The fix is in, but seniors have little reason to celebrate. About 16 million Medicare beneficiaries were facing an unprecedented 52 percent increase next year in their premiums for Part B, which pays for physician services. The budget deal worked out by the White House and Congress held that to a more manageable 15 percent increase. But this kicks the cost down the road, leaving an even bigger problem for seniors in future years.
Most Medicare beneficiaries are protected by a “hold harmless” provision, which ensures that their monthly Social Security checks will not be reduced when Medicare’s Part B premiums increase. The consumer price index used to adjust Social Security payments for inflation actually declined over the past year, resulting in no cost-of-living increase for recipients. In contrast, Part B spending increased about 6 percent. Despite the higher cost, premiums are not allowed to increase under the hold harmless provision. Any premium increase would reduce the Social Security check paid to millions of seniors.
Like other government guarantees, this one is not free. The 36 million beneficiaries protected by hold harmless pay $104.90 a month, about $15 less in premiums than they would without the provision. The 16 million who are not protected under hold harmless – including high-income seniors who already pay larger premiums than most others, new enrollees, Medicare beneficiaries who are also enrolled in Medicaid (for whom state Medicaid programs pay their Medicare premiums), and individuals (primarily civil servants) who never qualified for Social Security – make up the loss in revenue.
The premium increases would have been breathtaking. Most beneficiaries who are not protected by hold harmless were slated to pay $159.30 every month next year. Seniors with high incomes would have paid substantially more, with premiums exceeding $500 a month for those in the top bracket.
The Bipartisan Budget Act of 2015 reduces the premium increase for those not covered by hold harmless, who will pay $120.70 a month next year. Beneficiaries with high incomes will pay more, but even those in the highest income bracket will be charged about $100 a month less than would have been the case. By my estimate, that creates an $8 billion hole in the Part B trust fund which will be repaid by charging everyone who is not protected under hold harmless an additional $3 a month for as long as it takes.
That’s what the press statements say, but that is not how it will work out. Conveniently overlooked is what happens to premiums in 2017.
If inflation remains flat and the Social Security cost-of-living adjustment is zero, then we have a repeat of the fix in 2017 with most Medicare beneficiaries paying the same $104.90 monthly premium for another year. But that is not likely. Instead, we could see consumer prices rise somewhat even with continuing weakness in the economy. If that happens, the hold harmless provision will again impose very large increases in premiums for millions of seniors.
Here’s a rough calculation. The average retired worker receives $1,335 a month in Social Security benefits. If prices rise about 1 percent over the next year, then the average cost-of-living adjustment increase for 2017 will be about $14 a month. For Medicare beneficiaries protected by hold harmless, that is the most that Part B premiums can increase that year.
That will not be enough to avoid having to substantially increase the premiums paid by millions who are not covered by hold harmless. Even ignoring the $8 billion loss of revenue in 2016 caused by the Bipartisan Budget Act, premiums would increase by at least $35 a month for seniors who are not protected by hold harmless. Depending on how quickly the Medicare trustees want to re-establish a balance in the trust fund that is consistent with past practice and industry standards, the increase could be much higher.
That’s not the end of the story. The budget act explicitly denies the secretary of health and human services the authority to use the fix after 2017. That provision was included because White House and congressional negotiators know they did not solve the problem. We will continue to have a mismatch between rapid health spending and low general inflation, and that will lead to future “hold harmless” political crises. This is a symptom of a program that is on an unsustainable path, and no amount of budget maneuvering can fix it.
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