It’s hardly the first time that the law of unintended consequences has afflicted a seemingly benevolent public policy. But Medicare's “hold harmless” provision, aimed at making healthcare payments affordable for older Americans, turned into a threatened tsunami. When the actual numbers were finally released, they still represented a healthy increase for those in higher income categories, but were not nearly as bad as initially feared.
The point of the “hold harmless” rule is to limit the increase in premiums for Medicare Part B – the section that pays for doctor visits, surgeries and lab work – to the rise in Social Security benefits. So when the Social Security Administration (SSA) announced on October 15 that there would be no cost-of-living-adjustments (COLA) for Social Security benefits in 2016, most seniors could take solace in the fact that their medical expenses would be held in check. (For a quick refresher on Medicare, see Medicare 101: Do You Need All 4 Parts?).
But, as it happens, about 30% of Medicare recipients – including higher income-earners and those new to the program in 2016 – are not protected by the “hold harmless” stipulation. Even now, they face a very different outcome next year.
By law, Medicare has to generate enough revenue from Part B premiums to cover 25% of the program’s costs. So the roughly 7 million Americans who don’t qualify for "hold harmless" under this little-known provision will bear the brunt of rising Medicare outlays.
Most years, the “hold harmless” provision doesn’t even come into play. But because of the lack of inflation this year – a consequence, in large part, of lower gas prices – the SSA decided to suspend COLA for the first time since 2011. (For additional reading, see How Inflation Affects Your Cost of Living.)
There’s an irony here, since many older Americans don’t drive much, if at all, and therefore don’t benefit all that much from lower prices at the pump. At the same time, the elderly pay a disproportionate share of the nation's medical expenditures, which have continued to rise.
Who Will Pay?
Here are the recipients likely to experience these spikes:
• Beneficiaries who exceed the “hold harmless” income limits. These include individuals who earn more than $85,000 and couples who bring in more than $170,000.
Figure 1. If your modified adjusted gross income, or MAGI, from two years ago, is at the figures below, here is what you paid in 2015.
If your yearly income in 2013 (for what you pay in 2015) was
|File Individual Tax Return||File Joint Tax Return||File Married & Separate Tax Return||You Pay (in 2015)|
|$85,000 or less||$170,000 or less||$85,000 or less||$104.90|
|above $85,000 up to $107,000||above $170,000 up to $214,000||Not applicable||$146.90|
|above $107,000 up to $160,000||above $214,000 up to $320,000||Not applicable||$146.90|
|above $160,000 up to $214,000||above $320,000 up to $428,000||above $85,000 and up to $129,000||$272.70|
|above $214,000||above $428,000||above $129,000||$335.70|
Source: Medicare Website.
Figure 2: And here is how your payments will increase in 2016, if you do not qualify for “hold harmless” protections.
If your yearly income in 2014 (for what you pay in 2016) was
|File Individual Tax Return||File Joint Tax Return||File Married & Separate Tax Return||You Pay (in 2016)|
|$85,000 or less||$170,000 or less||$85,000 or less||$121.80|
|above $85,000 up to $107,000||above $170,000 up to $214,000||Not applicable||$170.50|
|above $107,000 up to $160,000||above $214,000 up to $320,000||Not applicable||$243.60|
|above $160,000 up to $214,000||above $320,000 up to $428,000||above $85,000 and up to $129,000||$316.70|
|above $214,000||above $428,000||above $129,000||$389.80|
Source: Medicare Website.
• Those receiving Medicare benefits for the first time in 2016. They didn't get Social Security last year, so fall out of the protections. In the lowest income group, they will pay $121.80 instead of $104.90
• Medicare recipients who don’t yet receive Social Security payments. For the same reason – no payments last year.
• Seniors who pay for Medicare premiums out-of-pocket. This is because they don't have the charges withdrawn from their Social Security check automatically.
Can the Increase Be Avoided?
If there’s a ray of hope for the 7 million Americans facing premium increases, it’s that the inflationary lull won’t go on forever. It’s possible, even likely, that prices will rise in a few years, thereby forcing Social Security administrators to resume cost-of-living adjustments. That, in turn, will open the door, down the road, for Medicare to distribute costs more evenly.
In the meantime, depending on your circumstances, you may be able to avoid the increase. If you haven’t done so already, consider taking the following steps:
- Update your income figures. Perhaps you used to make too much money to qualify for “hold harmless” protections, but have seen your income drop over the past year or so. The Social Security Administration has no way of knowing unless you update your records. If you’re close to the income threshold, you may also want to consult your accountant about ways you can reduce your income and spare yourself higher premiums.
- Apply for Medicare now. If you receive Medicare for the first time in 2016, you have no recourse under the “hold harmless” rule. That gives seniors who have already hit their 65th birthday a big incentive to sign up immediately, so they can start coverage in 2015 and avoid the higher rates.
- Sign up for Social Security. If you’re thinking about registering for Social Security anyway, now’s the perfect time to make it happen. Only those who receive both Medicare and Social Security in 2015 meet the criteria for “hold harmless.” It’s a little more complicated if you were planning to hold off for a few years and get a bigger monthly check. In that case, the short-term benefits may not outweigh the cost of forgoing a larger income stream in later years.
- Pay Part B premiums through Social Security. This is the easiest one. If the only reason you face higher Part B costs is because you’re paying premiums out-of-pocket, just contact Social Security and have the premium deducted from your checks instead.
The Bottom Line
For 70% of Medicare recipients, the “hold harmless” provision will help them stay within their budgets in 2016. The remaining 30%, however (some 7 million Americans), will have to foot the bill for higher healthcare costs. Although the ultimate price was not nearly as high as the 52% estimates (more like 16%, in fact), it's still a significant increase.