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Well, it’s time to get back to business here at Max Out of Pocket. It is already February and we haven’t even touched on where Medicare Part B premiums came in for the calendar year 2020. Even though I am 30 years or so out from Medicare coverage, I still watch these numbers closely. You should too. They may come sooner than you think.
So let’s get right to it.
In 2020, the Medicare Part B premiums for most beneficiaries will increase to $144.60 per month. This is a 6.7% increase ($9.10/month) from where we were in 2019. The total annual premium is $1,735.
According to the Centers for Medicare and Medicaid Services, approximately 10,000 people are signing up for Medicare every day. With that many people signing up daily, I would think the out-of-pocket premiums tied to this program would be a hot topic.
We already touched on the “premium-free” Medicare Part A program. Most of us get Part A coverage by paying our Medicare FICA taxes for 10 years. That program covers the inpatient/hospice services we might need when we hit age 65. But what if we need outpatient or physician services? How do we get those services covered during traditional retirement?
We need to get Medicare Part B coverage to help us take care of those services. Unfortunately, Medicare Part B coverage comes at a cost.
What is Medicare Part B?
The Medicare card calls Part B coverage “medical” coverage. But that is a very broad definition.
In general terms, I like to think of Medicare Part B as the piece of the Medicare program that covers services provided on an outpatient basis. This includes things like clinic visits, laboratory testing, home health care, and ambulance services. It even covers more intensive services provided on an outpatient basis like surgeries, diagnostic imaging, chemotherapy, and radiation therapy. Even if these services are provided in the hospital setting, if it is an outpatient service, generally, Medicare Part B will be responsible for covering the service.
I dropped “generally” a few times up there for a reason. Medical necessity and other rules governed by the Centers for Medicare and Medicaid (CMS) can cause reason for non-coverage. These are things we couldn’t possibly cover in one blog post (or even one blog), so let’s keep that in mind.
I do need to go ahead and call one thing out here, though. If we are in the hospital in an observation status, those services are considered outpatient Part B services. If a qualified practitioner does not order us “inpatient”, Medicare Part B is paying for those services, not Medicare Part A. It needs to be medically necessary for us to be ordered as an inpatient for Medicare Part A to cover the hospital stay. This impacts our out-of-pocket costs and I will discuss it exhaustively in a later post because it is a huge point of confusion.
This all may sound a bit vague, but Medicare is even fuzzier on what Medicare Part B covers when you check it out on their website.
What are Medicare Part B Premiums?
Medicare beneficiaries must pay a monthly premium to keep their Medicare Part B coverage active. As mentioned above, in 2020 this monthly premium is $144.60 for most beneficiaries. This comes out to $1,735.20 annually. If 10,000 people are really signing up per day, that’s over 17 million dollars getting added to the annual premium pool every single day.
10,000 people per day X $1,735 annual premiums = $17,352,000
I say “most” beneficiaries pay $144.60/month because Medicare tiers the premium responsibility based on income ranges. In other words, if we make more money, we are going to have to shell out more for Medicare Part B coverage. I took the table below directly from the Medicare website.
Side note: Did you know you can pay down Medicare Part B premiums with a Health Savings Account? Check out the guest post I did over at Physician on Fire on a Medicare Part B premium drawdown strategy.
Don’t Be Late to the Party
Medicare Part B is technically optional, but it also comes with some stiff penalties for not signing up on time. Most people become eligible for Medicare Part B at the age of 65. Medicare doesn’t like it if we don’t sign up when we become eligible.
Our monthly premium can go up by 10% for each 12-month period we could have been covered. So if you forget to sign up for 3 years and don’t meet one of the exemptions for being late, we are looking at a 30% penalty.
In 2020, that mistake could cost us over $500.
$1,735.20 X 30% late enrollment penalty = $520.56
There are of course confusing loopholes and waivers around this penalty, but be careful with it and make sure you understand enrollment requirements. Particularly, if you are still working at 65 and eligible for an employer’s health plan, make sure you understand the rules.
How is Medicare Part B Funded?
You might remember this chart from when we looked at Medicare Part A. It is based on 2018 data. Unlike Medicare Part A, which is mostly funded from payroll taxes, Medicare Part B is heavily funded (26%) with the premiums we pay into the program. Another 72% comes from “general revenue” funding. Not exactly sure what that means, but my guess is we are talking individual and corporate income tax revenue here.
KFF suggests that Medicare Part B does not have the financing challenges we see with Medicare Part A. This is because it is funded by beneficiary premiums and general revenues. Evidently, these are set annually to match projected outlays (claim expenses for medical services provided).
Take-Home
Once we hit 65, Medicare wants us on their rolls. So much so that they will penalize us if we don’t enroll timely. I think their goal is probably three-fold; collect premium dollars, make sure no one accidentally goes without coverage, and make sure everyone is paying their fair share. The penalty for not enrolling in some ways reminds me of the penalty the ACA tried to enforce as a tax for not having insurance.
In 2020, between our premium-free Medicare Part A coverage and our Medicare Part B premiums, we have covered a good chunk of our health insurance needs for only $1,735 annually. That certainly beats the $20,000 in premiums my employer and I are shelling out in 2020 for my commercial medical insurance.
That said, my commercial insurance comes with prescription drug coverage and we haven’t covered that piece of the Medicare program yet (Medicare Part D). Also, my plan comes with a $6,600 max out-of-pocket and unlimited coverage for medically necessary care. The Medicare program does not have a max out-of-pocket protection or unlimited coverage. This is something I plan to discuss extensively here on the blog in the future. It is also something to consider before we go marching into a “Medicare-for-all” scenario. And no, I am not talking politics here, just Medicare.
The everchanging Medicare program has more moving parts to it than any program I have ever worked with. Make sure you do your own research and understand the program’s rules. This blog is not responsible for your decision to sign up or if you were to sign up late. See my disclaimer page if you have questions.
Thank you for putting this together! It’s surprising how many young folks believe Medicare is free (and therefore we should make it available for every American!). I’d love to hear more on the topic of unlimited coverage and maximum out of pocket rules. I’ve heard a few tales of Medicare not kicking in for certain things (like nursing homes) until you’ve spent down all your personal assets, which is scary for folks putting all their eggs in the Medicare basket.
Hi Kim!
No problem. Technically, Medicare never kicks in for nursing home care (unless it is a short skilled nursing stay). Medicare leaves that to the state Medicaid programs, and you are absolutely right they make you spend down assets before Medicaid will start paying. A lot of states make you go all the way down to $2,500 before Medicaid kicks in. One of the nursing homes I work with runs about $350 per day, so that spend down cand happen pretty quickly when you are blowing through $10,000 per month.
Take care,
Max
Hey Max, I am really enjoying your Medicare posts. I made a financial protection for both of us until we are age 95. For healthcare costs, I just took each yearly estimate and grew it by a certain percentage. I didn’t put much thought into what the numbers would be when we get to 65 and Medicare kicked in. These posts are making me thinking differently about that model and will be looking to build out my own projections specific to Medicare. Knowing of course the rates and laws will probably be different 20 plus years from now. Looking forward to your future posts on the subject!
Thank you, Sir. Yeah, you can likely reduce the yearly estimate a bit (at least for premiums) and then make some reasonable assumptions on out-of-pocket costs for Medicare. I will be talking more about that piece in a coming post. Laws do change and the rate changes are ‘generally’ tied to inflation, but it is great to know them now and flag any changes that come up.
Max