The Medicare Mess and How to Tackle it Next Year

Bigstock-Enroll-In-Medicare-77216171If the government doesn't act soon, nearly one-third of Medicare beneficiaries will face a 50 percent increase in their Part B premiums for 2016, while more than two-thirds will pay no premium hike at all. Most beneficiaries will pay the same monthly premium next year as they paid this year–$104.90. But others making the same income will pay $159.30. And some high-income retirees will pay as much as $509.80. Even worse, the big premium increases could encourage many seniors to take Social Security benefits earlier than they otherwise would—a policy that would only increase the burden on the federal retirement system. The premium hikes would also stick state Medicaid programs with an enormous unanticipated bill. What's going on here?

Forbes' recent article, "Untangling the Medicare Premium Mess — And What It Means For You," says that the issue facing Medicare beneficiaries is largely the result of complex links between Social Security and Medicare. The Medicare laws require that program to bump up its premiums to cover increases in per-capita costs. Ok, sure. And if next year were a normal year, premiums for most beneficiaries would go up about 16 bucks—from $104.90 to $120.70. That's a manageable increase. Not that anyone wants to pay more, but most can handle this.

Except that 2016 will not be a normal year. Most retirees have their Medicare premiums deducted from their Social Security benefits, but because inflation was so low this year, there won't be a cost-of-living increase in 2016 for Social Security. And the law says that if Social Security benefits don't rise—you guessed it—neither can the Medicare premiums. That's at least not for most people who get Social Security benefits.

That means about 70% of Medicare beneficiaries won't see the premium hike. However, that leaves the entire burden of this year's Medicare cost increases on the remaining 30%. Those guys are going to be hit with 50% premium hikes.

This list of those who are unprotected is a bit curious. It includes high income seniors, new enrollees, those enrolled in Medicare but not getting a Social Security check, and the so-called "dual eligibles" (who receive Medicare and Medicaid benefits; their premiums are paid by state Medicaid programs).

For high-income people, those premium hikes are hefty: for a single making more than $214,000, Part B premiums are will increase from $335.70 to $509.80. For some of these folks, it'd be cheaper to buy insurance through Affordable Care Act exchanges than to buy Part B plus Part D drug coverage and a Medigap policy. But they also might be better off with Medicare long term. It's complicated.

Seniors with more typical incomes also have some tough choices to make. For years, we've heard how the government and many financial experts encouraged seniors to wait to take their Social Security benefits for as long as they could. However, the special circumstances in 2016 may give some the exact opposite message, like those age 67, single, making less than $85,000, and enrolled in Medicare but not yet taking Social Security. The rule is that you must pay a large increase if your premiums are not being deducted from your Social Security check. If you claim Social Security now and start having premiums deducted, you can save more than $500 in Medicare premiums in 2016, and you start getting Social Security benefits.

But it's a trade-off, because you may also receive less in lifetime Social Security benefits. You'll need to do some math and the answer will depend on how much money you make, your best guess about how long you will live, and whether you're married.

For more information about estate planning, please visit my estate planning website.

Reference: Forbes (October 9, 2015) "Untangling the Medicare Premium Mess — And What It Means For You"

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