Falling Gas Prices Mean No Social Security COLA -- and Higher Medicare Costs

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Last Thursday the Social Security Administration announced next year’s cost of living adjustment for retiree benefits, and the news is not good. Thanks largely to falling gasoline prices, the index used by Social Security to adjust beneficiary payments for inflation is below what it was a year ago. That means no increase in seniors’ monthly Social Security checks. At the same time, millions of seniors will have to pay much higher Medicare premiums. On top of that, every beneficiary will have to pay more up front before Medicare covers their doctors’ bills. Although a political solution would block the increase, the problem will not be solved without structural reforms.

Most of the 51 million people enrolled in Medicare Part B, which covers physician and other outpatient services, are protected by a “hold harmless” provision that ensures no reduction in their Social Security check when the Part B premium increases. The 35 million Medicare beneficiaries who are protected will continue to pay $104.90, the monthly premium that has been standard since 2013. But over 16 million seniors who are not protected by this provision will have to pay premiums that are 52 percent higher next year.

The spike in Medicare Part B premiums results from shifting a large increase in program cost from those protected by hold harmless to the smaller group of enrollees who are not protected. All of the revenue loss caused by hold harmless is completely recovered in the same year from the unprotected seniors. This action allows the U.S. Treasury to hold itself harmless from any revenue loss incurred as a result of helping seniors better afford Medicare.

The increase in premiums for those not protected by the hold harmless provision is startling. Instead of paying the current standard premium of $104.90, most will pay $159.30 every month in 2016. The premium drops back to $120.70 in 2017.

Those required to pay the high premium are unintended targets of a well-intentioned law. There are three major groups of people who constitute the 16 million not protected by the hold harmless provision.

The unluckiest of the groups is the one with 3 million people who were not enrolled in both Medicare Part B and Social Security at the end of 2015. Such individuals will pay hundreds of dollars in extra premiums next year because the Social Security Administration does not have the necessary information to gauge whether hold harmless is applicable.

The second group is states, which also incur collateral fiscal damage. Low-income Medicare beneficiaries who also receive premium assistance from Medicaid (known as dual eligibles) are not protected by the hold harmless provision but do not pay the premium. Instead the states are liable for the substantial costs of the increase. The 52 percent premium spike for 10 million dual eligibles will cost states an additional $6 billion, although a substantial portion of that money will be returned by the federal government in Medicaid matching payments.

The third group not protected by the hold harmless provision is the 2.9 million higher-income Part B enrollees who pay the income-related premium. Those in the highest brackets could see their premiums jump to over $500 a month.

There is more bad news. Even though 35 million beneficiaries are protected from a premium increase by the hold harmless provision, no one is protected from a 52 percent increase in the annual deductible next year. Currently, the Part B deductible—the amount beneficiaries pay each year before their insurance begins to cover medical costs—is $147. Next year it rises to $223, before falling to $169 in 2017.

The hold harmless provision has been applied on a case-by-case basis for the past three decades and affected relatively few people without attracting much attention. Now it cannot be ignored because of the large number of seniors who are adversely affected.

Congress and the Obama administration are working frantically to halt the two increases. House Democratic leader Nancy Pelosi has publicly urged Republicans to accept a proposal to limit the increases. House Speaker John Boehner appears willing but wants to see the $10 billion price tag offset elsewhere in the budget. Not openly discussed is the possibility that Medicare might dip into its $68 billion reserves. It is virtually certain that a deal will be made.

A smarter policy would combine the freeze on premiums and deductibles with changes in the rules surrounding “hold harmless.” There is no reason to penalize some Medicare beneficiaries for circumstances beyond their control, and little justification to offload more Medicare costs onto state Medicaid programs that are already struggling to provide appropriate care to their poor populations. Since the Part B deductible is a payment for health services made by the Medicare beneficiary and not a reduction in the Social Security check, it should not be included in the hold harmless provision.  

With program spending expected to grow an average of 7.3 percent annually through 2023, it is not farfetched to fear another “hold harmless” political crisis resulting from the mismatch of rapid health spending and low general inflation. The real solution requires slowing the growth of Medicare spending, but that will take structural reforms which will have to wait for another Congress and another administration.

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