Why High Earners Are Likely to See Higher Medicare Premiums in 2017

Low inflation, generally good for purchasing power, is likely to leave some high earners facing higher Medicare premiums next year.

When the Social Security Administration on Tuesday releases its annual cost-of-living adjustment for retirement benefits, Americans whose health-care costs are covered by Medicare will be watching to gain insight into how their premiums will rise in 2017. This is because the so-called COLA figure plays a big role in determining premiums for Medicare Part B, which covers doctor visits and other types of outpatient care.

While the final figure on the premium increase won’t be announced immediately—theCenters for Medicare and Medicaid Services last year released it in November—a high figure would spread the rising health-care costs over a greater number of people. A low figure would concentrate costs among the highest-earning Medicare beneficiaries.

Because inflation has been low, the cost-of-living adjustment is widely expected to be small. The American Institute for Economic Research this week predicted an increase in the 0.2% to 0.5% range. In a June report, the Medicare trustees forecast a 0.2% increase.

This would mean that most beneficiaries have little to worry about. Under the so-called hold-harmless provision of the Social Security Act, Medicare can’t pass along a Part B premium increase that’s greater than what most participants would receive through Social Security’s annual cost-of-living adjustment.

As a result, Medicare can’t pass along any premium increase greater than the dollar increase in Social Security payments to the estimated 70% of beneficiaries who will qualify for hold-harmless treatment in 2017. (A 0.2% increase would translate into a $2 increase in the average Social Security payment, which would effectively cap the average Medicare Part B increase at $2, according to the American Institute for Economic Research.)

The problem for high earners is that Medicare must then spread much of the projected increase in its costs across the remaining 30% of beneficiaries who aren’t covered under the hold-harmless provision.

That 30% includes those who already pay higher premiums because of their higher incomes. It also includes those who receive Medicare but have deferred or aren’t eligible for Social Security benefits. And it applies to those who are new to Medicare in 2017 and to lower-income Medicare beneficiaries whose premiums are paid by state Medicaid programs.

In June, the Medicare trustees projected that premiums for this group could rise by as much as 22%.

Of course, this could all be moot in an election year where Congress is up for grabs and incumbents may be looking to win over older constituents.

Last year, Congress staved off a 52% premium increase for Medicare beneficiaries not covered by the hold-harmless provision via a deal in the budget agreement that raised premiums by 16% for them instead.

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