Medicare Advantage?

 It's Medicare open enrollment season. The Retire Early site offers Top 5 things your Medicare Advantage sales agent won't tell you.

Dancing with IRMAA and MAGI

Jane is a widow. Her 76-year-old husband died in late 2019. She has assets and income for 2020 that look like this: 

• Widow’s social security benefits, based on 100% of her husband’s benefit - $2,700 per month, $32,400 per year  
• An IRA with a balance that generates RMDs of $35,000 this year
• Investments that generate income of $27,000 

Jane is 72. She has been on Medicare for seven years. This year, she is paying $144 per month as the premium for Part B coverage, and another $20 per month for Part D (prescription drugs), subject to a $435 per year deductible. 

Jane and her husband never had to worry about possible increases to their Part B and Part D premiums in past years. The threshold for those increases for a married couple is about $176,000, and their annual income was well within those limits. But now Jane has to dance with IRMAA. 

IRMAA is the awkward acronym that stands for “Income-Related Monthly Adjustment Amount.” The Social Security Administration, which manages Medicare payments and premiums, will increase the Part B and Part D premiums for beneficiaries who have more than a threshold income. Jane is now a single woman, and her income threshold is now $88,000. Jane now has to be concerned about that threshold. She has to dance with IRMAA. 

Trying to figure out how to know where the line is can be pretty complicated. The total of all of her sources of income is $92,400 per year. Her Adjusted Gross Income (AGI) is $4,860 less than that because only 85% of her social security income is taxed. But the technical rule requires that the income that is considered be calculated based on Modified Adjusted Gross Income, or MAGI. Without getting into too much detail, we can note that, for most people, MAGI will be the same as or pretty close to AGI. The untaxed portion of social security benefits is not included in MAGI for this purpose, either, but there are other items that, after being removed to calculate AGI, are put back in to calculate MAGI. 

The important thing for Jane and those in her situation to know is: If her MAGI gets into the mid-$80,000s or higher, she should keep IRMAA and MAGI in mind, and seek advice to avoid running over the line if possible, or be prepared to accept the higher Medicare premiums. Interestingly, her 2020 income will affect the calculation of her Medicare premiums for 2022. 

In truth, IRMAA will be a problem for Jane only if her total MAGI for 2020 is right at the $88,000 level. If it is less than that figure, there will no increase in premiums. If it is higher than $89,000, she will have enough money from the additional income to pay the increased premiums, which are described at this IRS site. If her 2020 income is $95,000, for example, she will have more than enough to pay that additional premium. If she happens to hit just over $88,000, she can always take out additional distributions from the IRA to bump up both AGI and MAGI for that year. 

Jane does have options, then, and at any rate having to pay a little more because she has more income is not a bad tradeoff. 

Medicare Part A and observation status

Andrew Taylor writes in the Los Angeles Times “I’m on Medicare and I still got a $25,000 hospital bill.” 

Taylor was diagnosed with prostate cancer and went to the hospital at his doctor’s direction for surgical treatment, a radical prostatectomy (complete removal of the organ). He spent two nights on a surgical ward before going home. 

He received a surprise bill for $25,000 from the hospital and another $4,700 from his surgeon.

Why? He was on Medicare Part A but not on Medicare Part B. Without telling him, the hospital had placed him on “observation status” despite the fact that he was there for a full surgical procedure. A patient on observation status is not regarded as “admitted,” and Part A covers only patients who have been admitted to a hospital. 

Taylor had no idea that this designation by the hospital would make such a major difference, even though he himself is a physician. Like many people, he knew that he had Medicare coverage for in-hospital treatment and he was being treated in a hospital. He assumed that something as major as a radical prostatectomy would be paid under that coverage. 

He recommends: 

“What can be done? If you are scheduled to be hospitalized for elective surgery, get a written statement from your surgeon and from the hospital that you will be admitted and not placed under observation status.” 

This is also a recurring problem for patients who require a rehabilitative stay in a nursing home after in-hospital treatment. Medicare will typically pay for such nursing home care, but only if the patient has been admitted for three days, under the "two midnight" rule. If the hospital has classified the procedure as outpatient or the patient as an observation patient, Medicare coverage for that needed postoperative care will not be provided. 

