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How Inflation Could Affect Medicare Premiums in 2025

Breaking down Part B premiums and how Social Security’s COLA can play a part in costs


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AARP (Source: Getty Images (4))

Key takeaways

Every fall, older Americans await the Social Security cost-of-living adjustment (COLA) and Medicare Part B premium announcements, which can affect next years’ budgets significantly.

The COLA is based on year-to-year changes in the consumer price index for Urban Wage Earners and Clerical Workers (CPI-W) for July, August and September. On Oct. 10, the Social Security Administration announced that the 2025 COLA will be 2.5 percent, which is less than the 2024 COLA of 3.2 percent.

But does the Social Security COLA affect Medicare premiums? Yes and no.

What determines Medicare Part B premiums?

Medicare Part B premiums aren’t based on inflation rates. Instead, they’re dependent on the health insurance program’s projected annual costs, though inflation does play a part in those projections.

Centers for Medicare & Medicaid Services’ (CMS) actuaries estimate per-person Part B spending for beneficiaries 65 and older and set the premium to cover a quarter of those costs. Part B covers doctor’s services, diagnostic tests, durable medical equipment, outpatient care, preventive care and some drugs administered at a doctor’s office.

Part A calculations differ

About 99 percent of Medicare beneficiaries don’t pay premiums for Part A because they or their spouse paid Medicare payroll taxes for at least 40 quarters, the equivalent of 10 years.

Those not working that long pay a portion of the projected costs for Part A, which covers inpatient stays in hospitals and skilled nursing centers, some home care and hospice care. In 2024, the tab is $278 a month for Part A if you or your spouse paid Medicare taxes for 30 to 39 quarters or $505 a month if you or your spouse paid Medicare taxes for fewer than 30 quarters.

“The base premium that most people on Medicare pay is 25 percent of the projected Part B total spending per person,” says Gretchen Jacobson, vice president of Medicare for the Commonwealth Fund.

The 2024 base Part B premium is $174.70 per person. The Medicare Trustees’ Report issued in May estimated that the Part B premium would rise to $185 a month in 2025. The true numbers coming in early October could be different.

“We’ve definitely seen it vary,” says Kevin Pierce, senior consulting actuary for Seattle-based Milliman consultants. The previous year’s Trustees Report projected Part B premiums of $174.80 a month in 2024; they ended up at $174.70. But for 2023, the Trustees Report estimated a $170.10 monthly premium while the actual Part B premium was $164.90.

Medicare’s base premium doesn’t vary by age, health status or location. About three-quarters of Part B beneficiaries pay the base premium, Pierce says.

The rest either don’t pay it because they get coverage through the Qualified Medicare Beneficiary program, a Medicare Savings Program for enrollees with low incomes, or Medicaid. Or they pay more because they’re subject to a high-income surcharge.

When does the COLA affect Part B premiums?

When the COLA isn’t large enough to cover a Part B premium increase, the payment is reduced. This so-called hold-harmless provision ensures that beneficiaries don’t receive less in Social Security benefits than in the previous year, Pierce says.

Medicare premiums are a fixed amount. The COLA is a percentage of Social Security benefits, so it varies based on the size of a recipient’s check.

People on the low end of the benefits spectrum may not receive enough to totally pay for a Part B premium increase. But the percentage increase will cover others with larger Social Security checks.

A small number of Medicare beneficiaries have benefited from the hold-harmless provision every year since 1988, CMS says. In 2024, fewer than 1 percent of people with Medicare Part B pay less than the full Part B standard monthly premium. Part B premiums increased from $164.90 in 2023 to $174.70 in 2024; the Social Security COLA was 3.2 percent.

In years when the cost-of-living allowance is low but the Part B premium increase is high, the hold-harmless provision affects more people. When the COLA was zero in 2016, the hold-harmless rule protected about 70 percent of Medicare beneficiaries.

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The 30 percent not affected included:

  • People whose Medicare premiums are not deducted from Social Security benefits.
  • New Medicare and Social Security enrollees.
  • Beneficiaries subject to the high-income surcharge.
  • Low-income beneficiaries whose Medicare premiums are paid by Medicaid.

If the COLA increases by 2.5 percent and Part B premiums increase by about 5 percent to $185 as estimated in the trustees’ report, the hold-harmless provision shouldn’t affect many beneficiaries, according to Pierce.

Does inflation affect Medicare’s high-income surcharge?

People whose income is higher than a set amount must pay extra for their Part B and Part D premiums, called the income-related monthly adjustment amount (IRMAA). This high-income surcharge was first assessed in 2007.

In 2024, the surcharge applies to single tax filers whose modified adjusted gross income is more than $103,000 or joint filers with incomes more than $206,000. Instead of the standard $174.70 premium, they pay from $244.60 to $594.00 a month for Part B this year. They also must pay $12.90 to $81 extra for Part D if they bought prescription drug coverage.

IRMAA has five tiers based on income. People subject to IRMAA pay 35 percent to 85 percent of projected Part B costs rather than the standard premium based on 25 percent of projected Part B costs.

The income levels used to determine the surcharge tiers are adjusted each year based on a slightly different inflation figure than the COLA — the change in the consumer price index for urban consumers (CPI-U) for the 12 months ending in August compared with the previous time frame.

If your income makes you eligible for a surcharge, the Social Security Administration sends a notice in the fall. The calculation is based on your modified adjusted gross income — your income minus deductions plus a few deductions that you have to add back.

The premiums that high earners are paying in 2024 are computed from the most recent tax return on file, typically a two-year lag. If your income has dropped because of certain life-changing events in the interim, such as retirement, death of a spouse or divorce, you may get your surcharge reduced.

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