A Low COLA and Higher Medical Costs Could Mean Double Whammy for FEHB and Medicare Premiums

An initial estimate of the 2021 cost-of-living adjustment (COLA) of 1.3 percent and higher than expected health care expenses (that will likely affect Federal Employee Health Benefits program premiums and Medicare Part B premiums) could mean a double whammy for federal annuitants.

While Social Security recipients who are enrolled in Medicare would also be affected by a low COLA, since some federal annuitants are not eligible for Social Security benefits or who have chosen to delay the receipt of their Social Security benefits, these annuitants would especially be affected.

This column explains the double whammy to federal retirees of a low COLA and higher than expected medical costs, and how there may be some relief in Congress that could minimize the problem.

SEE ALSO:  2021 COLA Announced for CSRS, FERS and Social Security

[Note:   An official announcement about the Medicare Part B premiums for 2021 will be made in late October.  2021 FEHB premiums will be released in early  November.]

Inflation is in fact on the increase – for the items that employees and annuitants truly need at this time

The latest consumer price index (CPI-W) – the change in the CPI-W from one year to the next that is used in determining the annual COLA – showed in August an annual inflation rate of 1.3 percent. But the 1.3 percent is misleading.

This is because that 1.3 percent rate does not truly reflect what the average person – employee or retiree – is spending his or her money on. Economists will tell us that the “laws of supply and demand” are still working when it comes to measuring “true” inflation.

Two of the items that illustrate recent swings in the law of supply and demand are food and health care. The cost of grocery food – food bought for consumption at home where so many individuals have been spending time over the last eight months due to the COVID-19 pandemic, was up 4.6 percent in August 2020 compared with the cost of grocery food in August 2019. This is the biggest annual increase in grocery food in 10 years.

Medical care during 2020 was obviously in high demand (up 5 percent), also a result of the COVID-19 pandemic. But health care costs have never been a big component of the CPI-W.

For years, there have been calls from organizations such as AARP that another CPI index be used to determine the COLA for Social Security recipients and federal annuitants, in particular, the use of the “CPI for the elderly” (CPI-E) in which healthcare costs are a major component.

The effect of a low COLA and Medicare Part B premiums

Most individuals over the age of 65, and this includes federal retirees, are enrolled in Medicare Part A (hospital insurance) and Medicare Part B (medical insurance). Medicare A is free for most enrollees, but Medicare Part B charges a monthly premium (that depends on an enrollee’s income) that changes annually.

Currently during 2020, the standard monthly Part B premium is $144.60 with individuals who have higher incomes paying more. At this time, there is an excellent chance that those premiums will increase effective Jan. 1, 2021. An official announcement about the Medicare Part B premiums for 2021 will be made later in October.

Since most Medicare Part B enrollees pay their monthly Part B premiums as a deduction from their Social Security monthly retirement check, a low COLA in 2021 applied to the Social Security monthly benefit, coupled with a higher than expected increase in Part B monthly premiums, could mean a net decrease in net monthly Social Security benefits in 2021 for many Social Security recipients.

However, many Social Security recipients including some federal annuitants, could find relief in the Medicare “hold harmless” provision and other legislation currently being considered in Congress.

The Medicare “hold harmless” provision

The Medicare “hold harmless” provision is a result of a statutory provision that prevents Medicare from increasing most Social Security recipients’ Medicare Part B monthly premiums by more than the COLA provided by Social Security in a given year. For 2021, the COLA is estimated to be 1.3 percent.

Back in April 2020, the Medicare trustees predicted that the standard Medicare Part B monthly premium would increase to $153.30 in 2021, representing a 6 percent or $8.70 monthly increase from the standard monthly premium of $144.60 in 2020.

However, those estimates did not take COVID-19 pandemic crisis into account. The extent to which Part B premiums increase in 2021 depends on a specific formula that takes different costs into consideration. Calculating that cost will likely be more of a challenge. While Medicare is spending more on treating COVID-19 patients, it is also spending less due to seniors delaying preventive care.

There is a potential problem associated with the “hold harmless” provision that certain federal annuitants should be aware of. To understand the problem, it is important to present the requirements for the ‘hold harmless” provision.

To qualify for the “hold harmless” provision, on which Medicare Part B payments would not increase to the extent it would result in a decrease of net Social security payments, an individual must be receiving Social Security benefits and must have had their Part B premiums paid out of those benefits for at least two months of the previous year.

Those individuals who make payments for Medicare Part B directly to Medicare and those who have their Part B premiums paid by Medicaid do not qualify for the “hold harmless” provision and therefore may be subject to higher Medicare Part B premiums.

The following example illustrates an individual who is not eligible for the “hold harmless” provision:

Janet, age 66, is a CSRS annuitant who is enrolled in Medicare Parts A and B. Janet is not eligible for a Social Security check because she did not accumulate at least 40 credits of Social Security during her working years. Since Janet pays her Medicare Part B premium separately to Medicare, she is not eligible for the “hold harmless” provision.

There are also some FERS annuitants over the age of 65 who are enrolled in Medicare Parts A and B but who have delayed receipt of their Social Security benefits in order to receive a larger monthly benefit. They too are not eligible for the “hold harmless” provision.

The “hold harmless” provision in fact only protects an estimated 70 percent of Medicare Part B beneficiaries, almost 43 million beneficiaries, from increases in the Medicare Part B premium that exceed the dollar amount of their COLA. But when the “hold harmless” provision is implemented more widely than usual – as will be expected in 2021 – there is no provision of the law to finance the unpaid portion of Medicare Part B premium increases of the approximate 43 million who are protected by the provision.

In the past, Congress has chosen to allow the cost burden of this unpaid portion to be borne by the 30 percent of beneficiaries who are not “hold harmless”. This includes many CSRS annuitants, as well as FERS annuitants between the ages of 65 and 70 who have decided to delay the start of their Social Security retirement benefits. The result could be a significant increase in Medicare Part B premiums for those federal annuitants in 2021.

Recently, the Congressional Budget Office estimated in its September budget outlook that Medicare outlays for 2020 would rise about 12 percent. This suggest that that the Medicare Part B premium increase for 2021 could be $17.40 per month higher than in 2020, increasing from $144.60 per month to $162.00 per month.

However, a proposed bill currently sitting before Congress would cap Medicare Part B premiums at 25 percent of what it otherwise would have been for 2021. This cap would apply to all Medicare Part B recipients, whether or not they are receiving Social Security retirement benefits.

While it is too soon to know whether the aforementioned bill will make it through Congress and become law, if it does many federal annuitants, especially those annuitants not receiving Social Security benefits, could be spared a high increase in their medical expenses in 2021.