Medicare Premiums: The YoYo Effect

There has been a lot in the media about the recent budget deal and changes to the Medicare Part B premium.  What just happened?

yo-yoHere is the bottom line (and its confusing):
·      If you are a current Medicare beneficiary and pay your Part B premium though a deduction to your Social Security check, your Part B premium will stay at $104.90/month for the time being.
·      If you are a Medicare beneficiary, but do not pay your Part B premium through a Social Security deduction—or are new to Medicare–your Part B premium will rise to about $123.

But as is often the case, the reality is more complicated….

Medicare premiums are supposed to cover 25% of the cost of Medicare. If there was a typical cost of living adjustment to Social Security benefits, the Part B premium for 2016 would have had to increase by $15/month to about $120.

But, 39 million Medicare beneficiaries—almost 70% of all Medicare beneficiaries—pay their premiums through a deduction to their Social Security check. Because the consumer price index actually went down in the last year, there will be no COLA increase in Social Security checks next year. And, there is a special Social Security rule that monthly checks cannot decrease—so (with no increase in Social Security checks) the $15/month increase could not be applied to 39 million Medicare beneficiaries.

If these 39 million Medicare beneficiaries do not pay the $15/month increase, Medicare is short $7 billion for 2016. Someone has to cover this $7 billion. Without further action by Congress, the 30% who are not already paying for Part B from their Social Security checks (such as people new to Medicare) would have been on the hook for this $7 billion.  This would have increased Part B premiums to $160 a month for this group, along with raising the Part B deductible (linked to the Part B premium) from $147 to $223 for all Medicare beneficiaries.

This would have created an administrative, policy and public relations nightmare.

The solution in the new budget deal approved by Congress is that Medicare will “borrow” $7 billion from the Treasury, which will be repaid over time by increasing Medicare premiums by a $3 surcharge.  For the 39 million who pay for Part B through Social Security, the surcharge will only apply in the future, when Social Security increases.

Going Forward
According to the Congressional Budget Office, it will take approximately 5 years to repay this $7 billion loan.  Of course, if the same thing happens next year, the repayment period will stretch out for another 4 – 6 years.  Perhaps one should look at this fix like any other short –term “patch” – sometimes the patch is adequate, and sometimes it is not.  Only time will tell.

More importantly, this fix adds one more layer of complexity to a Medicare structure that already has an increasing number of layers and other “fixes” build onto it.

Medicare is a 50 year old design that has been tweaked many times over the years, with the result that it is increasingly difficult to provide simple answers to beneficiaries’ simple questions.  In addition to fixing the financing of Medicare, perhaps Congress also needs to fix the understandability of the program.

    Leave a Reply

    Your email address will not be published. Required fields are marked *