Curbing the High Cost of Retirement Medical Care

The cost of medical care continues to rise and to be the wild card in retirement plans. Reports and studies update their estimates of the cost of retirement medical care each year. They show the cost to be high and also very unpredictable for individual retirees and couples. The studies focus on average or median costs. You have to be aware that individual costs vary greatly because of differences in personal health, geography, and insurance coverage. Your retirement medical costs can be substantially higher or lower than the forecasts.

We’re talking about out-of-pocket costs, those expenses that aren’t covered by Medicare. People on average incur higher medical costs than these estimates, but Medicare picks up some of the costs.

A couple retiring in 2013 and incurring median drug expenses during retirement would need to save $151,000 to have a 50% chance of covering their lifetime costs for prescription drugs only, according to the latest study from the Employee Benefit Research Institute. Those who incur among the highest medicine expenses are likely to need over $220,000. The good news in the report is that the prescription drug expense estimates are lower than last year’s because of a reduction in the rate of growth of medical and drug costs.

Remember those estimates are only for prescription drug costs. To have a high probability of paying all non-covered medical costs after age 65, EBRI estimates a couple age 65 today with a high level of medical expenses will need savings of $360,000.

How will these costs be paid? EBRI estimates that Medicare covers about 62% of medical costs for beneficiaries. (I’ve seen other reports estimate that Medicare pays only about 50% of costs.) Another 13% comes from private insurance and about 12% is paid by the retirees. The rest is paid by state programs, employer retirement benefits, and other sources.

Of course, there are steps you can take to reduce both the out-of-pocket medical costs and the uncertainty of your exposure to the medical costs.

– Those not already retired should take steps to establish good health habits, including participating in any employment or community wellness programs.

– When you’re eligible for a health savings account, take advantage of the option and fund it with the maximum amount each year. Contributions to HSAs are deductible if made by you and excluded from gross income if made by your employer. Earnings on the account compound without taxes, and all amounts withdrawn from the account are tax-free when withdrawn to pay for qualified medical expenses. It’s a good way to build a tax-advantaged retirement fund for medical expenses.

– Enroll in Medicare when first eligible. You pay a penalty for life if you decide later to sign up for Medicare or Part D Prescription Drug Coverage after your initial enrollment period expires. See our September 2013 visit for details.

– Sign up for Part D Prescription Drug Coverage. This is private insurance that is partially subsidized by the government. Prescription drugs are the largest medical expense for most of those age 65 and older. A good policy reduces your out-of-pocket costs and the uncertainty of how much you’ll pay should you have an above-average or catastrophic need for medicine.

When you don’t have much need for prescription drugs at the start of retirement, sign up for a barebones, low-cost policy. You always can switch to a more robust policy during a future open enrollment period if you need it and will avoid the premium penalty for signing up for Part D late.

– Consider a Medicare Supplement policy. When you’re in traditional Medicare (not Medicare Advantage), there are a number of deductibles, copayments, and coverage gaps. A Medigap policy will cover some of them and reduce your uncertainty. There are 10 different Medigap policies to choose from, so you can look for the right trade off for you between premiums and better coverage. See our October 2013 visit for details.

– Shop around. I can’t stress this enough. Recent studies have found that premiums for identical coverage for the same person can vary by 100%. There are people paying twice as much for Part D and Medigap policies than they should because they didn’t shop around. The insurance industry counts on a combination of inertia and people disliking insurance shopping. It costs people a lot of money.

– Have flexibility. A retirement plan needs a cushion and some flexibility because of the uncertainty of medical expenses. You should minimize fixed expenses so that spending changes can be made in case uncovered medical expenses arise.

– Plan for long-term care. Medicare won’t cover much of any long-term expenses you incur, and most of you won’t qualify for Medicaid. You probably don’t want to rely on Medicaid for long-term coverage anyway, because the level of care by facilities accepting Medicaid usually is considered to be of lower quality than at others.

I recommend most people plan on using several sources to pay for LTC. Part of the cost can be funded from savings. There probably are expenses you incur now that you won’t if you need LTC, and that money can be used to help pay for LTC.

To pay for the bulk of the coverage, you should consider obtaining either a standalone LTC policy or an annuity or life insurance policy with a long-term care rider. Or you can combine both types of coverage. Tapping the equity in your home through either a reverse mortgage or a sale can be a good way to plan for extended long-term care expenses. By using all these tools, you’ll have a solid plan to cover any LTC you need.

You can find details about a good annuity with a long-term care rider in our July 2013 issue and a life insurance policy with long-term care coverage in our January 2014 visit. Details about shopping for long-term care insurance are in our November 2012 and June 2013 visits. All are available in the members’ section of the web site.