By: Joseph Goldy, CFP®
The new year has begun, and with it come changes to monthly benefits and costs for Social Security and Medicare. On the positive side, Social Security recipients will see a 5.9% cost-of-living increase in their benefits, the largest since Ronald Reagan was President. Unfortunately, due to various factors, Medicare is also experiencing the most significant increase in Part B and D premiums in the program’s history.
This year, Social Security’s increase is due to the methodology of adjustments to the monthly benefit. The annual COLA adjustment is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The graph below shows that the pandemic brought a significant spike in the price of goods and services beginning in 2020.
While a 5.9% increase in benefits is substantial, the Social Security Administration only looks at July, August, and September to gauge the rise in prices, which have continued to rise since the end of September. According to the Bureau of Labor Statistics, the CPI-W saw an increase over the 12 months ending in December of 7.8%. So, while the Social Security COLA adjustment is welcomed, if the cost of goods and services continues at this pace, retirees would see an overall decline in their purchasing power
Photo credit: Social Security Administration
Offsetting some of the increase in Social Security benefits is the rise in Medicare premiums, which is the largest in the program’s 57-year history. The reasons behind the Medicare premium increase, and in turn, IRMAA thresholds, are a bit of a “perfect storm”: rising healthcare costs overall due to Covid, payback for the minimal increase in premiums experienced last year, and Biogen’s new Alzheimer’s drug Aduhelm.
From a financial perspective, pandemics are costly. Testing, treatment, medication, and supplies have added a considerable amount of expense to Medicare’s budget. In 2020, two Harvard economists attempted to put a total price tag for the U.S. on the pandemic; $16 trillion is what they came up with, assuming the pandemic ended in the fall of 2021, which has now come and gone. This amount is four times the cost of the 2008 financial crisis.
The second reason is that Medicare has also been absorbing the added healthcare cost, reflected in the slight increase in premiums experienced in 2021. Congress, however, voted to begin paying back this cost deferral, and that payback starts this year. This legislation is perhaps the biggest reason for 2022’s premium increase.
The final part of the perfect storm is Aduhelm, Biogen’s new Alzheimer’s drug that the F.D.A. recently approved. Biogen originally priced the drug at $56,000 per year for the average patient; high by any standard and indicative of a healthcare pricing system that is in significant need of change. Due to industry pushback, Biogen then lowered the drug’s pricing to $28,000, keeping the cost of this treatment high for most patients.
The story of Aduhelm continues to unfold with the most recent twist of Medicare deciding to limit the availability of the drug only to patients participating in clinical trials. Medicare’s decision will severely limit the number of patients with access to the treatment and had initially sent Biogen’s share price down 10% on the news.
$28,000 a year for drug treatment is still no bargain, and a recent article for the New England Journal of Medicine, James Robinson, Ph.D., M.P.H., explains why our current drug pricing system needs repair.
Medicare uses a system of pegging Part B premiums to the average sales price of drugs. Under the current pricing system, drug companies have an incentive to price their drugs as high as possible, and Medicare becomes a price taker instead of a price maker.
Additionally, Medicare covers 80% of the cost of drugs, making it difficult for patients to see a significant price difference between their options. Germany, in contrast, shows patients little to no cost if they pick a lower-cost drug and will see higher prices should they prefer a more expensive medication.
Although Medicare premium increases are beyond the control of our clients, building a plan that factors in realistic assumptions is an integral part of Highland’s planning process. If you have questions, please reach out to your wealth advisor.
Joseph Goldy, CFP®, is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ at Highland Financial Advisors, LLC, a fee-only fiduciary wealth advisory firm based in Wayne, New Jersey.
Joe specializes in working with newly independent women because of divorce or losing a spouse. He understands firsthand the value of having a clear financial picture pre- and post-divorce and a plan to restate goals as a single person. When he is not helping clients, Joe enjoys spending time with his two sons outdoors and volunteering to help raise money for Type 1 diabetes organizations.