More Punishment for Thrifty Seniors from Federal Medicare Laws

If two couples make almost the same amount of money, should one of them be charged $2,000 more in Medicare Part B premiums? Logically, no, but to the federal government, the answer is sometimes “yes.” This problem will get worse in 2016, and much worse by 2018.

Under federal law, an elderly couple can be charged thousands extra annually for Medicare Part B premiums if their income goes up by just a few dollars (which can occur because they saved their money, and thus have more savings account interest or investment income). That’s because Medicare Part B premiums suddenly jump by big amounts at certain income levels, rather than rising gradually the way your taxes do when your income rises.

Now, these arbitrary income cliffs will get even worse due to a quirk in federal law. As the Fiscal Times notes in “Millions Facing a Hefty Increase in Medicare Premiums in 2016,”

Nearly a third of the roughly 50 million elderly Americans who depend on Medicare for their physician care and other health services could see their premiums jump by 52 percent or more next year. That’s because of a quirk in the law that punishes wealthier beneficiaries and others any time the Social Security Administration fails to boost the annual cost of living adjustment. . . .

an estimated 15 million seniors, first-time beneficiaries or those currently claiming dual Medicare and Medicaid coverage will see their premiums jump from $104.90 per month to $159.30 for individuals . . .Higher-income couples would pay multiples of that increase.

As Reuters notes, even before this quirk jacks up rates, the economic punishment for earning a few extra dollars is already slated to increase dramatically due to the recently passed “doc fix” legislation to raise more revenue for Medicaid providers (known as the Medicare Access and CHIP Reauthorization Act of 2015):

Affluent enrollees already pay more for Medicare. Individuals with modified adjusted gross income (MAGI) starting at $85,000 ($170,000 for joint filers) pay a higher share of the government's full cost of coverage in Medicare Part B and Part D for prescription drug coverage. This year, for example, seniors with incomes at or below $85,000 pay $104.90 per month in Part B premiums, but higher income seniors pay between $146.90 and $335.70, depending on their income.

The [“doc fix” law] will shift a higher percentage of costs to higher-income seniors starting in 2018 for those with MAGI between $133,500 and $214,000 (twice that for couples). Seniors with income of $133,000 to $160,000 would pay 65 percent of total premium costs, rather than 50 percent today. Seniors with incomes between $160,000 and $214,000 would pay 80 percent rather than 65 percent, as they do today.

As Valley News notes, this economic punishment for earning a few extra dollars will now rise further due to the ironically named “hold harmless” provision in federal law. “High-income retirees . . .will be hit hard. . . . Affluent seniors already pay more for Medicare Part B and also Part D for prescription-drug coverage. . . . ‘When you combine it all, it's looking pretty ugly,’ says Sharon Carson, a retirement strategist at J.P. Morgan Asset Management.”

It makes no sense for the government to increase premiums by a big amount all of a sudden when income crosses an arbitrary threshold, since the same amount of money can be raised less painfully by increasing premiums more gradually as income rises, rather than in sudden big jumps at arbitrary income levels (“income cliffs”).

Raising premiums massively when income hits a specific dollar amount encourages people near that amount to work (and earn) less to avoid the increased premiums. It also encourages them to hide their income to stay just below the income cliff, and to come up with complicated and time-consuming schemes to shift taxable income from one year to the next, in order to stay just below an arbitrary income level that will raise their premiums.

When the government imposes big jumps in premiums for small increases in income, that harms the economy by creating disincentives to work. For example, income cliffs for health insurance tax credits that were carelessly included in the 2010 healthcare law are one reason that Obamacare may end up shrinking the nation’s labor force by 2.3 million people over the next decade.

To avoid that sort of waste, America’s tax code, like other progressive tax systems, relies on increasing marginal tax rates that gradually increase taxes, rather than sudden income cliffs, in order to be as fair as possible. But Congress and the president chose to ignore the obvious lessons of our tax code in crafting federal Medicare policy, resulting in unfair and discriminatory treatment of similarly-situated retirees.

Even before income cliffs radically increase due to the 2015 “doc fix” legislation and the “hold harmless” provision, there are already some income cliffs in Medicare Premiums. Here is a table summarizing 2015 monthly premiums, which are set based on 2013 income (“MAGI”), and includes increases (or surcharges) if your income reaches certain levels:

Medicare Part B and Part D 2015 monthly premium

MAGI: Single

MAGI: Joint

Part B monthly premium

Part B Surcharge

Part D Surcharge

Total Medicare premium





$0.00 paid to Medicare +
plan premium paid
to insurer


$85,001- $107,000

$170,001- $214,000


$ 42.00

$12.30 paid to Medicare +
plan premium paid
to insurer


$107,001- $160,000

$214,001- $320,000


$ 104.90

$31.80 paid to Medicare +
plan premium paid
to insurer


$160,001- $214,000

$320,001- $428,000


$ 167.80

$51.30 paid to Medicare +
plan premium paid
to insurer






$70.80 paid to Medicare +
plan premium paid
to insurer