Medicare Part B Fees Head for a Sliding Scale
High-income retirees may be in for an unpleasant surprise this winter.
It involves the monthly premiums that older Americans pay for Medicare Part B, which helps pay the cost of doctor visits, diagnostic tests and other routine care. The premiums, which are automatically deducted from Social Security checks, are currently $88 a month.
In January, everyone’s premiums will go up to adjust for healthcare inflation, but higher-income recipients will see even larger hikes.
As a result, a single retiree with an annual income of $80,000 or less (and a married person earning less than $160,000), could pay $98 a month next year, according to estimates, while a single person earning $81,000 would pay $110 a month. And under the same scenario a single person earning $200,000 would pay $170 a month -- or 73% more than lower-income Medicare recipients. (See chart for more details.)
Medicare will calculate your premium based on your income in your most recent tax return.
Congress approved tying premiums to income to raise money to offset some of the cost in 2003’s Medicare Modernization Act, which ushered in prescription drug coverage for seniors.
The sliding scale phases in over three years. As a result, those in the highest-income group will find their premiums soaring to more than three times the fees paid by those in the lowest-income group.
Of the 40 million Medicare beneficiaries, about 2 million will be adversely affected by the sliding scale.
But they will officially receive that news only a few weeks before their Social Security checks are docked for the higher cost.
“We will be notifying participants later in the fall -- late November or early December,” said Mark Lassiter, a spokesman for the Social Security Administration.
And, experts warn, some of those paying more will not necessarily be wealthy.
One-time events, such as the sale of stock or rental property, can temporarily knock otherwise lower-income retirees into a high-paying group, said Paul N. Van de Water, vice president for health policy at the National Academy of Social Insurance in Washington.
So could converting a traditional individual retirement account to a Roth IRA, or taking a lump-sum distribution from a retirement account.
“This is really a big deal,” said Jill Allagood, a certified financial planner at Tarbox Group in Newport Beach. “It’s pretty easy to kick over the top of the threshold if you’re not careful.”
Consider Susan, a hypothetical retiree with $49,000 in taxable income who converted a $100,000 traditional IRA into a Roth last year. This one-time event boosted her 2005 taxable income to $149,000. So, instead of paying $98 a month in premiums next year, as she would have if her 2005 income had remained at $49,000, she will pay $130 a month, about 30% more. If she instead converted the IRA in 2007, she would pay $245 in 2009, almost doubling her cost.
The law does give retirees with “a major life-changing event” the option to dispute their premiums. But it’s too soon to say how this dispute process will work or whether premium adjustments would be slow, swift, partial or full.
The government currently pays 75% of the cost of Medicare Part B, with recipients picking up the rest of the tab through their premiums. Under the new formula, higher-income recipients will pay 28% to 80% of the cost of their coverage under Part B.
The flat monthly premium of $88 this year reflected a 13% increase from 2005. If medical cost inflation remains at 13% a year, even beneficiaries in the lowest-income group will pay $98 a month in 2007 and $125 a month in 2009, Allagood calculated. But with the sliding scale, those who earn more will pay $175 to $400 a month in 2009.
(BEGIN TEXT OF INFOBOX)
Premium hikes on the horizon
How much might Medicare premiums, currently $88 a month for all recipients, rise in the next few years? Here’s an estimate based on a 13% medical cost inflation rate and the income-sensitive payment structure required under a new law.
Adjusted Gross Income
$80,000 or less
$80,001 to $100,000
$100,001 to $150,000
$150,001 to $200,000
More than $200,000
Adjusted Gross Income
$160,000 or less
$160,001 to $200,000
$200,001 to $300,000
$300,001 to $400,000
More than $400,000
Estimated Monthly Premium
*--* 2007 2008 2009 $98 $110 $125 $110 $140 $175 $130 $180 $245 $150 $225 $320 $170 $275 $400
Source: Tarbox Group