Many Medicare beneficiaries could see next year’s cost-of-living increases in their Social Security checks much reduced by higher Medicare premiums that will grow by $11.60 a month in 2005, the largest annual dollar hike in Medicare’s history.

The Part B premium, which covers doctors’ and outpatient services, will rise from $66.60 to $78.20 a month, a 17.4 percent increase. Next year’s Social Security benefits, not yet announced, are expected to rise only 2 to 3 percent, the rate of general inflation.

Someone receiving a $600 check, for example, would get an extra $15 a month next year under a 2.5 percent cost-of-living increase, but the new Medicare premium would wipe out all but $3.40. "A 17 percent increase is alarming," says John Rother, AARP’s director of policy. "If that pattern repeats itself in future years, it means that nobody will get Social Security benefits that keep up with inflation."

The news drew heavy criticism from consumer groups and Democrats—not least because the Bush administration announced it late on Friday of Labor Day weekend instead of the normal timing toward the end of October, which this year would be shortly before the election.

In response to the hike, Senate Democrats proposed legislation that would set a cap on Medicare premiums to prevent them from rising faster than the annual Social Security cost-of-living increase. "There has to be some protection," Rother says, "so that beneficiaries are not heavily penalized for something they have no control over, which is the rising cost of health care." Under a formula set by Congress, Part B premiums finance about 25 percent of the cost of outpatient care. So when health costs rise, so do premiums.

Mark McClellan, chief administrator of Medicare, said the 2005 hike is due mainly to increased payments to health providers—about four-fifths to doctors and one-fifth to Medicare’s private managed care plans—that were authorized under last year’s Medicare prescription drug law.

The drug benefit, which does not come into effect until 2006, is not a factor in the 2005 premium increase. But a controversial part of that law gave health providers billions of dollars in higher payments, beginning this year.

These include subsidies to the private plans, known collectively as Medicare Advantage, to persuade more of them to enter the program. The subsidies may enable MA plans to offer better benefits and lower copayments, which McClellan said would more than offset the raised premium for people who join them. Critics call this unfair, given that only 11 percent of beneficiaries are enrolled in MA plans. The 89 percent majority in traditional Medicare "should not even partially subsidize the minority of seniors in private plans," said Sen. Olympia Snowe, R-Maine.