Medicare Surcharges: The Impact of Indexing IRMAA Brackets to Inflation

DANVERS, Mass.–The Bureau of Labor Statistics’ Consumer Price Index for All Urban Consumers (CPI-U) will be used to index Medicare surcharges brackets for Medicare recipients starting in 2020. This is the first time since 2010 that surcharge brackets for Medicare premiums will be adjusted for inflation. A new white paper from HealthView Services, Medicare Surcharges – The Impact of Indexing IRMMA Brackets, reveals the impact of this change on Americans approaching and in retirement.

The paper shows that indexing the Income-Related Monthly Adjustment Amount (IRMAA) used to calculate surcharges, will, for many Americans, delay when they would otherwise cross bracket thresholds and reduce the expected impact of surcharges for current and future retirees. When Modified Adjusted Gross Income (MAGI) exceeds the six current IRMAA brackets, which will now rise over time, surcharges ranging from 33% to more than 201% on Medicare Parts B and D premiums are levied.

Drawing on case studies, the paper highlights the financial impact of indexing using the Medicare Trust Fund’s projected 1.7% CPI-U for 2020 (based on the August 2019 CPI-U), and a projected average of 2.4% based on government projections for subsequent years. The cases assume retirement income will increase by a projected 4% a year, with average Social Security increases of 2.6% and an expected 6% return from a retirement portfolio (60% stocks, 40% bonds and cash).

The analysis shows that a single healthy 65-year-old woman living to age 89, with $100,000 in current annual income starting retirement in the second bracket with a 33% surcharge, would save more than $50,000 in lifetime surcharges with inflation indexing. Her lifetime surcharges would be $201,432 compared to $253,516 without this change.

As the paper notes, assuming surcharges remain at 2019 levels, it will take her two years longer to cross the threshold of the third bracket at which surcharges increase to 84% of premiums, and an additional five years to become subject to the fourth bracket where surcharges rise to 134%. With indexing, she will not cross the fifth bracket threshold at which surcharges rise to 184% of basic Medicare.

“The reduction in surcharges outlined in the paper assumes indexing will remain in place for the foreseeable future based on current IRMAA legislation,” said Ron Mastrogiovanni, CEO of HealthView Services and HealthyCapital. “We believe that given pressure on the Medicare Trust Fund, retirees should expect additional changes and cost shifting to make up for lost revenues.”

For working Americans with income below current IRMAA thresholds, the paper shows that even with indexing, surcharges need to be planned for. Using the anticipated 4% annual Average Wage Inflation (AWI) rate used by Social Security, a 45-year-old woman in 2019 planning to retire at age 65, earning $77,000 this year, will, at retirement, be in the CPI-U adjusted third IRMAA bracket of $170,000 and will face surcharges of 84%. Assuming she lives to age 89, she will be subject to $184,399 in lifetime surcharges on top of her basic Medicare premiums.

The White Paper also highlights the importance for advisors and clients to understand the impact of required minimum distributions (RMDs) on surcharges, other events that can impact MAGI in retirement, as well as opportunities to manage and even reduce surcharges by incorporating financial products in portfolios that don’t count toward MAGI.

“Lower surcharges from indexing seem like welcome news,” added Mastrogiovanni. “However, overall healthcare spending relief is not realistic. Driven by inflation, retirement healthcare costs will continue to rise through retirement and need to be incorporated into retirement plans.”

HealthView Services draws upon 530 million healthcare claims, actuarial, government and economic data to project retirement healthcare costs. The firm’s rigorous bottom-up approach integrates specific variables – including health status, age, gender, income, and state of residence – that will drive future healthcare costs. The final calculations draw upon, and are consistent with, government healthcare inflation forecasts.