How Do You Control Retirement Health Care?

Curbing The High Cost Of Retirement Medical Care

May 5, 2014 by Bob Carlson 

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This article appeared on Liberty Investor™.

The cost of retirement medical care continues to rise and to be the wild card in retirement plans. Reports and studies update the 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. In your planning 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 overall 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. These estimates are of what you’ll have to pay.

A couple retiring in 2013 and incurring median drug expenses during retirement would need to save $151,000 to have a 50 percent chance of covering their lifetime costs for prescription drugs only, according to the latest study from the Employee Benefit Research Institute (EBRI.) Those who incur among the highest medicine expenses are likely to need more than $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 uncovered 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. (You can see that for the average person prescription drugs is the largest medical expense not covered by Medicare.)

How will these costs be paid? EBRI estimates that Medicare covers about 62 percent of medical costs for beneficiaries. (I’ve seen other reports estimate that Medicare pays only about 50 percent of costs.) Another 13 percent comes from private insurance and about 12 percent 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 costs of retirement medical care 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. For most of us that’s when we turn 65. You pay a penalty for life if you decide later to sign up for Medicare Part B or the Part D Prescription Drug Coverage after your initial enrollment period expires.
• 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 bare-bones, 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.
• Shop around. I can’t stress this enough. Recent studies have found that retirement medical care premiums for identical coverage for the same person can vary by 100 percent. 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 (LTC). 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 primarily 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 also can be used to help pay for LTC.

To pay for the bulk of the coverage, you should consider obtaining either a stand-alone 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.

I’ve covered all these strategies and more in detail in past issues of Retirement Watch. You also can find strategies in my books, including Personal Finance for Seniors for Dummies.