Costly Surprises are Hidden in Medicare’s Rules

Sue has learned an extremely painful lesson, which, in her case, will materially lower her living standard for the rest of her life. The lesson is this: You can’t trust that you are getting the real story from Social Security and Medicare websites.

A single, 68 year-old lady, who I’ll call Sue, contacted me last week. She was absolutely besides herself. She recently enrolled in traditional (Parts A, B, and D) Medicare and was hit with huge Part B and Part D monthly premiums. She had no idea why it was so high. After many letters, calls, and meetings with Social Security, she still had no idea.

Sue knew that you need to sign up at age 65 for Medicare Part A (hospital care) and Part B (outpatient care) if you don’t have employer-provided health insurance provided by a largish employer — an employer with 20 or more employees. You can also sign up for Part D (prescription drug insurance).

Sue also knew that if you aren’t covered by such an employer and don’t sign up immediately, you face a penalty in the form of a higher Part B premium and Part D for the rest of your life once when you do sign up. But Sue, who is employed sporadically, understood that Medicare provided an 8-month special enrollment period after one job ended to apply penalty free. As things turned out, between ages 65 and 68, Sue had several jobs with largish employers, but she was never between jobs for more than eight months. Altogether, Sue was out of work for 25 months between age 65 and 68, during which she wasn’t enrolled in Medicare. But since none of her periods of unemployment exceeded eight months, Sue figured that when she finally stopped working this fall, at age 68, she could enroll penalty-free in traditional Medicare (Parts A, B, and D).

How did Sue come away with this understanding? She read statements on the website, which are, at best, hard to decipher, and, at worst, misleading. For example, she read, “Usually, you don’t pay a late enrollment penalty if you meet certain conditions that allow you to sign up for Part B during a Special Enrollment Period.” and “You have 8 months to sign up for Part B without a penalty … .”

Unfortunately, Sue got it wrong. In determining if you need to permanently pay a Medicare Part B penalty, Medicare counts all the months between age 65 and the month you first enroll in Part B even if you, like Sue, had a series of jobs with a largish employer with no gap between jobs extending beyond 8 months. Instead of being exempt from the penalty because she was always in a special enrollment periods between jobs, Sue was hit with a 20 percent lifetime Medicare Part B premium penalty! This is calculated based off of Medicare’s base premium, which is $144.60 for 2020. Hence, Sue’s penalty, this year, is $28.90 (.20 x $144.60) per month or $347.04 over the year. Moreover, since the base premium can rise, through time, faster than the rate of inflation, Sue’s real penalty (her penalty measured in today’s dollars) may be higher, indeed a lot higher, down the road.

Where does the 20 percent penalty rate come from? For every 12 months that you’re not covered by Medicare Part B after reaching 65 and before you enroll, the penalty is an additional 10 percent. In Sue’s case, the 25 months encompass two 12-month periods, so she was hit with two 10 percent penalties, i.e., a total penalty of 20 percent.

To make matters worse, Sue was also hit with a Medicare Part D premium based on the cumulative (not consecutive) 25 months she went without credible prescription drug coverage. The Part D penalty is calculated according to the following.

Medicare calculates the penalty by multiplying 1% of the “national base beneficiary premium” ($32.74 in 2020) times the number of full, uncovered months you didn’t have Part D or creditable coverage. The monthly premium is rounded to the nearest $.10 and added to your monthly Part D premium.

(Note, “The monthly premium” in the last sentence appears to be a typo. It should surely say “The monthly penalty”.)

In Sue’s case, the 2020 penalty is 25 x .01 x $32.74 or $8.185, would be rounded to $8.20 per month. This is $98.40 per year. Together with the Part B penalty, Sue is facing over $440 in Medicare B and D penalties this year and potentially even higher real penalties year in and year out for the rest of her life. (Note, had Sue not qualified for Medicare Part A on a premium-free basis, she would also have been hit with a Medicare Part A late enrollment premium penalty.)

Unfortunately, this is not all the bad news for Sue. Sue has very low earnings, even when she’s working, but she does have some assets she accumulated when young. She’s by no means rich, but two years ago she sold some of her assets and realized a capital gain. This kicked up her 2018 Modified Adjusted Gross Income (MAGI), which, in turn, is forcing her to pay, at least for 2020, the IRMAA (Income Related Monthly Adjustment Amount) . If your MAGI, two years before the current year, is less than $87,000, you are exempt from IRMAA in the current year. If it’s higher, the extra additional annual premium can range from $693.60 to $4,164. As for the the extra IRMAA In Sue’s case, she has to pay $1,735.20 more this year. Had she realized her capital gains over several years, her 2018 MAGI would not have crossed the $87,000 threshold and she would have saved the $1,735.20. Most people aren’t aware of the IRMAA and take capital gains in larger amounts than is needed.

Sue has learned an extremely painful lesson, which, in her case, will materially lower her living standard for the rest of her life. The lesson is this: You can’t trust that you are getting the real story from Social Security and Medicare websites. Medicare could have easily provided on its site an example of how someone like Sue would be treated. It could also have sent a warning message to everyone at, say, age 62 about its Part B penalty, its Part D penalty, and its IRMAA rules — with copious simple examples. It does not.

What’s Sue’s best move at this point? My only thought is voting for Bernie Sanders or Elizabeth Warren as they both provide Medicare for everyone with no premiums, no penalties, no special high-income premiums, no deductibles, no co-pays, and and no co-insurance.

P.S. Here is the main Program Operations Manual System (POMS) reference on this: HI 01120.005 Life Changing Events.

For an explanation in less technical language, see this link to the form used to request a lower rate, which includes a limited plain-English explanation of when the form should be used.

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