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The Inflation Reduction Act's impact on Medicare benefits

by Susan Wright | Contributor
November 22, 2022


Medicare plays a key role in the financial security of millions of Americans. But due to the many “moving parts” that are associated with Medicare - as well as the program's frequent changes - it can be difficult to understand the different benefits and options that are available to you.

One of the biggest legislative changes to affect Medicare's benefits is the Inflation Reduction Act that was signed into law in August 2022. This act is designed to assist retirees and seniors to pay health care costs that have increased due to inflation.

Part of the Inflation Reduction Act includes a maximum out-of-pocket limit that Medicare beneficiaries will have to pay for their prescription medications. There are other “capped” copayments, as well.

If you or someone you know is a current Medicare enrollee - or soon will be - it is important to understand how the Inflation Reduction Act works and where you (or they) could attain some significant savings on health care items and services. This can be particularly beneficial as inflation continues to increase the cost of health care.

Why your decisions on Medicare coverage can be life-changing to your financial security in retirement

Health care is oftentimes the largest expense incurred by retirees. Therefore, decisions regarding when to stop working, at what age to claim Social Security benefits and how to generate ongoing income can all factor into how you will pay your health care expenses.

A sign that says Medicare.

A recent study estimated that an average retired couple aged 65 in 2022 may require approximately $315,000 saved (after taxes) in order to cover their health care costs in retirement - and this figure does not include paying for potential long-term care needs. (These could be in excess of $100,000 per year, depending on the type of care you need and how long it is required.)

Even as a Medicare beneficiary, you could still find that you have some substantial out-of-pocket health care expense responsibilities, such as:

  • Deductibles, copayments and coinsurance costs
  • Monthly premiums for Medicare Part B, Part D and Medicare Advantage (including added premium cost if you obtain coverage after your enrollment “window” has passed)
  • Medicare supplement insurance premiums
  • Nursing home, assisted care and home health care services

So, in many ways, your health care needs can impact your financial security in the future. With that in mind, it is best to be prepared. This includes knowing where you could curb some of your costs and how to pay for other potential health care related expenses in the future without taking money away from their originally intended purpose.

For instance, the Inflation Reduction Act can save money for Medicare enrollees by improving access to affordable treatments, as well as by strengthening the overall Medicare program. As an example, the benefits included in the Inflation Reduction Act can be a game changer for people who have health issues that require drug intervention. The first step is to understand how Medicare works and what each part of the program covers.

A brief overview of the Medicare program

Medicare came about as a part of the Social Security Act in 1965. This federal health insurance for people aged 65 or older (and some who are under 65 and qualify due to certain health conditions) offers a wide range of benefits.

The original Medicare program included Part A for hospital insurance and Part B for medical insurance. Throughout the years, though, there have been numerous changes made to Medicare and its coverage.

Today, the program consists of the following:

  • Medicare Part A - Medicare Part A helps to cover the cost of inpatient care in hospitals as well as some nursing home facility expenses. This portion of Medicare may also provide benefits for home health care needs and hospice care services.

  • Medicare Part B - Medicare Part B covers medical insurance for items such as services from doctors and other health care providers, outpatient care, home health care, durable medical equipment (like walkers, wheelchairs and hospital beds) and some preventive services like vaccines and annual wellness visits. Because the program began with just Parts A and B, these two coverage options together are often referred to as Original Medicare.

  • Medicare Part C (i.e., Medicare Advantage) - In lieu of selecting Original Medicare for your health care coverage, you could instead choose a Medicare Advantage Plan. These plans are also referred to as Medicare Part C. Medicare Advantage plans are offered through insurance companies that are approved to sell them. Many Medicare Advantage plans offer coverage for items that are not provided through Medicare Part A or Part B, such as dental and/or vision insurance. They may also include prescription drug benefits. However, these plans may also work in a similar manner as Health Maintenance Organizations (HMOs) or Preferred Provider Organizations (PPOs), which may require you to only use medical professional in a specific network. You may also need to obtain a referral before seeing a specialist if you have a Medicare Advantage, or Medicare Part C, plan.

  • Medicare Part D - Medicare Part D covers costs for prescription medications. You can purchase a Medicare prescription drug plan through insurance companies that offer them. The items that are covered - along with the premium cost - can differ from one insurer to another. So, it is important that you do some comparison shopping before you commit to a Medicare Part D policy. Many Medicare beneficiaries who have Original Medicare coverage (Medicare Part A and Part B) will also obtain Medicare Part D for prescription drug benefits.

Those who are enrolled in Original Medicare (i.e., Medicare Parts A and B) may also have the opportunity to purchase a Medicare Supplement insurance plan. These plans can pay for some of the out-of-pocket costs or gaps in Medicare's coverage, such as various copayments and deductibles. Therefore, Medicare Supplement insurance is often referred to as Medigap.

