Obama's Debt Plan May Hit Your Retirement

MarketWatch

If you're wealthy or you receive Medicare, President Obama's proposal to cut the federal deficit could very well either raise your taxes or cut your benefits. There's no winning if you're both rich and a Medicare beneficiary.

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The president this week offered up his plan to reduce the nation's deficit by $3.6 trillion, and the proposal calls for both tax increases — including a new tax on millionaires — and spending cuts.

"Either we ask the wealthiest Americans to pay their fair share in taxes, or we're going to have to ask seniors to pay more for Medicare," Obama said in a speech. "We can't afford to do both."

To be sure, Obama's plan is, as proposed, unlikely to become a reality; Republicans denounced the president's recommendations to the Joint Deficit Reduction Committee. But any version of a Republican plan that cuts Medicare benefits without increasing taxes on corporations or the wealthy isn't likely to become a reality either. President Obama threatened to veto any such bill.

At some point, however, someone's retirement plan is going to be affected. And it's likely — despite Obama's either/or statement — that at least two million seniors, and especially those with income of more than $85,000, will face higher health-care costs in the form of increased premiums and surcharges and/or reduced services in retirement no matter how the politicians cut the deficit.

But President Obama's plan to cut the deficit affects retirement plans, and Medicare, in other ways. According to experts at CCH, a Wolters Kluwer business, here are some of the ways the proposal affects your retirement planning.

The good news

President Obama did specifically exclude Social Security from his budget deficit proposals, so there would appear to be no direct impact on Social Security, said Mark Luscombe, a principal analyst with CCH.

Extracting savings out of Medicare

There are, however, a number of non-tax provisions to try to extract savings out of Medicare in areas where it is perceived that current payments are or may be excessive," Luscombe said.

For his part, Jay Nawrocki, a senior writer at CCH, said the Medicare and Medicaid provisions will mostly affect Medicare institutional providers such as hospitals, skilled nursing facilities and home health agencies. "Practitioners such as doctors, nurses and therapists will not be impacted by these provisions," said Nawrocki.

Overall, these provisions do not address the major components of either the Medicare or Medicaid reimbursement systems. "Hospitals will be most affected and may grumble the most because most of the cuts from their payments," said Nawrocki. "These cuts, however, come from more peripheral payments such as reimbursement for bad debts, a $20 billion reduction over 10 years, and additional payments to teaching hospitals, a $9 billion reduction over 10 years, and not from the majority of reimbursements made to hospitals for the provision of services."

While payments for some procedures will be reduced, Nawrocki said, the great majority of payments to hospitals will not be reduced.

Payments will, however, be reduced for rehabilitation hospitals, resulting in a saving of $3 billion over 10 years and payments to skilled nursing facilities will be adjusted as well, Nawrocki said.

Beneficiaries will pay

Luscombe said there are proposed increases in Medicare income-related premiums under Medicare Parts B and D. Under Obama's plan, an additional $25 will be added to the Part B deductible for new enrollees in 2017, 2019 and 2021. And, Part B and Part D income-related premiums will increase by 15% until 25% of beneficiaries are subject to these premiums, said Nawrocki.

In addition, a 15% surcharge will be added to Medigap premiums starting in 2017. "The administration is concerned that Medigap plans that pay all of the copay and deductible amounts for beneficiaries cause people to use services without considering costs and encourage use of services that may not be required," said Nawrocki.

Who does this affect and when?

According to Paul Clark, a senior Medicare analyst with CCH, the surcharge on Medigap policies proposed as part of the president's deficit reduction plan would not go into effect until 2017, and would apply only to new Medicare beneficiaries that year. "Current beneficiaries and 'near-retirees' — I'm assuming that means people qualifying for Medicare between 2011 and 2017 — would not be affected by this proposal," Clark said. "The surcharge is equal to 15% percent of the average Medigap premium or about 30% of the Part B premium. This applies across the board to new beneficiaries, regardless of income."

As a guesstimate as to how much the Medigap surcharge would cost new beneficiaries, Clark said the Part B premium is pegged to income, so, in 2011 numbers, this surcharge on Medigap policies would cost somewhere between $35 and $110 per month extra per individual. The additional cost by 2017 would be slightly higher than that, he said. At the moment, Medigap policies cost between $85 per month and $250 per month, depending on where you live and the type of plan you select.

