For virtually all retirees, Medicare is the core means by which health insurance is obtained in retirement. Coverage is provided via a combination of Medicare Part A (for hospital insurance) that is free, plus Part B (for medical insurance covering doctor’s visits, outpatient procedures, and more) for a subsidized premium, and Part D (for prescription drugs) also paid via a separate premium. Together, the Medicare system goes a long way to stabilizing the unknown of health care costs in retirement into a series of known health insurance premiums.
For most retirees, the Medicare Part B (and potentially Part D) premiums are simply subtracted directly from ongoing Social Security benefits payments, and each (Social Security benefits and Medicare premiums) have their own inflation adjustments each year (with Medicare healthcare inflation higher than general inflation adjustments most years).
Notably, though, the Social Security system also includes two key provisions to help smooth cash flows for retirees. The first stipulates that if inflation is negative, the Social Security Cost-Of-Living Adjustment (COLA) can never be negative; at worst, the Social Security COLA has a floor of 0.0%. The second provision, often dubbed the “Hold Harmless” rule, and applicable to as many as 70% – 75% of Medicare enrollees, states that Social Security benefits payments cannot decrease due to rising Medicare Part B premiums; at worst, the Medicare premium increase is capped at the dollar amount of the Social Security COLA increase.
Except in the coming 2016 year, when the Social Security COLA is projected to be 0.0%, the combination of these two rules means that none of the coming year’s Medicare Part B premium increase can be applied to the 70%+ of Medicare enrollees eligible for the Hold Harmless provision… which means all of the increase must instead be borne by the roughly 25% of Medicare enrollees not subject to the “Hold Harmless” provision. As a result, unless the Secretary of Health and Human Services Department intervenes by October, based on current projections the Hold Harmless provision may result in a spike in Medicare Part B premiums by as much as 52% (or over $600 per person) for those not protected by the rule!
Understanding Premiums For Medicare Part A, Part B, and Part D
When it comes to Medicare providing health insurance for retirees who are age 65 or over, there are two core parts to the coverage.
Medicare Part A, also known as the “Hospital Insurance” portion, covers most medically necessary hospital visits (along with medically necessary skilled nursing homes, and some home health care and hospice). As long as you (or your spouse) worked at least 40 calendar quarters (10 years) and paid into the Social Security system for that time period, you are eligible for Medicare upon reaching age 65, and it is free at that point.
Medicare Part B, also known as the “Medical Insurance” portion, covers the typical range of doctors’ services, preventive care, outpatient services and lab tests, etc. Unlike Medicare Part A, the coverage portion for Part B does have a cost, which is set every year by the Centers for Medicare & Medicaid Services (CMS), and is $104.90/month in 2015.
Medicare Part D is the plan for prescription drug coverage. Similar to Part B, it also has a monthly premium, although the exact cost will vary depending on the particular prescription drug plan chosen by the retiree.
Income-Related Monthly Adjustment Amounts (IRMAA) To Medicare Part B and Part D Premiums
Under the ‘normal’ rules for Medicare Part B, of the total cost of the program, individuals only pay about 25% of the true cost, and the Federal government covers the other 75%.
However, since the Medicare Modernization Act of 2003 (MMA) as adjusted by the Deficit Reduction Act of 2005 (DRA), for roughly 5% of Medicare Part B and Part D beneficiaries who are “higher-income individuals” (and couples), Medicare premiums are adjusted higher. This is accomplished by taking what is normally the 25%-of-cost share that individuals pay for Medicare Part B, and increase it to 35%, 50%, 65%, and ultimately up to 80% as income increases. (In the case of Part D, since the cost varies by plan, higher-income individuals simply pay a flat additional amount.)
These income-related monthly adjustment amounts (IRMAA) for Medicare Part B and Part D premiums are calculated based on Adjusted Gross Income (AGI, modified by adding back any tax-exempt bond interest) for the most recent tax return. Thus, Medicare premiums for 2016 will be based on the tax return that was most recently filed by April of 2015, for the 2014 tax year (a 2-year lag). (Certain special changes in circumstances, such as getting married/divorced, or a change in employment status, can merit an exception to the rules to use current [lower] income instead, although general year-to-year income fluctuations are not an accepted exception.)
