How insurance premiums really work, how Congress fudged with Medicare premiums and how Sen Sanders is – again – misleading Americans

The 2022 Medicare premium increase is mostly the result of Congressional action and the increasing cost and use of health care by beneficiaries, not additional reserves for possible new drug spending. But telling Americans the truth, the whole truth is not in the best interest of those with their own agenda. Sen Sanders can’t even tell the truth about what government will give pharmaceutical companies as part of the give and take of the “negotiating” process.

Remember, Medicare Part B premiums were projected to increase to $158, before the full impact of COVID was realized. The additional premium for the unknown factors back in 2020 was only $12.00 of the total.

When Medicare or any insurance company sets premiums it is trying to anticipate spending for the future based on past experience and anticipated future spending -educated guessing if you will. What are the future trends for health care costs?

If a plan guesses wrong for the current years expenses, in other words premiums were too low, that loss must be made up with future premium increase.

Let’s say in 2020 a premium is $1,000 per month. That amount is based on actual spending in the previous year plus anticipated use and cost of health care through the end of 2020. Premiums should cover all costs.

Now it is time to set the premium for 2021 – we must do that before the start of the year so estimates are required. What we find is that the actual spending during 2020 was not $1,000, but $1,200 – the premiums were too low for 2020.

When setting the 2021 premium our starting point is not $1,000, but $1,200 (actual spending for 2020). Let’s say based on current trends for the use and price of health care we expect our costs to rise by 8% during 2021. Our premium must be set to cover all that anticipated spending. Therefore our 2021 premium must increase from $1,000 to $1296 – a whopping 29.6% increase.

Who wants to pay that kind of increase? Instead of applying the actual required increase, the insurance company – in the case of Medicare – Congress – determined that only 25% of the required increase would be passed to the insured. Instead of increasing the premium by $296, it is increased by only $74. So the 2021 premium is now $1074. BUT ACTUAL COSTS ARE STILL $1,296.

Now we will set the 2022 premium. Through good luck the actual spending for 2021 was $1,296, but we still must apply the trend increase reflecting the anticipated growth in health care use and costs over the next year. The real $1,296 premium must increase by another 8% to $1399.68. Now the insured face a 30.3% premium increase – $1074 to $1399.68. Had the 2021 claims experience been higher than projected the 2022 premium increase should have been greater than 30%.

Here is what Medicare had to say on the subject.

Medicare Part B covers physician services, outpatient hospital services, certain home health services, durable medical equipment, and certain other medical and health services not covered by Medicare Part A. The increase in the standard monthly premium—from $148.50 in 2021 to $170.10 in 2022—is based in part on the statutory requirement to prepare for expenses, such as spending trends driven by COVID-19, and prior Congressional action in the Continuing Appropriations Act, 2021 that limited the 2021 Medicare Part B monthly premium increase during the COVID-19 pandemic. It also reflects the need to maintain a contingency reserve for unanticipated increases in health care spending, particularly certain drug costs.

There is significant uncertainty regarding the potential for future coverage of clinician-administered Alzheimer’s drugs (i.e., Aduhelm™), requiring additional contingency reserves. Potential Medicare drug coverage is currently the subject of a Medicare National Coverage Determination (NCD) analysis, which, if covered, could increase Medicare spending. The proposed NCD on Aduhelm (as well as any drugs in this category) is still to be determined.

Statement from CMS.gov