Congress's two year-budget deal features great news for millions of senior citizens who otherwise would have faced a 52 percent hike in Medicare premiums.
An unusual collision of Social Security and Medicare policy would have mandated the large premium increase for about 7 million seniors — about 30 percent of those who rely on Medicare Part B, the health program that covers doctor visits and other outpatient care.
But legislators used the budget deal to intervene, essentially loaning Medicare beneficiaries billions to avert the premium spike. This means that seniors won't see a large premium increase in 2016 — but will be stuck paying slightly higher premiums in years going forward, as they work to pay off this new loan.
A collision of Social Security and Medicare policy stuck seniors with a massive bill
Federal law requires that Medicare beneficiaries cover 25 percent of the Part B program's costs, usually through premiums, copayments, and deductibles.
Health care costs rise pretty much every year, as does the Part B premium. For 2016, Medicare actuaries expected a 15 percent increase, slightly higher than in previous years.
Medicare would usually pass on this increase to all beneficiaries, and that would be the end of it. But this time, a separate Social Security law barred that approach.
About 70 percent of Medicare beneficiaries have their premium deducted automatically from their Social Security check. For those people, Social Security has a "hold harmless provision" that bars premiums from increasing if it would reduce the size of the Social Security check.
Most years, the "hold harmless" provision never comes into effect. Social Security beneficiaries typically get a cost-of-living adjustment that exceeds the Medicare premium increase.
This time, however, is different. The Social Security Administration announced in mid-October that seniors would not get a cost-of-living adjustment in 2016 due to low inflation — the overall cost of living didn't go up, so there was nothing to adjust.
That meant Medicare couldn't touch the premiums of the 70 percent of seniors who do automatic Social Security deductions. Instead, the program has to turn to the other 30 percent of beneficiaries who don't do this — and have them pay the entire cost of rising health care prices for everyone. By law, beneficiaries as a whole have to pay a quarter of Medicare Part B's costs, so to make the math work, the 30 percent would each face a staggering 52 percent premium hike.
The group affected includes 2.8 million low-income Americans whose state Medicaid programs pay their premiums, 1.6 million who have chosen to delay receiving their Social Security benefits, and 3.1 million high-income Americans who already pay higher Part B premiums.
Tricia Neuman, who directs the Medicare policy program at the Kaiser Family Foundation, estimates about half of those who delay benefits earn less than $33,000 — making the 52 percent premium increase especially burdensome.
"A 52 percent increase in premiums and deductibles would have been unprecedented," she says. "It would have been a big deal for those with lower and moderate incomes."
Congress devised a "creative" fix to the problem
The new budget includes a loan from Medicare's general revenue funds to its beneficiaries, big enough to reduce the expected 52 percent premium increase to a 15 percent increase — the original amount Medicare had expected costs to rise if all beneficiaries chipped in.
Those under Social Security's "hold harmless" provision will not pay this increase. Their premiums will remain at $104.90 per month, the same amount they paid in 2015.
Medicare beneficiaries will ultimately be expected to pay back the loan, in the form of small premium surcharges, which begin at $2 per month in 2017 and rise to $3 per month in 2018 and 2019.
"The goal of this proposal is to smooth out the increase in premiums so that the 2016 premium doesn't have a crazy spike," Neuman says. "It's a creative approach that will reduce the burden on beneficiaries."