How to Cope With Medicare’s Rising Costs

Retirees can look forward to a big raise in 2022: a 5.9 percent increase in Social Security benefits. The annual cost-of-living adjustment is the largest since 1982, and it reflects the quickened pace of inflation this year.

But for beneficiaries also enrolled in Medicare, the raise will be diminished by an even larger cost increase: The premium for Part B, which covers doctor visits and other outpatient care, will soar 14.55 percent.

Those numbers underscore the bigger challenges facing more than 55.5 million retirees on Medicare: Gaps in coverage and high out-of-pocket costs — including deductibles, coinsurance and co-payments — can make health care costs difficult to handle, especially for people with lower incomes or those who need expensive drugs.

In 2018, average out-of-pocket spending for people with traditional Medicare was $6,150, according to the Kaiser Family Foundation, with one-third having spent at least 20 percent of their per-capita income on health care costs.

And high costs are not just a financial issue: They can lead to problems with access to treatment, poor health and even premature deaths.

It makes sense to pay careful attention to your Medicare coverage selections when you first sign up and during the annual fall enrollment season — and to plan for rising health care costs.

Behind the Part B increase

Two unique factors contributed to the double-digit Part B increase for 2022.

In part, Medicare officials were aiming to recoup costs that went uncovered in 2021. This year’s standard premium rose by just $3.90, to $148.50 per month. The increase would have been larger — the premium usually is set to reflect 25 percent of the projected total program cost for the year — but Congress wanted to limit it as a pandemic relief measure. Lawmakers passed legislation that capped the increase at 25 percent of whatever it would have been if Medicare had followed the usual formula.

But Medicare officials also said they needed to build a “contingency reserve” for the possible cost of Aduhelm, the controversial drug approved by the U.S. Food and Drug Administration in June for the treatment of Alzheimer’s disease. The drug was approved despite objections from the F.D.A.’s own scientific advisory panel, and it carried an astonishing price tag: $56,000 per patient annually.

This week its manufacturer, Biogen, slashed the price to $28,200 on the same day that a group of Alzheimer’s experts and health advocates called on the F.D.A. to pull the drug from the market.

Aduhelm will be administered by health care providers, and thus will be covered under Medicare Part B, rather than the Part D prescription drug program. A spokesman for the Centers for Medicare and Medicaid Services said Tuesday thatthe agency expected to release more information by mid-January about a review it is conducting of coverage of Aduhelm and other drugs of its type.

Biogen’s price reduction will increase pressure on Medicare to scale back the 2022 premium increase, according to Tricia Neuman, director of the Medicare policy program at the Kaiser Family Foundation. “Even before Biogen’s announcement, it was unclear if Medicare will cover Aduhelm or how many people on Medicare would get it,” she said. Any reduction probably would not take effect quickly, but it could be done retroactively, she said.

The squeeze

Typically, Part B premiums are deducted from Social Security checks, and the dollar amount of the 2022 increase, $21.60, will reduce the net cost of living adjustment by varying amounts, depending on a person’s benefit level.

Lower-income seniors will be squeezed hardest. For example, a senior with a $1,000 monthly Social Security benefit will receive a net adjustment of just 3.75 percent, compared with 5 percent for someone with a $2,500 monthly benefit.

Deductibles and other cost-sharing requirements are rising too. The Part B deductible next year will mirror the premium, jumping 14.77 percent, to $233. The annual deductible for Part A, which covers hospitalization, will increase 5 percent, to $1,556.

Many enrollees in traditional Medicare have supplemental insurance coverage, known as Medigap, that takes care of these cost-sharing burdens; some receive supplemental coverage from former employers as a retirement benefit, and Medicaid plugs gaps for low-income retirees. One in five people enrolled in traditional Medicare have no supplemental protection, Kaiser reports.

The cost of Part D prescription drugs can be sky-high. Monthly premiums for traditional Medicare enrollees have decreased somewhat in recent years, according to Kaiser. But deductibles and other out-of-pocket expenses have risen faster than inflation; the standard Part D deductible next year will jump 8 percent.

Medicare Part D plans do not cap the total amounts that enrollees must pay out of pocket each year. The coverage is offered through stand-alone plans, or as a benefit in Medicare Advantage plans.

The Part D deductible can vary by plan, but in 2022 it cannot exceed $480. That covers you during the “initial benefit period,” up to $4,430 in combined spending by you and your insurer. Beyond that point, you pay a percentage of drug costs that varies as your spending escalates.

The high cost of drugs can force some seniors to make difficult choices between paying for medications or other household expenses.

A recent study by the National Bureau of Economic Research found that when Medicare beneficiaries’ out-of-pocket drug costs jump, there is a significant drop in the number of patients who fill prescriptions and an increase in mortality. The researchers found that a $10.40 increase in a drug’s cost (34 percent) was associated with a 23 percent drop in drug consumption; 18 percent stopped taking all their medications. Most disturbingly, the change in prescription drug use was linked to a 33 percent increase in deaths.

