Low CPI Creates Medicare Winners and Losers

New and high-income beneficiaries will pay more than others for physician and outpatient coverage.

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Medicare Part B, which covers physician and outpatient services, will most likely levy no premium increase on about 30 million participants in 2010 and perhaps 2011 as well. Their good fortune, however, will be effectively paid for by the program's 10 million or so other participants. They will see premiums rise by a projected 8 percent in 2010 and another 13 percent jump in 2011. This discrepancy is an ironic consequence of a piece of good news, namely that very low levels of inflation are expected to result in no cost-of-living-adjustment (COLA) for Social Security recipients in 2010 and, quite likely, 2011.

Basic Medicare includes Part A coverage of hospital services, fully paid for by the federal government, and Part B, where the government foots 75 percent of the cost and participants must pay the remaining 25 percent, in the form of insurance premiums. Basic Part B premiums are $96.40 a month. Additional amounts, ranging as high as $211.90 a month, are charged on top of the basic premium, beginning with people who make more than $85,000 (individual tax return) and $170,000 (joint filers) a year. Medicare protects people paying the basic Part B premium from annual premium increases that are more than the amount of that year's Social Security COLA, which is based on changes in the Consumer Price Index (CPI). This is a welcome safeguard, given that health-care inflation regularly exceeds overall price increases. If there is no COLA increase in 2010, there can be no increase in the $96.40 premium. It's called a "hold harmless" clause. But the protection it affords most Part B recipients will expose a group of unprotected Part B participants to considerably higher costs. That group includes the higher-income participants, new Medicare enrollees, and people known as "dual eligible" beneficiaries whose Medicare premiums are paid by Medicaid.

The cause of the uneven treatment is the requirement that Part B must recover 25 percent of projected expenses through participant premiums. With continued price increases expected in the costs of physician and outpatient services, maintaining that 25 percent ratio can only come by collecting all of the program's higher premiums solely from the unprotected group.

About two-thirds of the unprotected group is composed of the dual-eligible participants. Their premiums are paid by Medicaid, a federal-state partnership. So the effect of a zero COLA on this group is actually to raise government payments for the program. But a direct impact will be felt by higher-income Part B recipients (about 5 percent of the program) and as many as two million people who will be participating in Medicare for the first time next year. They are not protected because they have no prior premium history to serve as a baseline for the hold-harmless provision.

"What you have is a small share of people on Medicare paying much higher premiums than the majority do for the same Medicare benefits," says Tricia Neuman, vice president for Medicare policy at the Kaiser Family Foundation. She noted that the mechanisms at play -- Social Security's COLA, the hold-harmless provision, and the need for Part B premiums to equal 25 percent of total expenses -- have been in place a long time, and says they have provided important protection, especially to those receiving low Social Security payments. "The situation will hit new Medicare enrollees the hardest, with many paying higher premiums than others, regardless of the size of their Social Security checks."

Last week, Social Security and Medicare trustees issued their annual report on the programs. [See Social Security, Medicare Busts Move Closer.] It showed continued financial deterioration of both programs but especially Medicare. Its projections for future premium increases in the Part B program used the middle of three sets of varying economic assumptions.

The report said the $96.40 core monthly premium will rise by $7.80 a month, or more than 8 percent, to $104.20 in 2010. That's the amount that will be paid by Part B participants who are not protected by the hold-harmless clause. According to Medicare actuary Kent Clemmons, these higher premiums will not keep pace with expected program expense increases, but the agency has a short-term asset cushion it plans to use to hold down the 2010 premium increase.

Because that cushion will be gone in 2011, he says, the impact of a zero COLA for that year would be much worse. The projected monthly premium of $104.20 in 2010 would rise in 2011 to $120.20. That's nearly 25 percent more than the $96.40 basic Part B premium that would stay in effect for most Medicare participants. "It is nearly certain there will be a zero COLA in 2010," Clemmons says, "and also a pretty good probability that 2011 will also be zero."

[See also Billions in Social Security Not Being Claimed.]