are enrolled in Medicare Part B and are receiving Social Security in 2015, you are held harmless of any changes. You will continue paying $104.90 per month for Medicare in 2016, and maybe even in 2017, if the cost-of-living adjustment to Social Security is zero again in 2017. You do not need to worry about any $3-per-month surcharges, either.
If you are signing up for Medicare for the first time in 2016, you will pay $124.80 per month for Medicare in 2016 ($121.80 premium plus $3 surcharge). What happens in 2017, if the cost-of-living adjustment to Social Security is zero again? If you are receiving Social Security, or will be receiving it in 2016, you will be held harmless in the future and pay the same $124.80 per month in 2017. If you are not receiving Social Security now or in 2016, your premiums will rise again in 2017 (the exact amount will not be known until late in 2016).
If you are enrolled in Medicare in 2015 but are not receiving Social Security yet, you will pay $124.80 per month for Medicare in 2016. What happens in 2017, if the cost-of-living adjustment to Social Security is zero again? If you claim Social Security in 2016, you will be held harmless in the future and pay the same $124.80 per month in 2017. Otherwise, your premiums will rise again.
If you are eligible for both Medicare and Medicaid, nothing will change for you. You are not paying your Medicare premiums out of pocket, so you should see no changes.
If your income exceeds $85,000 per person, you have been paying higher premiums even in 2015. Your premium will rise again in 2016, including the $3-per-month surcharge, but not as much as it would have without the provision of the Budget Act. CMS provides the table with premiums at each income level here.