For the current 2015 calendar year, the income-related monthly adjustment amounts for Medicare Part B and Part D were:
|Individual MAGI||Married Joint MAGI||Part B Premium (monthly)||Part D Premium (monthly)||Total Increase (monthly)|
|< $85,000||< $170,000||$104.90||Plan premium||N/A|
|Up to $107,000||Up to $214,000||+ $42.00||+ $12.30||+ $54.30|
|Up to $160,000||Up to $320,000||+ $104.90||+ $31.80||+ $136.70|
|Up to $214,000||Up to $428,000||+ $167.80||+ $51.30||+ $218.10|
|> $214,000||> $428,000||+ $230.80||+ $70.80||+ $301.60|
Notably, as a part of the Medicare Access and CHIP Reauthorization Act of 2015, in the future the third income bracket (from $107,000 to $160,000) will be split into two, and this new third bracket plus the fourth immediately above it (in essence, those with incomes from $133,500 to $214,000) will face an even higher income-related adjustment down the road on both Part B and Part D premiums. These new higher IRMAA premium amounts will first apply beginning in 2018.
Paying Medicare Part B And Part D Premiums From Social Security Retirement Benefits
When a retiree is signed up for Medicare Part B and is receiving Social Security benefits, the Medicare premiums are normally subtracted directly from the Social Security check. If the retiree is signed up for a Medicare Part D plan, the premiums can be paid separately or the insured may also request to have the premiums deducted directly from monthly Social Security benefits payments.
If the retiree isn’t yet receiving Social Security benefits and is paying Medicare premiums separately (e.g., because he/she is delaying Social Security benefits until full retirement age of 66, or beyond to earn Delayed Retirement Credits), a “Notice of Medicare Premium Payment Due” (Form CMS-500) is sent monthly to the insured for Part B premiums from CMS, and the Part D insurance carrier will generally invoice the insured directly.
The Social Security Benefits “Hold Harmless” Provision For Medicare Part B Premiums
Social Security benefits are eligible for a Cost-Of-Living Adjustment (COLA), which first began in 1975 (previously Congress had to pass a standalone law every time Social Security benefits were to be increased), and since 1983 the COLA has been calculated based on the Consumer Price Index for Urban Wage Earners (CPI-W).
A notable provision of the Social Security COLA, though, is that benefits can be adjusted upwards for inflation, but not downwards for deflation. In the event that the Social Security COLA would be negative, Social Security benefits are simply held flat (i.e., the COLA is 0.0% but not negative), and inflation adjustments begin again when the CPI-W eventually reaches a new high.
In addition to the fact that the Social Security COLA cannot be negative, though, Section 1395r(f) of the Medicare Code stipulates that the payment for Medicare Part B premiums cannot rise faster than the benefits that Social Security pays out. The net result of this rule, which has been dubbed the “Hold Harmless” provision, is that the net amount of a retiree’s monthly Social Security check can never decrease due to rising Medicare Part B premiums.
In other words, Social Security benefits checks cannot go down due to a negative COLA, and thanks to the Hold Harmless provision they also cannot go down because the standard rate for Medicare Part B premiums rises faster than the (positive) Social Security COLA.
When The Hold Harmless Provision On Medicare Part B Premiums Does NOT Apply
Notably, the Hold Harmless provision on Medicare Part B premiums doesn’t apply to everyone.
In order for the rule to apply, the retiree must have Medicare Part B premiums being deducted from his/her Social Security benefits in the first place. Thus, individuals who are delaying Social Security benefits – even if they’re already getting Medicare Part B and paying the premiums – aren’t eligible for the Hold Harmless provision, and their Medicare premiums would rise (even if everyone else’s wouldn’t). In addition, low-income Medicare recipients generally aren’t subject to the Hold Harmless provision, simply because they’re dual-eligible for Medicaid and their Medicare premiums are being paid by their state Medicaid agencies instead (which means a Medicare premium increase still doesn’t impact the insured, it simply impacts the state’s Medicaid program instead).
At the other end of the spectrum, the Hold Harmless provisions for Medicare premiums also don’t apply to anyone who is subject to the aforementioned income-related monthly adjustment amount (IRMAA) to Part B premiums. Such “higher-income” individuals (and couples) were deemed to not need to be protected by the Hold Harmless provision thanks to their “higher” income. As a result, anyone who has a 2-year-lagged modified AGI in excess of the first IRMAA threshold of $85,000 (for individuals, or $170,000 for married couples) is not eligible for the Hold Harmless provision.
