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Medicare coverage protects most Americans who are age 65 or older from the full brunt of their healthcare costs. Yet in order to get coverage for physician visits and other outpatient healthcare services, most Medicare participants have to pay monthly premiums under Part B. Earlier this week, the trustees of the Medicare Trust Fund gave participants some bad news: Several million of those who pay Part B premiums could see their monthly costs jump by more than half in 2016, thanks to a peculiarity in the law that sets premium amounts each year. To help you figure out whether your premiums might be at risk, let's take a closer look at this report to find out why premiums for some will be going up.

Medicare's costs and how they get passed on to you
Medicare sets the amount of Part B premiums in part by looking at the expenses that the program incurs in any given year. Ordinarily, you'd expect Medicare premiums to rise gradually over time in order to reflect the steady increase in overall healthcare costs.

The problem that the Medicare Trustees Report highlights, however, is that current law doesn't allow Medicare to impose those higher premiums on all of its participants. In particular, there is what's known as a hold-harmless provision in the law governing premium setting that limits the dollar increase in Part B premiums to the amount by which that individual's Social Security benefits rose for the same year. This provision doesn't apply to everyone, as it generally applies to those Medicare participants who have their premium payments taken directly out of their monthly Social Security check. Still, about 70% of those who are enrolled in Part B qualify for hold-harmless treatment.

As a result of this hold-harmless provision, Medicare isn't allowed to pass on its full costs to all of its participants. If it could, the report says that Medicare participants who enroll in Part B and aren't subject to income-based surcharges would end up paying monthly premiums of $120.70. That in itself would be potentially painful for participants, with the rise amounting to about 15% compared to the 2014 baseline premium amount of $104.90.

Right now, though, most early projections anticipate that there won't be any cost-of-living increase made to monthly Social Security benefits next year, because most gauges of inflation have been flat to down over the past year because of the big drop in energy prices. With Social Security likely to remain unchanged, Medicare won't be able to pass on any of its added costs to beneficiaries who qualify for hold-harmless treatment.

In response, the hold-harmless provision will force Medicare to concentrate the burden of its cost increases onto the relatively small number of participants who don't qualify to have limits on higher premiums. Under the report's intermediate assumptions, the estimated monthly premium for 2016 would be $159.30, or 52% higher than the current 2014 level.

Will you be one of the unlucky Medicare participants shouldering a larger burden?
There are several groups of Medicare participants who don't get the benefit of the hold-harmless provision and therefore are at risk for higher premiums. First, those who are brand-new enrollees to the program for next year could potentially have to pay the higher premium amount. In addition, those who have incomes that are higher than $85,000 per year already have to pay income-based surcharges on top of the baseline Medicare premium, and that amount could be increased to reflect the added costs. Those who are eligible for dual benefits under Medicare and Medicaid could also see an impact, although they generally have their Part B premiums paid by state governments.

Perhaps most controversially, those who choose to pay their Medicare Part B premiums directly instead of having them deducted from Social Security payments would also be at risk of higher costs. This typically occurs among those Medicare recipients who haven't yet started taking Social Security benefits, and it's a particularly arbitrary distinction that makes little policy sense.

At this point, Medicare officials haven't made a final decision on how they will handle the issue. Secretary of Health and Human Services Sylvia Burwell highlighted the lack of premium increases for the majority of participants, reiterating that "70% of enrollees in Part B will have no change in premiums." Some believe that the administration could take action to avoid an increase before rates are formally announced, although it's unclear exactly what that action would look like.

As useful as Medicare is, it's important to keep an eye on the costs that the program incurs. When healthcare gets more expensive overall, it can lead to Medicare participants having to bear a larger share of the expense than they're used to paying. That's why having a financial cushion in retirement is so useful to handle surprises like this.

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