Medicare Means Testing
As more baby boomers turn 65, Medicare enrollment is projected to swell from 57 million in 2016 to around 64 million in 2020 and 81 million by 2030.1
In 2015, legislation known as the “Doc Fix” changed the formula used to reimburse physicians for Medicare services, offering a long-term solution for one of Medicare’s most pressing fiscal challenges. Once again, the costs were offset by raising Medicare premiums for some higher-income retirees.2
Income-related Medicare premiums reduce strain on the federal budget by imposing higher costs on beneficiaries with greater financial means. Now more than ever, it is important to consider your health insurance options carefully and to factor rising health-care costs, including potential Medicare surcharges, into your retirement planning.
Original Medicare consists of Part A hospital insurance and Part B medical insurance (for physician services, outpatient care, and lab tests). These programs are administered directly by the federal government and have standardized services, premiums, and deductibles.
Two additional forms of coverage are offered by Medicare-approved private insurance companies and have varying premium costs and benefits. Part C Medicare Advantage is an alternative to Original Medicare, and plans often include prescription drug coverage and other benefits. (Participants must still pay Part B monthly premiums.) Part D Prescription Drug Coverage can be purchased by people who have Original Medicare or Medicare Advantage Plans that do not offer drug benefits.
Those enrolled in Original Medicare also have the option of purchasing Medicare Supplement Insurance (Medigap), which is offered by private insurance companies. Medigap insurance helps cover out-of-pocket costs such as deductibles, copays, and coinsurance (up to plan limits).
Most people sign up for Medicare when they turn 65. Medicare Part A is premium-free for most beneficiaries, but Part B requires monthly premiums, so workers who are covered by an employer-sponsored health plan might wait before signing up for Part B.
Coverage changes can be made during Medicare’s Open Enrollment period from October 15 to December 7 each year.
Though you can enroll in a Medigap plan at any time, the best time to do so is during the initial Medigap open enrollment period — the six-month period that begins on the first day of the month in which you are 65 or older and enrolled in Medicare Part B. During this time, you can buy any Medigap policy sold in your state for the same premium the company charges to healthy enrollees, even if you have health problems.
Means testing for Part B began in 2007 after passage of the Medicare Modernization Act in 2003. A provision of the Affordable Care Act established income-related premiums for Part D.
Income-related Medicare premiums are based on modified adjusted gross income (MAGI). Individuals with MAGIs above $85,000 ($170,000 for married couples) may already be paying surcharges for Part B and Part D coverage. Beginning in 2018, Medicare beneficiaries with incomes between $133,501 and $214,000 ($267,001 and $428,000 for married couples) will be required to pay higher Part B and Part D surcharges than they currently do. It’s estimated that these higher surcharges could cost the average affected individual about $1,000 per year ($2,000 for a married couple).3
Faced with rising health-care costs, more cost sharing, longer life expectancies, and diminishing health-care benefits, future retirees could see a growing portion of their budgets consumed by health care. Creating a long-term plan to save for, manage, and reduce medical costs could help strengthen your financial position in retirement.