All Americans have noticed that prices are rising, with the annual inflation rate at 7.9% for the twelve months ending in February 2022. But inflation doesn't necessarily hit everyone the same way. Retirees living on a fixed income are more likely to face tough tradeoffs when prices rise steeply, especially if medical costs are increasing. While Medicare helps make healthcare more affordable for seniors, it's not immune to inflation.

Will inflation affect Medicare coverage? Here's what you need to know.

Understanding Inflation

Inflation describes the loss of purchasing power of a currency over time. For instance, $100 bought more goods in the year 2000 than that same amount of money can buy today. There are two causes of inflation: demand-pull and cost-push.

Demand-pull describes when the amount of demand for products or services is greater than the economy's ability to meet that demand. For example, consider how people were able to sell individual rolls of toilet paper for exorbitant prices in the earliest days of the Covid-19 pandemic. The demand for toilet paper was greater than retailers' ability to meet it, so "enterprising" individuals were able to ask for $20 a roll from desperate shoppers.

With cost-push caused inflation, costs rise for the input goods and services that go into manufacturing products, and the finished product has a higher price tag as a result. For instance, rising gas prices can increase the price of seemingly unrelated goods and services such as groceries. Since the supply chain that gets cereal, apples and yogurt on grocery shelves relies on gasoline, a sudden spike in gas prices will result in higher food costs as the market raises prices to maintain a profit.

How Does Inflation Affect Medicare Part B Premiums?

The clearest way rising prices affect Medicare is via monthly premiums for Medicare Part B. For more than a quarter of Medicare recipients, these premiums are their biggest annual healthcare cost, and nearly a third of beneficiaries spend 20% to 30% of their monthly income on healthcare, according to Medicare Plans Patient Resource Center.

Most Medicare beneficiaries pay the standard monthly premium of $170.10 (as of 2022). This premium amount is recalculated each year to account for inflation. The standard premium cost was $135.50 in 2019, $144.60 in 2020 and $148.50 in 2021. The big jump in premium prices between 2021 and 2022 reflects the high level of inflation the economy experienced in that time.

While this premium amount does increase each year, it's also paired with an annual cost of living adjustment (COLA) in Social Security benefits. Using the inflation rate as a guide, the Social Security Administration determines the COLA increase each year in an attempt to ensure that every beneficiary maintains the same level of buying power from year to year. Since many Medicare beneficiaries have their premiums deducted from their Social Security benefits, theoretically the COLA should guarantee that your monthly premium will always take the same size bite out of your benefits.

Unfortunately, COLA does not necessarily keep direct pace with inflation. The 2022 COLA was 5.9%, which was the biggest adjustment in forty years — but with an inflation rate of 7.9%, even the hefty COLA may not be enough to cover inflation-increased Medicare Part B premiums.

How Does Inflation Affect Medicare Part D Costs?

After Medicare premiums, prescription drugs represent the next-highest annual healthcare cost for beneficiaries. What's concerning is the fact that the cost of these drugs will often outpace inflation.

According to the Kaiser Family Foundation, in 2020, prices rose faster than inflation for half of all prescription medications covered by Medicare Part D. This kind of increase means higher out-of-pocket drug costs for Medicare beneficiaries, which can overload a tight budget.

Additionally, the average Medicare Part D premium cost rose in 2022 to $33 per month from the 2021 average of $31.47 per month.

So Medicare Part D participants are not only paying higher premiums for their prescription drug coverage, but they are also paying more out of pocket for those drugs.

For Medicare participants who do not have Part D coverage or prescription drug coverage through a Medicare Advantage plan, the increase in drug prices will affect them directly since Original Medicare (which includes Parts A and B) does not cover prescriptions at all.

How Does Inflation Affect Medicare Advantage Costs?

Medicare beneficiaries may choose to receive their Medicare benefits through a private insurer. This option is referred to as Medicare Advantage, and it allows beneficiaries to access Medicare Parts A and B (hospital insurance and medical insurance), along with additional coverage of things like prescription drugs, vision and dental care, through a private insurer.

When you opt for a Medicare Advantage plan, you will still have to pay the monthly Part B premium, which is currently set at $170.10. While some Advantage plans do charge an additional monthly premium, 86% of these plans have no monthly premium requirement.

That does not mean they are without cost, however. The amount you will pay for your Medicare Advantage plan depends on the plan's deductible, coinsurance amount, out-of-pocket limits, and rules for seeing out-of-network providers. This also means that inflation may affect these costs, making your Medicare Advantage plan more expensive after a spike in inflation.

Mitigating Inflation's Impact

While the facts about inflation's potential effect on your Medicare benefits may seem grim, there are steps you can take to protect yourself.

To start, it's smart for Medicare Advantage plan enrollees to reassess their plan options every year. Shopping around for the Advantage plan that best meets your needs can help you mitigate the effects of inflation.

It's important to remember that you can only disenroll or change your Medicare Advantage plan during specific time frames. These include your initial enrollment period, open enrollment, which occurs every year between October 15 to December 7, or a special enrollment period, which you may qualify for based on certain special circumstances.

Additionally, depending on your health and circumstances, a Medigap plan may save you money when inflation is increasing prices. Medigap, which is also known as Medicare supplement insurance, is private insurance that helps beneficiaries on Original Medicare (Parts A and B) pay for out-of-pocket costs like coinsurance, copays and deductibles. You cannot enroll in both Medicare Advantage and Medigap at the same, and if you need to switch from one to the other, you must do so during initial enrollment, open enrollment or special enrollment.

In general, Medigap is a less expensive alternative for those with serious medical conditions, while Medicare Advantage may work better for those in generally good health. Medigap does not cover dental or vision care, nor does it cover prescription drugs, but you can pair a Medigap plan with a Medicare Part D plan.

The Bottom Line

Rapid inflation affects all of us, but it is a harder problem to solve for those on a fixed budget. When inflation affects programs like Medicare, beneficiaries may need to look for creative solutions to afford their medical costs. Revisiting your Medicare decisions annually can help you make the best choices for your healthcare and budgeting needs.