Using 2010 figures, Clark said about 17%, or 8 million, Medicare beneficiaries purchase a Medigap policy. But many more beneficiaries get coverage similar to a Medigap policy from their employers or former employers, Clark said.

Clark also noted that President Obama's plan calls for an across-the-board increase of $25 in the Part B deductible in 2017, 2019, and 2021 — but, again, this would only apply to new beneficiaries, not current or near-retirees.

As for Medicare Part B and D premiums, Clark said President Obama's proposal "could be a little clearer." It calls for a 15% increase in income-adjusted premiums, again, starting in 2017, and 'would maintain income thresholds associated with income-related premiums until 25% of beneficiaries under Parts B and D are subject to these premiums.'

Currently, Clark said there is a set monthly Part B premium for individuals with incomes of $85,000 or less ($170,000 for people filing a joint return). Then, the premium is adjusted between $85,000 and $107,000; between $107,000 and $160,000; between$160,000 and $214,000; and finally above $214,000. For 2011, most Medicare beneficiaries pay either $96.40 or $110.50 per month in premiums. But, according to the Social Security Administration, about 5% of Medicare beneficiaries, or some 2.3 million older Americans, presently have income above $85,000 and pay a higher premium. "I'm guessing that this 15% increase would apply to people with incomes above $85,000 or whatever the equivalent number will be in 2017," said Clark.

Read Social Security's explainer about Medicare premium rules for higher-income beneficiaries.

$248 billion in saving

So what does all this buy us? Obama's proposal would save $248 billion in Medicare spending over 10 years and $73 billion in Medicaid spending also over 10 years, according to Nawrocki. As a reference, the total estimated spending on Medicare for fiscal year 2010 was $522 billion, according to the Medicare Trustee's report, with $168 billion going to hospitals, he said.

Not surprising, others — not just Republicans — are up in arms. For instance, the American Hospital Association (AHA) doesn't think it should have to accept more reimbursement cuts. They already accepted, they say, significant reimbursement reductions with the adoption of health-care reform. "President Obama's proposal will make it harder for America's seniors to receive the care they need and will result in the loss of jobs in communities across the nation," the AHA said in a release."

"(The) plan to cut Medicare and Medicaid funding would translate into at least 200,000 job losses to hospitals and the businesses they support by 2021. This is the wrong prescription to create a healthier America and sustain job growth in a sector of the economy that is actually adding jobs."

Read the entire AHA statement on President Obama's debt-reduction proposal.

The footnote

Of note, Clark, a CCH Medicare analyst, said one significant factor related to Medicare and the federal budget was left out of President Obama's deficit reduction plan. "Under current law, Medicare payments to physicians are set to be cut almost 30% starting Jan. 1, 2012," Clark said. "This relates to a law that has been on the books since 1997, requiring physician payments to be more closely aligned with changes in gross domestic product. Congress intercedes every year to postpone these physician cuts, without changing the underlying law. It is likely that Congress will intercede again before the end of the year."

But in President Obama's budget proposal for 2012, which was released earlier this year, he proposed freezing physician payments at current levels for two years, at a cost of $54 billion. According to Clark, President Obama's plan was to pay for this "two-year fix by reducing improper payments and fraud and abuse and shifting payments away from some providers to finance the physician payments."

"Since his deficit reduction plan did not mention the so-called 'doc fix' but proposes some of the same shifts in Medicare payments and focus on fraud and abuse, the overall 'savings' to Medicare may be much less than the almost $250 billion proposed in the plan, assuming that Congress intervenes to avert the 30% cut in Medicare physician payments next year," said Clark.

Details of the plan to reduce health-care costs are on pages 35 to 45 of the President's document, "Living Within Our Means and Investing in the Future: The President's Plan for Economic Growth and Deficit Reduction.

Bottom line

As with many things related to retirement, nothing is certain except this: One must plan to deal with all of the risks, not just some of the risks, one might face in retirement. And in recent days, the notion that one has to plan for both expected and unexpected health-care costs in retirement should be front and center if wasn't. So too should the notion that one has to plan for political risks as well.

Robert Powell is editor of Retirement Weekly, published by MarketWatch.

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