Double whammy: Potential lack of COLA could mean higher Medicare premiums

If there's no Social Security cost-of-living adjustment, advisers will need to plan for significantly higher health costs for some clients.

The 2015 Social Security Board of Trustees annual report stated that some Medicare enrollees could see a 52% increase in their Medicare Part B premiums starting in January 2016!

To understand how this is possible, a brief overview of Medicare is helpful. Medicare Part B provides health insurance coverage for physician and outpatient services. It is a core portion (along with Part A) of most seniors’ Medicare coverage.

Part B creates a major intersection between health care and financial planning. This is because Part B has an annual premium, and most Medicare enrollees have this premium deducted from their Social Security benefits. The amount of the premium is based on one’s income. More specifically, it is based on modified adjusted gross income.

This means that more affluent clients pay a higher premium for this Part B coverage. In 2015, annual per person premiums range from $1,258 to $4,028. Once again, the 2015 trustees annual report said some Medicare enrollees could see a 52% increase in their Part B premiums next year.

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The trustees report said the cost of providing physician and outpatient coverage increased more than expected. Normally this would result in a slightly higher Medicare Part B premiums for the 50-million-plus Medicare enrollees.

But the trustee report said that it is likely there will not be a cost-of-living increase for Social Security in 2016. Medicare cannot legally charge all enrollees a higher price for the Part B premium in years where there is no Social Security cost-of-living increase (COLA).

More specifically, Medicare cannot charge a higher price to most enrollees. Some enrollees, however, can be charged a higher Part B premium even if the Social Security COLA is zero.

Enrollees who are above the first income bracket (see chart above) reporting over $85,000 in income ($170,000 for joint filers) can be charged higher premiums. This means that the higher-than-expected cost of running the program is passed onto a very small portion of the enrollees (those with higher incomes).

A second group that could see the price hike includes the small percentage of enrollees who do not have the Part B premium deducted from their Social Security benefits. This group includes some federal retirees. A third group includes new enrollees into Medicare in 2016.

Health and Human Services Secretary Sylvia M. Burwell has said she is exploring various policy options in an effort to soften the potential 52% price hike. The 2016 pricing announcement is expected in October.

Even if the Medicare Part B price hike is lessened, it is clear that financial advisers need to incorporate significantly higher health costs into the financial planning process. This is especially true for clients with higher incomes. It is also important to understand how effective tax and investment planning, including Roth accounts, health savings accounts, annuities and life insurance, can help.

Peter Stahl is the founder of Bedrock Business Results, which provides training to financial advisers and their clients on the convergence of health care and financial planning. He can be reached at [email protected].