Low COLA & COVID-19 Costs Could Trigger A Medicare Premium Spike

Low COLA & COVID-19 Costs Could Trigger A Medicare Premium Spike

When the Social Security Administration announced that the cost-of-living adjustment (COLA) for 2016 would be zero, a stunning thing occurred.  The Medicare Trustees projected that the monthly Part B premium would increase by an unprecedented $54.50 (52%) between 2015 and 2016— from $104.90 to $159.30 per month.  What does this have to do with the situation today?

An extremely low COLA (including the 1.3% that we are forecasting for 2021) could trigger a special provision of law that can cause Part B premiums to spike.  That’s especially true when combined with the higher than forecast Medicare outlays due to COVID-19, and the need to replenish program reserves.

When there’s a COLA as low as 1.3%, a provision of law known as “hold harmless” ensures that an individual’s net Social Security benefit will not decrease from December of one year to January of the next, because of an increase in the Part B premium.  That’s an important protection, but it doesn’t go far enough.

The provision only protects an estimated 70 percent of beneficiaries (almost 43 million beneficiaries) from increases in the Medicare Part B premium that exceed the dollar amount of their COLA.  When an individual’s Part B premium increases more than the dollar amount of their COLA, the Part B premium is reduced to prevent a reduction in net Social Security benefits from one year to the next.

But when hold harmless is triggered more widely than usual, as we expect to be the case in 2021, there is no provision of law with which to finance the unpaid portion of Medicare Part B premium increases of the roughly 43 million who are protected by the provision.  In the past, Congress has chosen to allow this cost burden to shift to the 30 percent of beneficiaries who are not held harmless.  Because the cost is spread over far fewer people, instead of all beneficiaries, those who are not protected by hold harmless pay a far larger share of the costs, thus the huge Part B premium jumps.

In 2015, after a national coalition of senior advocacy groups (including TSCL) demanded action, Congress reduced the increase in Part B premiums from $159.30 per month to $121.80 per month, which was still a very high increase of 16.1 percent.  The premium included a $3 “repayment” amount that was added to monthly premiums of all beneficiaries in future years to recover the cost of the reduced premium rate in 2016 over time.

These higher Medicare Part B premiums, in turn, contributed to ongoing flat growth in Social Security benefits in subsequent years — even when a 2 percent COLA became payable two years later in 2018.  The Medicare Part B premium took the entire 2 percent COLA of about half of all beneficiaries — the half with lower benefits.  Many beneficiaries did not see any growth in their net Social Security benefits until they received a 2.8% COLA in 2019.

The Medicare Trustees estimated in their April 2020 annual report that the base 2021 Part B premium would rise by $8.70 (6 percent), from $144.60 to $153.30.[1]  The annual report was written prior to the coronavirus national emergency and does not incorporate the effects of the coronavirus caused recession, the interaction with an extremely low COLA.

Recently Congressional Budget Office estimated in its September budget outlook, that Medicare outlays for 2020 would rise about 12 percent — roughly double the rate forecast by the Medicare Trustees in their April 2020 report.  This suggests that the Medicare Part B premium increase for 2021 could be about $17.40 per month higher in 2021, rising from $144.60 to $162.00.  But even this estimate does not include the full impact of cost shifting that occurs when people with low Social Security benefits are protected from reductions due to high Medicare Part B premium increases.  Thus, the base monthly Part B premium increase for 2020 could be even higher than $17.40, and closer to the spike seen in 2016.

TSCL is working with Members of Congress to head off this Part B premium dilemma.  To learn the full details, you can download an issue brief at https://seniorsleague.org/assets/2020-COLA-Hold-Harmless-Issue-Brief-9.2020.pdf

[1] Ibid, page 192.