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Mark Miller: Remaking Retirement

Seven Steps to Manage Rising Health-Care Costs

Medicare premiums are rising for high-income beneficiaries under health-care reform law.

The new health-care reform law aims to cover nearly all Americans and to get our exploding national health-care tab under control. But reform also calls for some upfront investment, and someone needs to foot the bill. Rich retirees--it's time to grab your wallets.

Starting this year, the most affluent seniors are shouldering steep increases in Medicare premiums mandated under the Affordable Care Act (ACA). This year, the surcharges affect individuals with $85,000 or more in annual income, and joint filers with income over $170,000 (see table below).

While $85,000 may not sound all that high, keep in mind that income typically falls in retirement after paychecks stop arriving. Social Security, pensions, and retirement account withdrawals are the usual income sources. To get a better sense of who may be affected, we asked T. Rowe Price to illustrate several income mixes for individuals and couples who would be subject to the new surcharges. For example, a single filer might have annual Social Security income of $38,000, plus $52,700 in withdrawals from tax-deferred investments. That level of Social Security income would be generated by many years of high-income history; the tax-deferred withdrawal assumes a 4% annual withdrawal rate on a $1,317,500 portfolio. (Click here to see more scenarios.)

 How Higher Medicare Premiums Impact High-Income Beneficiaries in 2011
Income:
Single Return
Income:
Joint Return
Monthly
Surcharge: Part B
Monthly
Surcharge: Part D
Combined Monthly
Surcharge

Annualized

$85,000-$107,000 $170,000-$214,000 46.10 12.00 58.10 697.20
$107,000-$160,000 $214,000-$320,000 115.30 31.10 146.40 1756.80
$160,000-$214,000 $320,000-$428,000 184.50 50.10 234.60 2815.20
>$214,000 >$428,000 253.70 69.10 322.80 3873.60
Source: The Centers for Medicare and Medicaid Services
Modified Adjusted Gross Income is used to qualify, which is total adjusted gross income plus tax-exempt interest income. Part B premium for beneficiaries with income up to $85,000 in 2011 is $115.40; Part D premiums for these individuals vary according to the plan.
Combined and annualized figures reflect only beneficiaries who choose to enroll in both Part B and Part D (Part D is optional).

The most affluent seniors have been paying higher income threshold Medicare Part B premiums (doctor visits and outpatient services) since 2007. The surcharge was put in place by the Medicare Modernization Act of 2003. But until now, the income threshold was indexed to inflation annually to keep level the percentage of beneficiaries subject to the surcharge. The ACA freezes the threshold at 2010 levels through 2019, starting this year.

And the ACA also extends the income threshold formulas to Part D prescription drug enrollees for the first time. The changes will affect just 5% of Medicare enrollees this year, although that figure will rise to 14% by 2019 as more seniors jump past the frozen income threshold levels, according to the Kaiser Family Foundation.

High-income seniors who pay both Part B and Part D premiums could see their combined premiums rise anywhere from $300 to $700 per month by the end of the decade, according to Juliette Cubanski, associate director of Kaiser's Medicare Policy Project. "That's a considerable sum, considering that the base Part B premium for most people this year is $96.40," she says.

The new income thresholds also affect people who choose a Medicare Advantage plan (Part C), which often covers prescription drugs. Advantage enrollees typically pay the monthly Part B premium plus a supplemental premium to the Medicare Advantage plan; now, these premiums are being adjusted to factor in the higher-income amounts for Part B and Part D coverage, where applicable.

The policy aims to help offset the cost of health-care reform by reducing taxpayer subsidies on Medicare services for seniors who don't really need the help. The standard Part B premium is set annually to cover 25% of program costs; taxpayers foot 75%. Seniors subject to the new income thresholds will see that subsidy fall by the end of the decade to just 20%. "The examples everyone mentions are Bill Gates and Warren Buffett," says Cubanski. "Why subsidize rich Medicare beneficiaries?"

Kaiser estimates that the higher premiums will save taxpayers $25 billion for Part B from 2010 to 2019, and $10.7 billion for Part D.

The ACA does provide important new benefits to retirees that should at least take the edge off the higher expenses over time.

The Medicare D prescription drug doughnut hole will be closed. That's the coverage gap that starts when a beneficiary's annual drug spending hits $2,830, and resumes at the catastrophic level ($4,550). This year, pharmaceutical companies are providing a discount of 50% on brand-name drugs to low- and middle-income beneficiaries who find themselves in the gap. Then, the doughnut hole itself will shrink a bit every year, ultimately disappearing entirely in 2020.