In general, before undergoing any planned medical treatment, consult with your physician to ensure that problems like this will not arise. The regulations adopted by CMS in November 2015, and the CMS publications on the two-midnight rule, reflect that CMS consistently emphasizes the physician's medical judgment (not that of his or her billing people) on the question of whether the care that is needed for the planned treatment is expected to require a hospital stay that will span three days / two midnights and thus be eligible for Medicare coverage. In addition, CMS has developed a list of inpatient only procedures (over 150 pages) which identifies the surgeries that will automatically be paid under Part A. 

For ER visits, emergency services by themselves are, in general, covered only under Medicare Part B, but sometimes the condition that gives rise to the emergency requires inpatient care, and the same situation can arise. 

More Medicare and ACA scams

It was inevitable. The Wall Street Journal has posted: 

Fraudsters Are Exploiting New Health Law
One Con: Telling Medicare Beneficiaries They Must Choose New Plans

A selection:

According to a recent survey. . . a significant portion of Medicare recipients has misconceptions about the ACA. While there have been no changes to Medicare's annual open-enrollment procedures, 20% of Americans age 65 and over incorrectly believe they can enroll in Medicare through one of the new state-based health-insurance exchanges, which actually cater to individuals under 65. Seventeen percent believe exchange-based policies are replacing Medicare, according to the survey.

David Lipschutz, a policy attorney at the nonprofit Center for Medicare Advocacy, says Medicare employees "as a rule" don't contact beneficiaries. He says Medicare rules prohibit most insurers, brokers and agents from initiating contact with Medicare beneficiaries.

The Medicare surtax on trusts and estates

In the Health Care Education and Reconcilation Act of 2010, Congress adopted a new 3.8% surtax to provide additional funding to the Medicare program. Codified at 26 USC 1411(a)(2), the surtax will generally apply only to investment income over $200,000 (single taxpayer) or $250,000 (married couple). Importantly for our probate and trust clients, however, the surtax will also be potentially imposed on trusts and estates, at a much lower income level.

The surtax is separate from the estate tax, which is currently imposed only on gross estates of over $5 million per person. It is an addition to the income tax which is imposed on trusts and estates.

The surtax will apply only to tax years beginning after January 1, 2013. For some estates and trusts, electing a fiscal year that ends in October or November could delay the imposition of this surtax for the first year.

The calculation could be a bit tricky. The statute provides that the 3.8% is applied to the lesser of

• the estate or trust's adjusted gross income over $7,500 or 
• the estate or trust's "undistributed net income."

(For some reason, many authors have said that the threshold is $11,600. A review of the statute's cross-reference to 26 USC 1(e), however, shows that it is $7,500.)

The estate or trust would normally avoid this surtax by distributing net investment income to the intended beneficiary. It should be noted, however, that this step could lead to:

• in a high-value estate or trust, the investment income bringing a recipient over the personal investment income threshold, in which event he will be personally responsible for paying the 3.8% amount, or 
• making the distribution available to creditors in the event that the recipient is experiencing financial difficulties.

For some trust beneficiaries, keeping net income within the trust is a good way of keeping the money out of the hands of the beneficiary's creditors, with a good spendthrift clause in the document. That protection will now have to be balanced against the potential imposition of the 3.8% surtax.

Financing Medicare

An article by Richard L. Kaplan called Rethinking the Medicare Payroll Tax, posted at SSRN, starts off with a review of how the Medicare program is currently financed.

Part A - standard Medicare, pays hospital expenses and some home health - financed by a 1.45% tax on earned income (wages and salaries), plus another 1.45% on the employer - total 2.9% tax on earned income.

Part B - optional Medicare, pays doctors visits, ambulance, some durable medical equipment. Financed by a monthly premium charged to the beneficiary and deducted from social security benefits, subsidized by general Federal revenues. Premium $115 to $369 per month, depending on annual income levels. The graduation based on income was first introduced in 2006.

Part D - prescription drugs. Financed generally like Part B, but with various premiums based on a number of factors.

The new tax added under the Affordable Care Act is a combination of two items, to be effective in 2013.

1. An increase in the employee portion of the payroll tax from 1.45% to 2.35% for those earning over $200,000/$250,000. The employer contribution is unchanged.

2. A 2.9% tax on investment income (interest and dividends, rents, capital gains) over $200,000/$250,000.

Kaplan goes on to proposed that the payroll tax approach be abolished and that Congress change the Medicare program so that it is financed by general revenues. Don't hold your breath.