And ultimately, in order for the Hold Harmless provision to apply and limit the year-over-year increase in Medicare Part B premiums to the amount of year-over-year increased Social Security benefits, it’s necessary to have been getting Social Security benefits (and paying Medicare premiums) in the prior year in the first place. If there’s no prior year over which an increase can be calculated, there’s no way to apply the Hold Harmless provision.
Notably, though, this last test for ‘prior year’ benefits is measured at the end of the prior year; as long as the retiree was entitled to receive Social Security benefits for the prior-year’s November and December, and having Medicare Part B premiums subtracted from those benefits as they were paid in December and January (as Social Security benefits are technically paid with a one-month lag, and Medicare premiums are subtracted from those checks on a then-current-month basis), the Hold Harmless provision can apply. Ultimately, the Hold Harmless rule is calculated based on the change in net benefits payments (Social Security benefits minus Medicare premiums) across those last two months of the prior year. Thus, as long as the individual is both entitled to Social Security benefits for the last two months of the prior year, and is actually on Medicare Part B (and paying those premiums from the Social Security check) in the first place, the Hold Harmless provision can be applied (again, assuming income is not high enough to trigger the Medicare premium surcharge).
In practice, the application of these limitations is estimated to exclude roughly 25% of Medicare Part B enrollees from the Hold Harmless provision.
Historical Application Of The Hold Harmless Provision On Medicare Part B Premiums
Historically, in most years the Hold Harmless rule has been a moot point. Even though the health-care-related inflation rate has been higher than the general inflation rate in recent years, because Medicare premiums are still small relative to the total size of a Social Security benefits check, even the higher inflation rate on Medicare premiums compared to Social Security COLAs wasn’t sufficient to trigger the rule.
Example. In 2014, the average Social Security benefit payment was $1,306/month. Thanks to a 1.7% Social Security COLA for 2015, the average Social Security benefit payment rose to $1,328/month in 2015. At the same time, the premium for Medicare Part B in 2014 was $104.90/month. Given that Social Security benefits had increased by $22/month, even if Medicare Part B premiums had risen by 10% for 2015, to $115.40, the Medicare Part B premium “Hold Harmless” provision still wouldn’t have applied. While Medicare premiums would have been up 10% and Social Security benefits were only up 1.7%, on a dollar basis Medicare premiums were up “just” $10.50, while Social Security benefits were up $22.
Accordingly, even with the 10% Medicare Part B premium increase, the net Social Security check would still have increased, from $1,306 – $104.90 = $1,201.10 to the higher $1,328 – $115.40 = $1,212.60. Which means the Hold Harmless wouldn’t apply. (Although in practice, this was a moot point in 2015, as Medicare Part B premiums actually remained flat in 2015, thanks to ongoing cost savings from the implementation of the Affordable Care Act.)
In fact, given this dynamic – that even a modest COLA on the total Social Security benefit (on a percentage basis) is sufficient to avoid the Hold Harmless provision on even a large (percentage) increase in Medicare Part B premiums – this Hold Harmless rule (first established under the Medicare Catastrophic Coverage Act of 1988) was never actually applied for its first 20+ years of existence. It never became relevant until 2010… when the financial crisis and associated recession in the preceding two years had turned inflation negative, such that the Social Security COLA was ‘floored’ at 0.0%.
The Medicare Part B Hold Harmless Provision In 2010 And 2011 When Social Security COLAs Went To 0.0%
When Social Security benefits didn’t increase at all in 2010 (and again in 2011) due to the 0.0% COLA, it meant any dollar increase in Medicare Part B would trigger the Hold Harmless provision. As a result, the rule actually “kicked in” for the first time, and by the CBO’s estimate, about 3/4ths of Medicare Part B enrollees had their Medicare Part B premiums “locked in” at the 2009 rate of $96.40 (as noted earlier, about 25% of Medicare Part B enrollees are not eligible for the Hold Harmless provision for various reasons).