As of 2022, there were 10 Medigap plans to choose from. Based on the plan you choose, this supplementary medical insurance can help you reduce your costs by paying for items like:

  • Medicare Part A coinsurance
  • Medicare Part B coinsurance or copayment
  • Skilled nursing facility coinsurance
  • Medicare Part A deductible
  • Medicare Part B deductible
  • Foreign travel emergency costs

What is the Inflation Reduction Act?

The Inflation Reduction Act was signed into law on Aug. 16, 2022. This legislation was designed in part to help older Americans and retirees pay for health care costs that have risen due to inflation.

Prior to the passage of the Inflation Reduction Act, more than 5 million Medicare enrollees struggled to afford their prescription medications. In some cases, this could mean having to choose between buying food or medicine - but not both.

Retirees who are on a fixed income are oftentimes more likely to skip necessary medication due to the high cost. But the Inflation Reduction Act has made some changes to Medicare - some effective in early 2023 - so that many of these individuals can spend less on their necessary prescription drugs.

So, what can this new law mean for your financial future?

First, the Inflation Reduction Act could save money for those who have Medicare coverage. It can do so by improving access to affordable medical treatments, while at the same time, strengthening the Medicare program.

There are several areas where a significant amount of savings may be seen, such as:

  • Lower costs for prescription medications
  • Improved Medicare Part D prescription drug coverage
  • Negotiated prices for medications
  • Better access to vaccines for Medicare beneficiaries

Lower costs for prescription medications

There are several areas where you could pay lower costs on your prescription medications as an enrollee in Medicare Part D. For instance, the cost of one month's supply of each Medicare Part D-covered insulin will be capped at $35. Further, starting on Jan. 1, 2023, beneficiaries are not required to pay a deductible for insulin.

Beginning in 2025, the act requires that annual Medicare Part D out-of-pocket costs be capped at $2,000. Also, you may choose to pay the out-of-pocket expenses that you are responsible for on a monthly basis rather than all at once, as they are incurred.

In addition, if you incur prescription medication expenses that are high enough to reach the Medicare catastrophic coverage phase in your drug coverage, as of 2024, you will no longer be required to pay coinsurance or a copayment.

The Medicare catastrophic coverage phase refers to qualifying for a smaller amount of copayment and/or coinsurance for the remainder of the year on certain medications once you have spent a pre-stated amount. In 2022, the out-of-pocket cap is $7,050. This amount goes up to $7,400 in 2023.

Improved Medicare Part D prescription drug coverage

There are other ways that Medicare's Part D prescription drug coverage may be improved due to the Inflation Reduction Act. As an example, for those who take insulin via a traditional pump - which is also covered through Medicare's durable medical equipment benefit - that insulin is covered under Medicare Part B as of July 1, 2023.

In addition, as of 2024, the Medicare Part D Low-Income Subsidy, or LIS, program will be expanded to those who have limited resources, such as individuals who earn less than 150% of the federal poverty level.

Negotiated prices for medications

Another provision of the Inflation Reduction Act includes Medicare negotiating directly with drug manufacturers for the price of various drugs that are covered through Part B or Part D. This is the first time Medicare has negotiated as such.

These negotiated prescription drug prices will be phased in over time. For example, in 2023, Medicare will negotiate the cost of 10 drugs, and the prices for these will become effective in 2026. This portion of the Inflation Reduction Act could require the pharmaceutical companies to find more ways to stay competitive in the marketplace.

Going forward, Medicare will choose and negotiate the costs for:

  • 15 Medicare Part D drugs in 2025, with the prices effective in 2027
  • 15 Medicare Parts B and D medications in 2027, with the prices becoming effective in 2028
  • 20 Part B and Part D drugs in 2027, with prices effective in 2029
  • 20 Medicare Part B and Part D covered drugs in 2028, and every year after that

If a drug manufacturer does not follow Medicare's negotiation requirements, it will be required to pay a tax. The manufacturer may also be penalized if they do not fulfill various other requirements.

The ability of Medicare to negotiate prescription medication prices means that many Medicare enrollees will have expanded access to innovative and life-saving treatments, and the cost could be lower for them and for Medicare itself.

Better access to vaccines for Medicare beneficiaries

Over the past few years during the COVID-19 pandemic, vaccines have become a popular topic. Older Americans can be particularly susceptible to certain illnesses and viruses, so obtaining vaccinations can be an integral part of a retiree's overall health care plan.

Based on the Inflation Reduction Act, beginning in 2023, those who are covered under Medicare Part D's prescription drug plans will not be required to pay any amount out-of-pocket for certain vaccines - such as the shingles vaccination - that are recommended by the Advisory Committee on Immunization Practices.

Does the Inflation Reduction Act apply to Medicare Advantage plans?

Medicare can become stronger for current and future beneficiaries due to the Inflation Reduction Act, because this legislation makes health care more accessible, equitable and affordable.

The provisions of the Inflation Reduction Act apply to Original Medicare - as well as stand-alone Medicare Part D coverage. In addition, all Medicare Advantage (i.e., Medicare Part C) plans that offer prescription drug coverage have enhanced benefits effective Jan. 1, 2023.

