What it means
Part B is the medical side of Medicare, covering doctors, outpatient treatment, lab tests, medical equipment and many preventive services. Unlike Part A, which most people receive without a premium, almost everyone pays a monthly premium for Part B.
The amount is announced each year, so a figure quoted in an old article may be out of date. Most people have the premium taken directly from their Social Security benefit, while others are billed directly.
This means retirees often see a smaller benefit payment than they expected, which can come as a shock. Planning should therefore start from the benefit after the premium has been deducted.
Higher earners pay more through an income-related monthly adjustment amount. The tax authority and Social Security look at income from an earlier tax year, so a one-off event such as selling a business or a property can push someone into a higher band two years later.
People whose circumstances have changed, such as through retirement, can appeal for the figure to be reduced. There is also a penalty for enrolling late.
People who delay Part B without qualifying employer cover can face a higher premium for as long as they hold the cover, so the cost of delay compounds over time. Anyone still working should check exactly how their employer plan interacts with Medicare before putting off enrolment.
Paying the premium does not mean everything is free. Part B usually has an annual deductible and then the member typically pays a share of approved costs, commonly 20%, with no cap unless they hold extra cover.
For that reason many people also buy a supplemental policy or join an Advantage plan. For employers and advisers, the premium is a fixed item in retirement income models.
Retiree health benefit schemes often reimburse it, which makes it a liability that must be estimated and, in some cases, accrued on the balance sheet.
In practice
Real-world examples.
Example
A retiree is surprised that his monthly Social Security payment is lower than the amount shown in his benefit letter. His adviser explains that the Part B premium has been deducted at source. They adjust his budget to use the net figure.
Example
A consultant sells her business for a large gain at age 63. Two years later, as she enrols in Medicare, her premium includes an income-related surcharge based on the year of the sale. She appeals, showing that her income has dropped sharply since she stopped working.
Example
A company that promises retirees a reimbursement of their Part B premium estimates the cost for 500 retirees. At an assumed premium of $2,400 a year each, the annual cost is 500 x 2,400 = $1,200,000. The finance team includes this in its retiree benefit obligation.
Formula
Calculation
Annual Part B cost = (Monthly premium x 12) + Annual deductible + (Approved costs above deductible x Coinsurance rate)
The figures below are assumptions for illustration, because the actual amounts are set each year. Suppose the monthly premium is $200 and the annual deductible is $250. A member has $5,000 of approved services, so the amount above the deductible is 5,000 - 250 = $4,750, and coinsurance at 20% is 4,750 x 0.20 = $950. The annual cost is 200 x 12 + 250 + 950 = 2,400 + 250 + 950 = $3,600.Case study
Seen in the real world.
Stonebridge Advisory is an illustrative, fictional financial planning firm. A client, Raymond, was planning to retire and had calculated that he needed $4,000 a month from his savings and benefits.
His adviser pointed out that he had not allowed for the Part B premium or the income-related charge that would apply because of a large investment gain that year. At an assumed total of $330 a month, the premium came to 330 x 12 = $3,960 a year.
Raymond increased his retirement budget by that amount and moved some gains to later years to avoid pushing his income into a higher band. The illustrative lesson is that a small monthly premium is a permanent cost and needs a place in the plan.
Watch out
Common mistakes.
- Using last year's premium in a budget, when the amount changes annually and income-related charges depend on earlier income.
- Delaying enrolment without checking whether the employer plan counts as qualifying cover, which can trigger a lifetime penalty.
- Assuming the premium covers all costs, when a deductible and coinsurance usually apply as well.
Questions
People also ask.
How is the premium paid?
Most people have it deducted from their Social Security benefit, and those who do not receive benefits are billed directly.
What is the income-related adjustment?
It is an extra charge for people whose income, measured from an earlier tax year, is above set thresholds.
Can I appeal an income-related charge?
Yes, if a life-changing event such as retirement or loss of income has reduced your earnings, you can ask for a new decision.
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