Beneficiaries often dropped drugs that are relatively inexpensive, such as statins and blood pressure medications, which are crucial to preventing common causes of serious disability and death, such as strokes and heart attacks. And, the effect was the same among high- and low-income enrollees.

“People are dropping drugs that keep them away from death and out of hospital,” said Amitabh Chandra, professor of public policy at the Harvard Kennedy School of Government and a co-author of the study.

Policy options

President Biden’s now-imperiled Build Back Better bill would cap out-of-pocket Part D costs at $2,000 a year, starting in 2024, increasing annually based on the rate of increase in program costs. It also would allow Medicare to negotiate prices with drug companies for some high-cost drugs covered under Part D starting in 2025, and Part B, starting in 2027. The legislation also would limit cost-sharing for insulin to no more than $35 per month.

“These are urgently needed, fiscally responsible reforms that will meaningfully help older adults, people with disabilities, and their families,” said Frederic Riccardi, president of the Medicare Rights Center, a nonprofit consumer advocacy and counseling organization. “It’s not just about making drugs more affordable, but making them more accessible, too. The longer Congress waits to act, the longer beneficiaries will remain exposed to unchecked drug prices and unlimited Part D costs.”

Mr. Riccardi and other advocates also argue that the $2,000 cap would help many, but won’t provide enough assistance to seniors with very low incomes. They want to see two programs expanded to make more people eligible: the Medicare savings program, which can help cover premiums and cost-sharing requirements for Part A and Part B; and the low-income subsidy, which helps beneficiaries with Part D premiums, deductibles and cost sharing. The federal government sets income and asset requirements for these programs.

How to plan

The cost of health care in retirement often is expressed as an intimidating, lifetime estimate. Fidelity Investments estimated earlier this year that a 65-year-old couple retiring in 2021 can expect to spend $300,000 in retirement, based on average longevity forecasts.

But 80 percent of that is spent annually on Medicare premiums and cost-sharing, Fidelity found. That means it is crucial to make careful Medicare coverage selections, and to consider how you’ll use income and savings to meet these expenses. Here are issues to consider.

Premiums vs. deductibles: A question to consider when you sign up for Medicare is the trade-off between the upfront cost of premiums and variability of costs.

Selecting Medicare Advantage offers the lowest-premium option: In many cases, you will pay your Part B premium but not an additional upfront amount for Part D coverage, which often is wrapped into these plans. Medigap plans are not used with Advantage plans.

But buying a supplemental policy could be difficult if you decide to switch to traditional Medicare later on. And you will be exposed to high out-of-pocket costs in years when you need a lot of health care services — say, for a surgery or serious illness. This year, the average Advantage plan had a ceiling of $5,091 for in-network Part A and Part B services, and $9,208 for in-network and out-of-network services combined, according to Kaiser.

Traditional Medicare has no built-in out-of-pocket cap, and the annual cost of a Medigap policy can run from $1,600 to more than $3,000, depending on where you live and the plan type that you select, and your premiums will rise as you age. Another option is a high-deductible Medigap, which will bring your premium down sharply but comes with a $2,490 deductible in 2022.

“If you get a standard Medigap policy, you’re probably going to spend the most over the course of your lifetime, but you’ll do it in a very consistent way, where all of your needs are covered by the premiums you pay,” said Stephen Weber, a certified financial planner and senior investment strategist at Vanguard. “The high-deductible option can be a way to reduce your premium costs, if you’re willing to deal with the fact that there’s a deductible.”

Coverage checkup: Enrollees should review Part D or Advantage plan coverage annually during fall enrollment (Oct. 15-Dec. 7). Plans often revise monthly premiums from year to year, as well as the drugs they will cover and the rules for accessing them.

Delay taking Social Security: Increasing your monthly Social Security income through a delayed claim is one of the best ways to protect against the risk of rising health care costs in retirement, Mr. Weber said. “Deferring Social Security is probably the best overall inflation strategy that you can have as a retiree: You have this wonderful increasing annuity that’s inflation-adjusted every year.”

Use a Health Savings Account: These accounts are available to workers enrolled in employer-sponsored high-deductible plans. Health savings accounts can be used to pay deductible and other out-of-pocket health care costs, but they also offer a tax-efficient way to save for unforeseen medical expenses in retirement. Contributions are tax-deductible, and investment growth and interest are tax-exempt, as are withdrawals spent on qualified medical expenses.

H.S.A. balances can be invested, although this strategy works only for savers who have the financial capacity to pay out of pocket for current health care expenses. “Most people don’t think about their H.S.A. as a potential investment vehicle,” Mr. Weber said. “They tend to think of them as cash reimbursement accounts.”