The law also contains some important improvements to traditional Medicare aimed at boosting preventive care. Medicare patients now receive an annual wellness visit--with no co-payment or deductible--that includes a comprehensive health risk assessment and a long-term personalized prevention plan. Deductibles and co-payments also were eliminated for most preventive care services.

But the new income threshold premiums arrive at a time when rising out-of-pocket health insurance costs pose a growing threat to retirement security for all retirees--affluent or not. Cubanski says the median out-of-pocket premium expense for Medicare beneficiaries as a share of income rose from 11.9% to 16.2% between 1997 and 2006 (the most recent year for which data is available).

While Medicare provides strong financial protection for basic services, coverage gaps force beneficiaries to pay relatively high out-of-pocket costs. Kaiser reports that Medicare covered just 48% of total per capita medical and long-term care expenses, which averaged $17,231 in 2006. The out-of-pocket expenses are distributed between premiums, long-term care, prescription drugs, and other costs (see chart below).

 

What You Can Do
In retirement, high health-care expense is a fact of life. The Employee Benefit Research Institute reports that a man with median drug expenses will need $124,000 in savings in order to have 90% certainty of meeting lifetime expenses; for women, the figure is $152,000 (ladies, that's because you live longer than the guys).

But smart planning and management of your health-care expenses certainly will help. Here are seven steps to consider:

Avoid the surcharge. "The surcharges on Medicare premiums starting in 2011 can be steep," says Christine Fahlund, senior financial planner at T. Rowe Price. "It's important for retirees to work with their tax advisors to try to avoid them each year, or as often as possible." One possible strategy is to take portfolio withdrawals from a Roth IRA, which are not counted in Social Security's definition of taxable income. Or, alternate withdrawals from taxable accounts so that you don't have to pay the surcharge every year.

Challenge the surcharge. The Social Security Administration (SSA) will determine if you must pay the premium surcharge using your most recent tax return--in most cases, 2010. Eligibility is determined using your modified adjusted gross income (MAGI), which is the total of your adjusted gross income and tax-exempt interest income. If your MAGI is higher than the income threshold in any given year, you'll get a letter from the SSA indicating your premium.

If your income has fallen since your tax return was filed, you may be able to appeal under certain circumstances. For more information, download a free guide to the income threshold at the Social Security Administration's website.

Work longer. Staying on the job even a few years longer than planned is one of the best overall ways to improve retirement security--and health insurance is one of the key reasons, because it means more years of employer-sponsored health insurance and delayed Medicare enrollment. If full-time work isn't possible, try to stay on part-time if that will allow you to stay insured.

Shop the plans annually. Unfortunately, seniors need to re-shop prescription drug or Advantage plans annually to ensure that they are getting the best price and appropriate coverage. Insurance companies often change their offerings year-to-year in ways that can increase premiums by thousands of dollars, or make it difficult to get certain drugs. And your health needs may change, too.

The annual enrollment window runs from Nov. 15 to Dec. 31, and with dozens of plans available in most parts of the country, shopping can be a complex chore. For the computer-savvy, the Medicare website offers a terrific Plan Finder tool; more personalized help is available from your local State Health Insurance Assistance Program, a network of non-profit Medicare counseling services. The Medicare Rights Center also offers free counseling by phone (1-800-333-4114).

If you're willing to pay to get advice and help with paperwork, hire an independent, fee-based counseling service such as Allsup. For $200 to $300, Allsup assigns an adviser who will provide a written personalized plan analysis and offer phone consultations.

Consider long-term care. A long-term care (LTC) insurance policy can help protect against an outsized nursing expense that can wreck your retirement plan. The LTC insurance market is undergoing a shakeout as some big insurance companies leave the market and others have been putting through double-digit rate hikes, so look for carriers with a history of stable premiums. Self-insurance is an option if you have $500,000 to $750,000 in retirement assets available to fund an LTC need.

Buy Medigap insurance. Insurance companies sell Medigap policies to supplement Medicare's basic coverage. Typical policies cover deductibles and co-insurance for long hospital stays and outpatient services. All Medigap plans insure against the risk of high out-of-pocket Part A and Part B co-insurance costs. Beyond that basic coverage, Medigap plans provide escalating levels of coverage--and higher premiums--as you move through the alphabet of options.

Practice prevention. This last one may sound like mom-and-apple-pie, but exercising more and losing weight will not only make you feel and look better but also help reduce your risk of expensive chronic illnesses, such as diabetes and heart disease. Take advantage of the new Medicare prevention benefits by getting regular checkups and recommended screenings for diseases such as cancer.

Mark Miller is a retirement expert and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living. The views expressed in this article do not necessarily reflect the views of Morningstar.com.