There are roughly 56 million eligible Americans that count on Medicare (or Medicare Advantage plans) to help maintain their physical and financial well-being each and every month. Of these 56 million, about five in six are aged 65 and up. Without Medicare to step in and cover a lion's share of their eligible medical costs during retirement, it's possible the poverty rate for seniors would be considerably higher than it is now.
The Medicare seniors know and love
Original Medicare, which roughly 70% of eligible members are still enrolled in, is comprised of three key components: Part A, Part B, and Part D.
Part A, also known as hospital insurance, covers in-patient hospital stays, surgeries, and long-term skilled nursing care, as an example. The great thing about Part A is that there's no premium required for a vast majority of Americans. Just as 40 lifetime work credits qualifies someone to receive Social Security benefits during retirement, 40 lifetime work credits also allows an individual to receive Medicare Part A without a premium once they reach age 65, or have other extenuating circumstances arise, such as becoming disabled.
Part B, also known as outpatient services, covers eligible medical costs in the outpatient setting, such as doctor and clinic visits. Part B has also come to cover select pharmaceutical products that are administered on an outpatient basis, such as IV-based cancer treatments. Unlike Part A, Part B does require a monthly premium from members, and certain well-to-do persons could face a surcharge to their monthly premium if their individual income or combined income as a couple tops $85,000 or $170,000, respectively, in 2017.
Finally, Part D is the prescription drug plan portion of Medicare. As the name implies, it covers the medicines you'll be prescribed that aren't administered in the doctor's office. As with Part B, there are monthly premiums required, and wealthier individuals ($85,000 single/$170,000 couple) will be expected to pay a surcharge on their monthly Part D premium.
Medicare Part B premiums march higher
Of these three Medicare components, Part B is arguably the biggest wildcard when it comes to your potential out-of-pocket expenses. This argument is only enhanced by taking a look at how Medicare Part B's monthly premium payments have evolved over the past 51 years.
As you'll note from the chart of Medicare Part B premiums between 1966 and 2017, the trend is higher most years. Over 51 years, the compounded annual increase in premium cost is roughly 7.7%, which is consistent with high medical care inflation rates. Medical care inflation has outpaced the inflation calculated by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in 33 of the past 35 years. The CPI-W is the measure used to determine whether or not Social Security recipients get a "raise" each year, and if so, by how much.
One of the primary reasons Part B costs have skyrocketed in recent years is those aforementioned IV-administered drugs in the outpatient setting. Specialty drugs designed to treat cancer often cost five- and six-digits annually, and Medicare members are typically responsible for somewhere around 20% of the total cost of treatment. This means a brand-new cancer immunotherapy that costs $150,000 a year, would work out to a $30,000 cost to the Medicare patient. And I know what you're probably thinking: "You forgot to include the discounts that drug companies give to Medicare!" Unfortunately, Medicare is unable to negotiate on its own behalf, so Medicare's gross-to-net discounts from list are often pretty small. This is a big reason why Part B premiums are increasing at such as a rapid pace.
Hold harmless, Medigap, and Medicare Advantage are saving graces
Thankfully, Medicare enrollees have a few tricks up their sleeve that can help keep their Medicare Part B costs under control.
To begin with, about 70% of all Medicare enrollees are protected by the "hold harmless" clause. For Medicare enrollees who are also receiving a Social Security benefit each month, the hold harmless clause prevents their Part B premiums from rising by a faster rate than Social Security's cost-of-living adjustment (COLA), which is determined by the aforementioned CPI-W. For example, COLA rose only 0.3% this year for Social Security beneficiaries – the lowest increase on record. This means Part B premiums for existing Medicare enrollees rose by just 0.3% as well.
The hold-harmless clause ensures that Social Security recipients won't see their monthly benefit decline on a year-over-year basis. Thus, even though Part B premiums are $134 a month in 2017, only about 30% of Medicare members (e.g., new enrollees, persons not enrolled in Social Security, or persons who prefer to be directly billed for their Part B premiums) are actually paying $134 a month for Part B this year.
Medigap plans can also be a saving grace. Medigap plans are designed to help "fill the gap" of what Medicare members have to pay in out-of-pocket Part B costs. On the surface, a Medigap plan has a monthly premium that's going to increase your overall health costs. However, if you have a chronic condition that requires potentially expensive medicines, a Medigap plan can ultimately reduce your total medical costs and provide some peace of mind by giving you a general idea of what your out-of-pocket costs might be in a given year.
This last point is another reason why Medicare Advantage plans have also been gaining steam. Medicare Advantage plans are offered by private insurance companies, and they contain all the services you'd be able to get under Parts A, B, and D with original Medicare. However, Medicare Advantage plans have maximum out-of-pocket annual costs for Part A and B expenses, whereas original Medicare does not.
Long story short, Medicare Part B premium inflation isn't expected to ebb anytime soon, so be prepared.
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