Medicare Part A: 10-Years Of Work To Premium Freedom? Maybe.

Ever wonder how much we will have to pay for Medicare Part A premiums? Probably not. It’s a long way off for many of us. For others, it’s not as far off as it used to be. Then there are some already on Medicare Part A and have absolutely no idea how much it is costing them in out-of-pocket premiums.

Since I consider healthcare one of the pillars of personal finance, it’s important for us to answer these types of questions from time to time. These things impact us.

Now that I have a pretty steady blog running, I can do just that. 

Max’s slightly ridiculous future Medicare card.

Let me start first with some good news. Medicare Part A premiums are currently “premium-free” for most people. It will take a few years of work, but odds are, those close to Medicare age will qualify for premium-free Part A coverage when they become eligible for the program at the age of 65.

What I don’t know is how long this “premium-free” gravy train will be sustainable. 

What is Medicare Part A?

As some advanced readers already know, the Medicare program is split up into four parts. As I like to say, the government got creative and used the first four letters of our alphabet to simplify a multibillion-dollar program. Today we are going discuss the first part and the out-of-pocket premiums that come with it.

You will see me refer to it as just “Part A” from time to time.

Before we can worry about how much our Part A premiums are going to run us, we need to understand a little bit about what we are getting with this kind of coverage. Just like any other large purchase, Max wants to understand what he is paying for.

Medicare Part A generally covers inpatient services provided in the hospital setting. It also covers a few other services such as skilled nursing facility services, hospice, and sometimes home health. Here at Max Out of Pocket, we are usually talking about inpatient hospital services when we talk about this part of the Medicare program. 

Okay, that makes sense, but how much is it going to cost us?

How To Get Part A For Free

Hopefully, everyone reading this has worked at least 10 years.

That’s because once we have worked 10 years (40 quarters) while paying Medicare FICA taxes, we qualify for what they call “premium-free” Part A coverage. In other words, we don’t have to pay premiums for it when we become Medicare eligible. If we do some simple math, this comes up to an annual out-of-pocket premium cost of $0.00 to fund Part A coverage.

$0.00 Monthly Part A Premium X 12 months = $0.00 Annual Part A Premium

We can check-in and see if we have met this criterion over on the Social Security portal. Mine looks like this:

Social Security website showing I will qualify for Medicare Part A at 65.
Max has achieved Medicare Part A “Premium-Freedom”

What If I Haven’t Worked Enough For “Premium-Free” Part A?

If we haven’t worked at least 7.5 years (30 quarters) while paying Medicare FICA taxes, we are going to be looking at some serious out-of-pocket premiums for Part A. Part A premiums will cost us $458/month in the calendar year 2020 if we have not worked the 30-quarter minimum. This comes out to $5,496 annually.

$458 X 12 = $5,496 in Medicare Part A Premiums Annually

If we worked 30 to 39 quarters, we get a bit of a discount on our Part A premiums. Premiums for people who fall into this category will pay $252 per month in the year 2020. This comes out to $3,024 annually.

$252 X 12 months = $3,024 in Part A Premiums Annually

The message here is work the ten years. We don’t want our Part A premiums interfering with our retirement plans. 

How Is All Of This Funded?

All of this “free-premiums” talk got me wondering how we actually fund Medicare Part A.  

The Kaiser Family Foundation is a great resource for questions like this one. They are filling the need for trusted information on national health issues. They also allow us to share some of their fancy charts with proper citation. I don’t think I have done a proper citation since high school, and I can just about guarantee you I was doing it wrong back then.

Let’s cover it briefly as Max definitely needs a refresher.

[Author(s)], [Title of publication], (KFF, [date of publication])

I can handle that:

[Juliette Cubanski, Neuman Follow, Meredith Freed], [The Facts on Medicare Spending and Financing], (KFF, [8/20/2019])

So now I can steal this chart from them to help illustrate how the Traditional Medicare Part A program is funded. You can find it here.

You will want to look at the second column in the bar graph below.

Sources of Medicare Revenue from the Kaiser Family Foundation.
[Juliette Cubanski, Neuman Follow, Meredith Freed], [The Facts on Medicare Spending and Financing], (KFF, [8/20/2019])

As you might have guessed, our Medicare FICA taxes fund most of the Medicare Part A program. We already covered Medicare FICA taxes here on the blog; I can cite myself on that one. But I didn’t go into too much detail on where those taxes go. Here is a sophisticated chart I made showing the Medicare 1.45% FICA tax.

1.45% FICA
Max is a visual learner.

Medicare FICA taxes (payroll taxes) account for 88% of the Medicare Part A revenue. The rest of it comes from taxes on Social Security benefits and interest. Only 1% of it is funded by actual premiums. So, I imagine, that 1% in revenue comes from people who fall into the two scenarios above where they have not hit the 30/40 quarters of work requirement.

Sources of Medicare Part A Revenue from the Kaiser Family Foundation.
Here is Medicare Part A blown up from the chart above.

Will Medicare Part A Still Be There When I Retire?

Unfortunately, this isn’t a question the Max Out of Pocket crew can field. I certainly believe it will be there, but it is likely the premium or tax structure will need to change to prevent the complete depletion of the Medicare Part A trust fund. 

Current 2019 projections put the Medicare Part A trust fund’s depletion date at some point in 2026. They suggest that a combination of lower-than-expected revenues from payroll taxes in 2017 and 2018 combined with higher than expected spending for Medicare Part A benefits put pressure on both ends of the program (revenue & expenses). The Medicare Part B and D programs do not have the same challenges since both are funded by beneficiary premiums and other general revenue (whatever that means). Does this mean Max may get hit with a Medicare Part A premium in the future to stop the bleeding? Maybe.

According to this chart, we only have 6 years to figure this out. Then again, back in 2005, they said this year (2020) would be the year the Part A program would run out of money. These are only estimates.

Medicare solvency projections.
[Juliette Cubanski, Neuman Follow, Meredith Freed], [The Facts on Medicare Spending and Financing], (KFF, 8/20/2019)]

It could also mean we need to make some adjustments to our 1.45% Medicare FICA tax to make the trust fund solvent again. If we recall, the government played with our payroll taxes once before when we all got a two year discount on Social Security.

Early retirees will need to keep this in mind when projecting out their healthcare expenses. 

Final Thoughts

It pays to work ten years in the United States. The Medicare benefits we currently get for those 10-years of work are worth about $5,496 in 2020. 

That said, given the current projection estimates on the 2026 depletion of the Medicare Part A trust fund, it is very likely we will see some changes to either Medicare FICA taxes or the Part A premium in the future. 

Lastly, there is a hefty deductible that comes along with the Medicare Part A program that we need to make sure we are prepared to pay in the event of an inpatient stay at the hospital.

Do you qualify for “premium-fee” Medicare Part A benefits yet?


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