Posted by: drdata921 | May 5, 2013

Will the Promises Be Kept – Medicare

In the last post, I discussed the implications of the proposed shift to the “Chained CPI” that would reduce the annual inflation adjustment for Social Security. These proposals were made in the recent Federal budget submitted to congress by the Obama administration. The upshot of that post was that although the changes appear to be minor, over time they could be substantial and cause financial distress for retirees.

In this post I will discuss some of the more visible proposals for Medicare. The proposals in President Obama’s budget would reduce Medicare spending by about $371 billion over 10 years.

To begin with the positive, President Obama proposes to eliminate the prescription drug coverage “donut hole” by 2015. Currently, after the government has paid $2970 in prescription drug benefits, payments end. There are some subsidies that kick in after that point, but they offer only a small partial discount for covered generics. After the recipient has out-of-pocket expenses of $4750 for prescription drugs, they enter “catastrophic coverage” which begins payments again. The donut hole will end altogether in 2015 under the budget proposal. This could be very helpful for the majority of seniors.

Also, the 2% cuts for medical providers that kicked in as part of the “sequestration” process will be reversed. However, cuts for hospitals and some other providers will occur and drug companies will be required to provide greater rebates than they offer now. This could be meaningful for recipients as this potentially could increase the number of physicians who do not take Medicare patients. This could also affect the willingness of hospitals to admit Medicare patients – particularly private hospitals.

On the clearly negative side, there are additional premiums, surcharges, and expenses to shift costs to recipients:

• Beginning for Medicare recipients entering the program in 2017, deductibles for Medicare Part B will increase by $25 until they have increased by a total of $75 in 2021. Part B is that part of Medicare that handles routine doctor’s visits and the like. It is the part where you pay monthly premiums.

• Recipients who buy Medigap coverage that has low cost-sharing requirements will be required to pay a 15% surcharge on top of the cost of their policy which will go to the government. Medigap coverage is the supplemental insurance that protects you from the part of medical expenses not covered by Medicare. The government believes that if insurance is covering the expenses, this encourages excessive use of medical services and the surcharge is designed to discourage that. The government logic may or may not be right, but it does create additional expenses for retirees – however you decide to go.

• The requirement for greater Medicare premiums by “wealthy” retirees is proposed. This would affect singles in 2017 earning more than $85,000 annually or couples earning more than $170,000. While much of this is in place currently, this budget would increase these premiums floors. However, here is the catch: These amounts would not be adjusted annually for inflation until 25% of recipients fall into the limits above. If you fall at the low end of these incomes, your premiums, which cover 25% of the insurance costs now would be increased to cover 40%. At the high end, you could be required to cover as much as 90% of the insurance costs. The larger concern for most retirees should be the lack of an inflation adjustment because it will affect more and more retirees over time. This seems like nothing less than a backdoor attempt to raise Medicare premiums!

To put this in perspective, the Kaiser Family Foundations estimates that if these income criteria were imposed in 2012, the cap for singles would be about $47,000 and about $94,000 for couples. This is hardly what I would define as “wealthy.” I guess that the government defines “wealthy” as anyone who is not direly poor!

So, while there are some good things coming out of the budget, this could be a net cost increase for many if not most seniors. Pair this with reduced benefit adjustments coming from Social Security and you have identified the crux of the problem for retirees.

However, what is most concerning about both the proposed Medicare and Social Security changes is that this is Obama’s opening offer. Anyone who knows anything about negotiation strategies knows that you never open the negotiation with your best offer. So, the final outcome for seniors could be much nastier. The Republicans would clearly like to gut or at least significantly scale back these programs. If the Democrats don’t try to hold the line, who will be the advocates for seniors?

The political perspective is that during the recent election, both political parties said, and I quote: “If you are 55 years old or older or in retirement, you will not see a change.” What happened to that promise? Sounds like election year rhetoric to me! Sounds like we were fed a lie in an attempt to win our votes!

A much more detailed discussion of these changes can be found at:

http://www.thefiscaltimes.com/Articles/2013/04/15/5-Medicare-Changes-Buried-in-Obamas-Budget.aspx#page1

Because of the importance of these issues, please pass on this blog post to others who are in or approaching retirement. If we don’t act to preserve our benefits, the going could get very rough in retirement as adjustments to benefits are scaled back and costs are shifted to retirees.

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