Medicare premium hikes will only mildly clip seniors' Social Security inflation raises in 2012, but proposed changes could cut future cost-of-living adjustments.
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By Mark Miller | 11-10-11 | 06:00 AM | Email Article

Here's some good news for seniors: Social Security will award a sizable cost-of-living adjustment (COLA) in 2012--and Medicare premiums won't clip your inflation raise much at all.

Retirement columnist Mark Miller writes about trends in retirement, aging, and the economy. He is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living, and writes a syndicated column for Reuters. Mark blogs at RetirementRevised.com Twitter: @retirerevised.

The Social Security COLA and Medicare Part B premium go hand in hand, because the premium is deducted from most seniors' benefits. Social Security benefits will be increased 3.6% starting in January--the first inflation adjustment in two years. And this year, the base premium for Part B--which covers doctor visits and other outpatient services--will rise just $3.50 per month to $99.90.

That means a senior receiving the average monthly Social Security benefit ($1,177) will see a net 3.3% gain in benefits--just under $39 per month. Meanwhile, the Part B deductible will be $140, a decrease of $22 from 2011.

There's also good news for the relatively small number of high-income seniors who pay surcharges on their Part B premiums. They will see their total Part B costs plunge next year.

But don't chalk up the lower-than-expected Medicare Part B premium to moderating health-care expenses. Instead, it mainly reflects the fact that Part B costs will be spread across a much larger base of beneficiaries next year, due to the complicated interaction between Social Security COLAs and Medicare.

The Background
Under the formula that governs Social Security COLAs, no increases were awarded in 2009 or 2010. But, although Part B premiums rose sharply both of those years, about 75% of Medicare beneficiaries were "held harmless" against the increases. That's because, by law, most beneficiaries can't be subjected to higher Medicare premiums if it means that net Social Security benefits would fall.

Part B is structured so that beneficiaries bear 25% of total program costs. But the "hold harmless" exemption for the majority of seniors meant that in 2010 and 2011, that cost was spread among a much narrower base of beneficiaries--low-income beneficiaries whose premiums are paid by Medicaid (so-called "dual eligibles") and high-income seniors. In 2010, the base premium jumped to $110.50 from $96.40, and it rose to $115.40 in 2011.

This year, the relatively high COLA means most Medicare beneficiaries are eligible to pay the new Part B rate; that means the 25% of Part B costs will be spread across a far larger base of enrollees, bringing down the rate hike paid by each enrollee.

The high-income premium surcharges are paid by individuals with $85,000 or more in annual income, and joint filers with income over $170,000, and they scale upwards through four income brackets. Currently, the surcharges affect just 5% of seniors, but they are on track to hit 14% by 2019 under the new health-care reform law. The income threshold previously was indexed to inflation, but the Affordable Care Act froze the threshold at 2010 levels through 2019, starting this year.

But seniors already in the high-income group will see significant relief next year. Their total Part B premiums (base plus surcharge) will drop 13.4% (see chart).

High-Income Seniors Also Will See Lower Medicare Part B Premiums
Total Part B premiums will fall 13.4% across all income brackets
Income: Single
Income: Joint
Part B Monthly 2011
Part B Monthly 2012
$85k-$107k
$170k-$214k
161.5
139.9
$107k-$160k
$214k-$320k
230.7
199.8
$160k-$214k
$320k-$428k
299.9
259.7
>$214k
>$428k
369.1
319.7
Source: The Centers for Medicare and Medicaid Services

The Part B news comes as the fall Medicare enrollment period for prescription drug and Medicare Advantage plans is in full swing. Enrollment started earlier this year (Oct. 15) and runs until Dec. 7.

Average premiums for prescription drug and Medicare Advantage plans will fall 4% next year--but it's still critical for seniors to reshop their plans every year if possible. For example, among the top 10 drug plans--which cover 77% of enrollees--some are cutting premium prices, but six are raising prices.

High income seniors also pay surcharges for Part D prescription drug plans, but those won't be changing significantly next year.

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