The Centers for Medicare and Medicaid Services (“CMS”) recently announced the 2018 premiums for Medicare Part B (Physician Services).
In case you’re wondering what the premiums are for 2018, the best answer is “it’s complicated and it depends.” And that gets at the focus of this blog post – the complexities (and pitfalls) of the Medicare Part B premium structure.
Note: there is a separate premium for Part A (Hospitalization), but this Part A premium is only paid by individuals who did not complete least 40 quarters of Medicare-covered employment; 99 percent of those covered by Medicare have the required employment and do not pay any Part A premium. So, the remainder of this blog will focus on the Part B Premium.
The “basic” Part B premium for 2018 is $134/month and this amount is unchanged from 2017. This basic Part B premium is designed to cover 25% of the projected average per capita Part B program costs and federal general revenues pay for the remaining amount.
It Depends (Part 1): The Social Security “Hold Harmless” Provision
The rate of health care inflation is, generally, greater than the overall increases in inflation. So, for the past two years, the increase in Medicare premiums has been greater than the cost-of-living adjustment (“COLA”) under Social Security. Without special rules retirees (who have Medicare Part B premiums automatically deducted from their Social Security checks) would see their Social Security checks go down. However, rules prohibit Social Security checks from actually decreasing in this way (the “hold harmless” rule).
To fix this dilemma, CMS charges to full basic premium – the $134.00 per month for 2018 – only to Medicare beneficiaries who are not covered by the hold harmless rule. The groups who pay this full basic benefit include Medicare beneficiaries who do not receive Social Security benefits, those who enroll in Part B for the first time in 2018, and those who pay an income-related premium (to be discussed below). In total, 30 percent of Medicare beneficiaries pay the full basic premium.
What about the other 70 percent? The impact of the hold harmless rule emerged in 2016, (when the Social Security COLA was zero). The fix: Medicare Part B premiums for those protected under the “hold harmless” provision will only increase by the amount available from their Social Security COLA. So, for 2016 the Medicare Part B basic premium increased f from $104.90/month to 121.80/month (for those not protected under the hold harmless provision), but was unchanged for those covered by hold harmless.
Deferring – But Not Avoiding – Increases
The “hold harmless” rule serves only to delay the impact of the Part B premium increases – but Medicare beneficiaries must now pay the piper. As Social Security COLA increases start up again (they will be 2 percent for 2018), those covered by the hold harmless provision will see Medicare Part B premiums increase by more than the general Medicare increase – so that premiums for these individuals will now catch up to the basic rate. In effect, for the 70 percent of Medicare beneficiaries covered by the hold harmless rule, this catch-up increase will absorb most (or all) of their Social Security COLA for 2018.
This loss of Social Security COLA makes actuarial sense – over time it brings Part B premiums for these individuals back to the basic level. However, it is not clear that Social Security beneficiaries with no COLA for 2018 feel they have been “protected” by the hold harmless rules.
It Depends (Part 2): Blame IRMAA
As noted above, the basic Medicare Part B premium covers only about 25 percent of the true cost of Part B coverage and the remainder is subsidized by federal general revenues. Since 2011 individuals with higher incomes have been required to pay additional Part B premiums, based on their income. Depending on income, under IRMAA Medicare Part B premiums can go up to as much as $428.60/month. Here is a link to the full set of Medicare Part B premiums.
Increases from the basic $134/month start at annual incomes over $85,000 (individual tax return)/$170,000 (joint return). Here is where the IRMAA rates get tricky:
• Medicare Part B premiums under IRMAA are based on the modified adjusted gross income (“MAGI”) shown on your most recent tax return available to CMS. So, for 2018 premiums CMS is looking at your 2016 tax return.
• MAGI includes gains from the sale of property – including your primary residence. So, if you downsize and sell your home, you can expect a bump up in your Medicare Part B premium for the year that reflects this sale.
• MAGI also includes capital gains from the sale of investments. So, the sale of stocks that have appreciated can also bump up your Part B premiums.
• IRMAA increases are not phased in. So, in theory, a one dollar increase in MAGI can increase your Medicare Part B premiums by over $600/year for an individual and $1200 for a couple. Needless to say, this can come as a rude surprise – especially for a couple who has not really had a change in income, but simply sold a residence or some appreciated stocks.
• You can appeal an IRMAA determination for a “life changing” event that will reduce your income. However, the grounds for such an appeal are fairly narrow, such as death of a spouse, divorce or a work reduction/stoppage. (Here is the form for filing such an appeal.)
Medicare beneficiaries don’t really have an opportunity to shop for a better Part B premium – if you elect to remain in traditional Medicare, your Part B premium is set by law. Of course, the cost of Part B can be a factor in a deciding whether to choose a Medicare Advantage plan over traditional Medicare. And, Medicare beneficiaries might want to check with their accountant or tax planner to see if the sale of an asset will trigger an IRMAA increase and may even want to time certain transactions to reduce the impact of IRMAA.
Perhaps the key takeaway is that any system providing health insurance for over 50 million Americans will have complicated rules – lots of complicated rules. And consumers need to be proactive in understanding how those rules apply to them and how to minimize potentially adverse consequences from those rules.