Your retired clients’ Medicare Part B premiums have remained at the same level in 2015 as they were in 2014, but absent some political moves in Washington, that will change in 2016.
According to an August paper from the Center for Retirement Research at Boston College, Part B premiums for higher-income Americans are scheduled to rise significantly in 2016. That’s because it appears there will be no cost-of-living adjustment for Social Security recipients in 2016—for only the third time in the past 40 years.
Lower inflation and no 2016 COLA for Social Security recipients will cause a “flap in the Medicare program” next year, point out CRR authors Alicia Munnell and Anqi Chen, because by law, the cost of higher Medicare Part B premiums cannot be passed on to most beneficiaries — about 70%, they say, who are considered “held harmless” on premiums — when they do not get a raise in their overall Social Security benefits.
To begin, why won’t there be a COLA for Social Security recipients next year? Any adjustment in Social Security benefits as of Jan. 1 of each year is based on comparing CPI-W in the third quarter of the preceding year (2015 in this case) with the CPI in the prior year’s (2014 in this case) third quarter. The CPI in 2015’s third quarter is, so far, below 2014’s third-quarter inflation, and thus no COLA.
(CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers, is used by the Social Security Administration to adjust benefits for both Social Security and Supplemental Security Income (SSI) recipients.)
Parts B of Medicare, funded by Social Security’s Supplementary Medical Insurance Trust Fund, covers physician and outpatient hospital services (Part B) and Part D pays for prescription drugs (Part A is funded by a separate Hospital Insurance Trust Fund and pays for inpatient hospital services, home health and hospice care and “skilled nursing facilities,” i.e., nursing homes).
The paper points out that 75% of the costs of Parts B and D are paid from the government’s general revenues; the remaining 25% comes from monthly premiums paid by beneficiaries out of their Social Security benefits before those benefits are sent.
Beginning in 2007, Part B premiums became based on the income of the beneficiary. Munnell and Chen write that under current law, Part B premiums for other beneficiaries “must be raised enough to offset premiums foregone due to the hold-harmless provision.” The estimated monthly premium in 2016 for these other beneficiaries will be $159.30, up 52% from 2015’s $104.90 monthly premium. Higher income participants, they write, would then pay “multiples of $159.30 depending on their income level."
Here’s what the premiums were in 2015 for higher-income Medicare enrollees:
Income-Related Part B Premiums for 2015
Source: Centers for Medicare and Medicaid Services
However, because by law any higher costs to the Medicare system must be paid by beneficiaries, and since most beneficiaries will not pay higher rates because of their incomes in 2016 (held harmless), higher-income recipients, along with new enrollees during the year, will pay much higher monthly premiums in 2016 due to the lack of a COLA.
Likely Income Thresholds for Part B Premiums for 2016
Source: Centers for Medicare and Medicaid Services
This flap, the authors say, highlights the broader “complicated interaction between Medicare premiums, which are generally deducted automatically from Social Security benefits, and the net benefit – the money available for non-health care expenditures.” Since Social Security COLAs do not “fully reflect the increase in health care costs faced by the elderly, the net Social Security benefit does not keep pace with inflation.”They further state that the problem arises because “the system is less than perfectly indexed for three reasons.”
1) “The increase in the Part B premium is not tied to the medical care component of the CPI-W, but rather is based on cost projections built up from assumptions about general price inflation, excess medical inflation, changes in utilization of services, and changes in the complexity of services.”
2) “The CPI-W does not increase the fraction of the market basket attributable to medical care costs on a timely basis." In other words, as medical care costs grow faster than the prices of other goods, "they should account for a larger fraction of all goods purchased,” but the weights “fail to fully reflect the impact of medical care inflation.
"When the weights are not fully adjusted, reported inflation is less than it should be and the COLA is inadequate to cover previous medical care and non-medical care spending.”
3) Munnell and Chen conclude that even if the CPI-W weights “were kept up to date for the population as a whole, the COLA would not fully protect the spending of the elderly,” citing an experimental price index developed by the Bureau of Labor Statistics (BLS), which finds that Americans aged 62 and older “allocate roughly twice as much of their budget to medical care as the population as a whole.”
So, the authors argue, “using an index for the whole population does not compensate the elderly for the extra dollars they need to pay for their medical costs, forcing them to cut back on their non-medical-care spending.”
(See next page for Social Security chart on COLA rates over the past 10 years)