Other options for reducing the impact of inflation in the future

While saving money on prescription medications and health care items and services can help to keep your retirement more financially secure, there are some other ways that you could also combat the erosion of your income and assets due to future inflation. One way is to enhance your incoming cash flow.

In the past, many people relied on only three sources of income in retirement. These included cash flow from:

  • Employer-sponsored defined benefit pensions
  • Social Security
  • Interest/dividends/portfolio drawdowns from personal savings and investments

Although many companies have done away with the traditional pension plan, there are still some employees and retirees who have access to income from this source. The way in which you receive income from a defined benefit pension can often depend on the choices that you make.

For example, many people choose the single-life option. This pays a regular income stream to the worker/retiree for the remainder of their lifetime. But, while this option typically pays out a higher dollar amount, the income will usually stop upon the recipient's death - and this can leave a surviving spouse with a substantial drop in their future income stream.

Therefore, it is essential to review all of the income payout options that are available through a defined benefit pension plan before you make a commitment. You should also consider viable income replacement strategies if you and/or your spouse may be eligible for this type of retirement plan.

Social Security is another income generator for many retirees. The amount of income you receive from this source will depend on your employment earnings, as well as when you file for benefits. For instance, you will receive the total amount you are eligible for if you claim Social Security at your full retirement age. This can be between age 65 and 67, based on the year you were born.

Each year, Social Security recipients will typically receive a cost-of-living adjustment, or increase in their benefits in order to help keep pace with inflation. (Note, however, that Social Security cost-of-living increases are not guaranteed.) The amount of the increase can also fluctuate, based on the prior year's inflation rate.

Social Security Cost-of-Living Adjustments from 1975 to 2021

Year1975 COLA8.0 Year1991 COLA3.7 Year2007 COLA2.3
Year1976 COLA6.4 Year1992 COLA3.0 Year2008 COLA5.8
Year1977 COLA5.9 Year1993 COLA2.6 Year2009 COLA0.0
Year1978 COLA6.5 Year1994 COLA2.8 Year2010 COLA0.0
Year1979 COLA9.9 Year1995 COLA2.6 Year2011 COLA3.6
Year1980 COLA14.3 Year1996 COLA2.9 Year2012 COLA1.7
Year1981 COLA11.2 Year1997 COLA2.1 Year2013 COLA1.5
Year1982 COLA7.4 Year1998 COLA1.3 Year2014 COLA1.7
Year1983 COLA3.5 Year1999 COLA2.5 Year2015 COLA0.0
Year1984 COLA3.5 Year2000 COLA3.5 Year2016 COLA0.3
Year1985 COLA3.1 Year2001 COLA2.6 Year2017 COLA2.0
Year1986 COLA1.3 Year2002 COLA1.4 Year2018 COLA2.8
Year1987 COLA4.2 Year2003 COLA2.1 Year2019 COLA1.6
Year1988 COLA4.0 Year2004 COLA2.7 Year2020 COLA1.3
Year1989 COLA4.7 Year2005 COLA4.1 Year2021 COLA5.9
Year1990 COLA5.4 Year2006 COLA3.3 Year2022 (est) COLA10.5
Source: Social Security Administration

Personal savings and investments may also be used for generating retirement income - and if this is the case, you need to ensure that the amount of money you access rises accordingly with your future expenses and inflation.

Many people purchase annuities to supplement their income in retirement. These flexible financial vehicles are designed for paying out a regular amount of cash flow, either for a set time period - such as 10 or 20 years - or for the remainder of your lifetime, regardless of how long that may be. It is critical that you understand how to help protect yourself from inflation if you are depending on an annuity for a significant portion of the total.

The importance of annuities during inflation can come from a number of areas, such as:

  • Providing a reliable, ongoing stream of income for retirees - possibly even cash flow that continues for life
  • The opportunity to increase the amount of income from annuities over time

Knowing that an annuity will continue to pay you a steady stream of income - sometimes referred to as an income “floor” - you may be able to take more risk (and in turn, generate higher returns) with your other assets so that your purchasing power continues to rise going forward. (But if your other investments incur losses, the annuity can still ensure that you have at least some amount of income coming in regularly.)

Depending on the annuity, you may also have the option to add an inflation rider. This option will automatically increase the amount of income that is generated, based on certain factors, such as the Consumer Price Index.

The good news with regard to annuities is that this protected income will continue to flow in, regardless of what is happening in the stock market or even in the overall economy. This, in turn, can allow you to focus on other important aspects of retirement, such as spending time with loved ones.

Following the Inflation Reduction Act, which Medicare coverage option is right for you?

Given its many options, choosing the right Medicare plan can be challenging. Like most other financial and health care coverage-related tools, though, there isn't just one single strategy that is best for everyone across the board. With that in mind, you should first determine what your particular needs are before you make a commitment to any type of plan.

Alliance America can help

Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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