The importance of Medicare simply can't be overstated. According to data from Avalere Health, it's the program responsible for ensuring that 56 million Americans receive medical care this year. The vast majority of these 56 million people are senior citizens aged 65 and over.
Though Social Security usually garners most of the attention since it provides a tangible monthly benefit to seniors, within a few generations Medicare will actually be paying out more in lifetime benefits than Social Security, at least according to an analysis from the Urban Institute. Without Medicare as a foundation to cover a good chunk of the growing medical costs seniors face during retirement, many seniors would likely be in financial trouble.
Unfortunately, the affordability of Medicare could soon be called into question if premium inflation trends for the program continue to head rapidly in the wrong direction.
Big Medicare premium hikes could be around the corner
According to Kiplinger, if Congress were not to step in, Part B premiums (those that cover outpatient services) for about 30% of all Medicare beneficiaries could climb from $121.80 per month in 2016 to $149 a month in January 2017. For you math-o-phobes, that's an increase of about 22%, which is on top of the 16% premium increase beneficiaries dealt with in 2016! Combined with a Social Security cost-of-living adjustment (COLA) that could be around 0.2%, the burden of Part B premium hikes could fall squarely on this 30% of the eligible population.
About 70% of the population is protected from having their Part B premiums skyrocket because retirees who have their Medicare premiums automatically deducted from their Social Security benefit are shielded from having Part B premiums rise by any more than their annual COLA. This is known as the "hold harmless provision."
Who would be affected, you wonder? Three groups in particular could be in line to pay higher Part B premiums. For starters, new enrollees into Medicare Part B in 2017 would be welcomed with the $149-a-month premium. Secondly, people who don't automatically have their Medicare premiums deducted from their Social Security payments will be exposed to the higher premium. Finally, higher-income individuals with incomes above $85,000 would be expected to feel the full force of premium increases. As a reminder, individuals with incomes over $85,000 already face a surcharge on their monthly Medicare premiums for Part B and Part D (prescription drug plans).
It's worth pointing out that the official Part B premiums won't be announced until October, so it's possible there could be a little play upwards or downwards in the estimated $149-a-month price for Part B premiums.
Why Part B premiums are primed to skyrocket
There are actually two reasons why millions of retirees could have to pay substantially higher Medicare premiums in 2016.
First, we can blame rising medical costs. Part B is traditionally associated with outpatient services and physician visits. However, it's an oft-overlooked fact that medication delivered within the confines of a doctor's office via approved medical equipment qualifies as a Part B cost. The vast majority of therapies that qualify for Part B are either cancer drugs, ophthalmologic drugs, or rare-disease therapeutics, which are all specialized and tend to command high price points.
According to a report from the U.S. Government Accountability Office, nine drugs in 2013 accounted for 76% of all new Part B expenditures, with Roche's Lucentis and Regeneron Pharmaceuticals' and Sanofi's Eylea both topping $1 billion in expenditures. As long as the healthcare system continues to favor U.S. drugmakers, their ability to boost prices will likely have an inflationary long-term effect on Medicare premiums.
Premiums are also soaring because of the hold harmless provision. Since 70% of Medicare beneficiaries are shielded from premium hikes, the responsibility of that 70% gets shifted onto the remaining 30% who don't have Medicare premiums withheld through Social Security, or who don't receive a Social Security payment.
Ways you may be able to reduce your Medicare expenses
Thankfully, there are two particular strategies that can be employed to reduce what you'll owe in Medicare expenses.
To begin with -- and this is primarily for those of you still in the workforce with years or decades to go before retirement -- opening and contributing to a Roth IRA could be a smart move in more ways than one. Having money in a Roth that can be withdrawn is advantageous since it can help cover unexpected medical costs during retirement. More importantly, though, withdrawals from a Roth IRA don't count toward your income since they're tax-free. Being able to withdraw money without it counting toward your annual income can be critical during retirement when you're trying to avoid Medicare premium surcharges.
The other solution is to give serious consideration to a Medicare Advantage plan, which is also known as Medicare Part C. About 30% of all eligible Medicare beneficiaries have chosen a Medicare Advantage plan as opposed to original Medicare because it's a potential money saver.
Medicare Advantage has a number of benefits and pitfalls compared to original Medicare. Its key selling point is that it comprises Part A (hospital insurance), Part B, and almost always Part D, wrapped up in one plan. Instead of enrolling in numerous separate plans, seniors can buy a single plan offered by a private insurer that covers everything. Medicare Advantage also has annual out-of-pocket limits, which can add some degree of certainty to seniors' annual out-of-pocket costs.
The downside? Medicare Advantage networks tend to be much smaller than original Medicare, and out-of-pocket costs could technically be higher -- depending on your coverage -- than if you had original Medicare. Nonetheless, comparing both Medicare Advantage and original Medicare to see which offers the best value could save you money.
For the time being, all we can do is watch and wait for the October release of Medicare's 2017 premiums.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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