However, the reality was that the costs of Medicare did increase from 2009 to 2010, and since 75% of Medicare Part B enrollees were ‘protected’ by the Hold Harmless provision, the remaining 25% not eligible for Hold Harmless had to bear the entire brunt of the premium increase. This effect – of ‘squeezing’ the impact of 100% of the Part B premium increase into just 25% of Medicare Part B enrollees – caused Medicare Part B premiums to ‘spike’ by 14.6% in 2010, from a prior premium of $96.40/month all the way up to $110.50/month.
The fact that the Social Security COLA was 0.0% again in 2011 meant the process repeated itself once more the following year; those who had been on Social Security (and Medicare) since 2009 saw their premiums remain at $96.40 thanks to Hold Harmless, anyone who had just joined the program in 2010 saw their Part B premiums locked in at $110.50 under Hold Harmless, and all of the necessary premium increase for the Medicare program was allocated to the roughly-remaining-25% of enrollees, who saw their Medicare premiums rise another 4.4% to $115.40. And of course, anyone who was new to Medicare in 2011 simply entered in at this new $115.40 Part B premium rate!
Notably, though, these effective ‘surcharges’ – where increased Part B premium obligations were allocated to just the subset of those subject to the Hold Harmless provision – were mitigated once Social Security benefits actually began to increase again, as they did once the 2012 Social Security COLA was announced (at 3.6%). At that point, Social Security benefits increased (in dollar terms) enough for those who were previously subject to the Hold Harmless provision to finally participate in their share of the Medicare Part B premium increases of the prior years. And of course, once the premium increases could finally be “shared” amongst more people, the relative increase per person was far less, and as a result the overall standard rate on Medicare Part B actually declined in 2012 to $99.90 (an increase of about 3.6% for those who had previously been subject to Hold Harmless, but a decrease for those who had enrolled in 2010 or 2011 or those who had anticipated enrolling in 2012!).
Notably, the premium decrease in 2012 didn’t necessarily “have to” be as significant as it was; its magnitude was likely driven at least in part by the fact that Medicare inflation had otherwise been fairly modest over the 2010-2012 time frame (due in part to the ongoing implementation of the Affordable Care Act, which included several new provisions intended to reduce Medicare costs and especially Medicare-related fraud). As a result, once the costs could be fully redistributed to recognize that modest inflation rate, it turned out that Medicare Part B premiums in 2012 really didn’t need to be much higher than they had been in 2010.
Another 0.0% Social Security COLA And A 52% Medicare Part B Premium Increase For 2015?
The reason all of these rules matter is that, similar to 2010-2011, we are on track for another negative inflation year, due to the crash in oil and related energy prices by nearly 50% in the end of 2014 and first quarter of 2015. Given that inflation doesn’t seem to be spiking here at the end of the summer, the year-of-year inflation rate (measured for Social Security from the third quarter of the prior year to the corresponding quarter of the current year) is likely to finish negative. Accordingly, in the latest Trustees Report from Social Security for 2015, it was estimated that the coming 2016 year will be another with a 0.0% COLA. And as we’ve seen, a negative inflation rate and a 0.0% COLA means that the Hold Harmless provision for Medicare Part B premiums will kick in again, too.
Except this time around, we’re further out from the initial cost savings that were generated from the Affordable Care Act, and the economy is stronger (at least on a relative basis) than it was back in 2010. As a result, while once again the Medicare premium increase for the whole system must be spread across “just” 30% of the enrollees (with expanded Medicare and no inflation adjustments for IRMAA, the number subject to the Hold Harmless provision has increased from about 25% to 30%), this time the magnitude is far greater: based on the data provided by the most recent Medicare Trustees Report for 2015, this time Medicare premiums are projected to rise by 52% for Part B in 2016 (first highlighted for advisors in an article by Investment News retirement guru Mary Beth Franklin). This would amount to a Medicare Part B premium increase of almost $55/month, or nearly $650 per year (and double that for a married couple).
Notably, Health and Human Services Secretary Sylvia Burwell does have the ability to set a lower premium than this, and has already indicated that she is exploring other policy options; the “final” Medicare Part B rates for 2016 won’t be set until October. Nonetheless, as the projections currently stand, the potential Medicare Part B premium increase is quite significant… at least, for the subset of Medicare enrollees not eligible for the Hold Harmless rules, who will face the premium increase!
So what do you think? Have you discussed the potential Medicare Part B premium spike with clients? Will your clients be eligible for the Hold Harmless provision? Are you considering any new/different planning strategies for those who will not be protected?