Medicare
Image: Medicare.gov.

Medicare provides coverage for most Americans age 65 or older, regardless of their income levels. Yet what many people don't realize is that the premiums for Medicare's Part B medical coverage are determined, in part, based on the income level of each recipient, and those whose incomes are above certain threshold amounts pay more for their monthly Part B premiums than the vast majority of participants.

Looking ahead to 2016, it's entirely possible that the disparity between what high-income retirees pay for Medicare and what most people's premiums are could get a whole lot wider. Let's take a closer look at the strange element of Medicare law that's producing this result, and what it means for the program, as a whole.

Why the rich could pay a lot more for Medicare in 2016
Medicare Part B is essentially a cost-sharing mechanism. The program sets its premiums for each year in part by looking at its costs, and looking for ways to deal with the gradual increase in healthcare costs over time. As a result, you'll typically see Part B premiums for all Americans rise steadily year after year.

Yet as a recent report from Boston College's Centers for Retirement Research noted, there's a complication in the way that Medicare premiums interact with Social Security benefits. In particular, the increase in rank-and-file Medicare participants' Part B premiums is limited to the percentage increase of the cost-of-living adjustment for Social Security benefits. Because of the big decline in energy prices during the past year, Social Security recipients aren't likely to receive a cost-of-living adjustment for 2016, and that will force Medicare to hold the current Part B premium amount at its 2015 level of $104.90 per month for the majority of participants.

This element of Medicare law, known as the hold-harmless provision, doesn't apply to those with high-enough incomes to trigger increased Part B premiums. Specifically, if you earn more than $85,000 as a single Medicare participant, or $170,000 for a married couple, then higher premiums apply that can add between 40% and 220% to the basic premium level for most Americans. That's the reason why high-income Medicare participants paid between $146.90 and $335.70 per month in 2015.

If the hold-harmless provision didn't exist, then Medicare costs for 2016 would shoot up to $120.70 per month, or about a 15% rise. Yet with about seven out of every 10 Americans getting the benefit of the hold-harmless provision, Medicare will have to pass on the higher costs to the three in 10 remaining who don't qualify for hold-harmless treatment. The Boston College group estimates that this will push the basic premium for noneligible participants in Medicare Part B up to $159.30 -- a rise of more than half in a single year.

Just how much will the rich pay?
For high-income Americans, the damage will be even greater. The surcharges for Part B premiums would be imposed on this higher basic premium amount. As a result, those in various income brackets could pay even more:

  • Singles earning $85,000 to $107,000, and joint filers with incomes of $170,000 to $214,000 would pay $223 per month, up from $146.90 this year.
  • For those in the $107,000 to $160,000 range for singles and $214,000 to $320,000 for joint filers, monthly premiums would rise to $318.60 compared to $209.80 this year.
  • Between $160,000 and $214,000 for singles and $320,000 to $428,000 for joint filers, premiums would amount to $414.20 per month, up from $272.70.
  • Above $214,000 for singles and $428,000 for joint filers, Medicare costs would climb above the $500 per month mark, with a premium of $509.80 compared to just $335.70 this year.
  • Those who favor higher premiums for high-income Medicare participants would point out that even these high premiums likely represent only a portion of the actual value of the insurance coverage that Medicare provides. As those who've shopped in the private market know, getting health insurance in your 60s isn't a cheap proposition, and Medicare participants benefit from being part of a huge group with the bargaining power that goes with it.

Nevertheless, for those who've called for greater means testing in retirement benefits that the government provides, it's important to realize that rich Americans already pay more than their lower-income counterparts, and that's likely to become even more dramatic in the future. Reasonable people can disagree about whether such differences are justified; but if you're prone to be affected by the high-income provisions of Medicare, you need to know just how large the potential consequences of a high income in retirement can be.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.