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Managing Medicare's Costs

Retirees look for ways to avoid Medicare’s means-tested premiums

Not long before he signed Medicare into law in July, 1965, President Johnson said that he didn’t want it to become a welfare program. He thought that should be the role of Medicaid, which was part of the same legislation. In his view all Medicare beneficiaries should pay the same amount for their coverage, the only exception being people who were eligible for Medicaid.

Johnson believed that if higher income people were required to pay more, Medicare would over time become a program that primarily benefited lower-income people. Wealthier individuals would pay ever higher premiums and perhaps someday even the full cost of their coverage.

For almost 40 years President Johnson’s concern seemed far-fetched. But since 2003 three laws have been enacted that collectively add tens of billions of dollars to the Part B and Part D premiums that affluent people will pay during the next decade. At the same time, Medicare’s definition of affluence is being revised downward to include a larger slice of 65-and-older population.

The mechanism for collecting the higher premiums is a monthly surcharge that Social Security tacks on to Part B and Part D premiums. In Medicare’s terminology this additional charge is called an Income-Related Monthly Adjustment Amount.

The amounts of these monthly adjustments are determined by your modified adjusted gross income or MAGI, as reported on your income tax return. MAGI is calculated by adding your adjusted gross income and any non-taxable interest you earn. If you file as a single person and your MAGI is greater than $85,000 but less than $107,000, you will pay about $600 more in Part B premiums this year than someone with a MAGI under $85,000.

That extra $600 this year adds up to $16,000, assuming 3% annual increases. And if your MAGI is more than $107,000 but less than $160,000, you move up to the next tier, and so on. There are five tiers altogether, and this Medicare chart shows the amounts that people in each tier will pay in 2016.

What should you know about means-tested premiums?
First, if you receive a notice from Social Security that you are going to have to pay income-related premiums, you can sometimes get a reprieve. If your income has dropped because you stopped working or reduced your work hours, you may be able to have the higher premiums cancelled by filing a Request for Reconsideration with Social Security.

Other reasons you may use to sidestep the higher premiums are that you received a lump-sum payout from your company pension plan or that you lost an income-producing property because of an event out of your control.

To see additional ways you might be able to file a successful reconsideration request, check out Social Security’s booklet explaining how higher-income premiums work. The list of the reasons you can appeal are on page 7 and an explanation of how to file a Request for Reconsideration is on page 10 of this booklet.

Careful tax planning can also help. By keeping close track of your income and deductions throughout the year, you will know whether you are near a cutoff point that will result in higher premiums if you go past it. If you see that your income will exceed one of the cutoff points, and if you can postpone income or accelerate deductions (or both), you may be able to reduce your MAGI.

You might also be able to bunch your income and deductions so that you pay the higher premiums every other year instead of every year. Many states, for example, allow you to pay your annual property taxes in December or January. In a given year, you could make one annual payment in January (for the prior year) and another in December (for the present year). By making two annual payments in one calendar year, you will get a larger deduction that could reduce your income enough to avoid the higher premiums.

It’s also helpful to know what kinds of income are not included in MAGI. Withdrawals from a health savings account are not included, for instance, nor are reverse mortgage payments you receive. If you have a Roth IRA, any withdrawals you make won’t be counted. Also, if you either take a loan from a cash value life insurance policy or cash it in, that money does not count as income. And payments from some non-qualified annuities are not included in MAGI.

Even if your MAGI is currently below the first cutoff point of $85,000 for a single filer and $170,000 for a married couple, the day may be coming when you will pay the higher premiums. The Affordable Care Act froze the income thresholds for means-testing at their 2012 levels, where they will remain until the start of 2020. By that time, 14% of all Medicare beneficiaries will pay means-tested premiums, compared to only 5% who did in 2012.

Many policy experts expect that future Congresses will continue to expand the amounts of means-tested premiums and the percentages of seniors who pay them. It may be the only realistic way of dealing with Medicare’s fiscal challenges. While eliminating waste, fraud, and abuse can make small dents in Medicare’s deficits, it is unlikely they will have a major impact. The same can be said for the fledgling accountable care organizations. It seems unlikely, though, they will have a major impact.

That leaves policymakers with two choices: 1) require relatively affluent people to pay much higher premiums, or 2) substantially reduce benefits. Because the second option is politically unpalatable, Republicans, who are traditionally opposed to new taxes on the wealthy, are often willing to sign on to laws that increase the amounts that affluent people pay for Medicare coverage.

An example of the across-the-board support for means-testing was last April’s Medicare “Doc Fix” legislation, which was endorsed by a majority of Republicans as well as Democrats. That law further increases the amounts that well-to-do people will pay in Part B and Part D premiums, beginning in 2018. At that point, single individuals whose MAGI is between $133,501 and $214,000 will pay about $775 a year more than they do now, or roughly $20,000 more over a 20-year period. For married couples, the amounts are as twice as high.

In another example of bipartisan agreement on means-testing, Republicans were generally supportive of a provision in President Obama’s 2014 budget to expand means-testing to include the top 25% of the Medicare population. Had that become law, as a Kaiser Family Foundation analysis pointed out, seniors with MAGI’s that were more than $45,000 a year would have been required to pay higher premiums.

As a society, we may at some point decide that the truly affluent – millionaires and billionaires — should pay the full cost of their Medicare benefits. In that case Medicare will become the opposite of what Lyndon Johnson hoped for — universal coverage for which everyone but the poor paid the same amount.

To that point, in a recent Forbes magazine column, University of Chicago health economist Tomas Philipson said that because Medicare is not sustainable in its current form, perhaps it should not be a program for the very affluent. If that happens, wealthy seniors would no longer be eligible for any Medicare benefits that they didn’t pay for in full. Philipson concludes that “eligibility cuts through means-testing Medicare should be done for the simple reason that if the goal is to finance care for those who cannot afford it, then care should not be financed for those who can.”◊◊

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