For this post on medical and healthcare costs, I brought in a Medicare and healthcare expert. David Armes, CFP® is a fee only financial planner in Long Beach, CA, and a premier expert in the retirement healthcare field. I’m often asked how to manage retirement healthcare costs, and David was kind enough to share his wisdom on the topic.
Are you retired or will be soon? You probably haven’t given much thought to having a long-range plan for managing health care costs. Instead, your focus has been on making sure you follow Medicare’s many enrollment rules and choosing the right supplemental coverage. You should also think about how you’ll manage your health care expenses in retirement.
If you are a healthy 65-year-old you may have another 20 or even 30 years of paying insurance premiums and medical bills. As you probably know from your own experience, health care costs increase faster than other kinds of spending. It’s important to have some kind of longer range plan for controlling those costs.
Your healthcare plan doesn’t need to be elaborate. It doesn’t necessarily need to be a written plan either. With such a large expense looming however, you really need to have some strategy in mind.
#1 Estimating your retirement healthcare costs
You can start by getting a rough idea of how much you’ll spend for health care during retirement. One way to estimate this is take your current healthcare costs and project them at 4% or 5% rates of growth for 20 or 30 years.
Also review published estimates to get an idea of your potential costs. For example Fidelity Investments did a widely recognized study.
Fidelity estimated a 65-year-old couple without employer coverage should expect to pay $245,000 in retirement healthcare costs. They assumed the husband and wife will live to age 85 and 87. They also assumed their health care costs will increase between 4% and 5% per year during retirement. CNN Money estimated a very similar number.
Although estimates are only educated guesses, they can be helpful in a couple of ways. When you realize how much you may pay, you may be more motivated to control your health care spending during retirement. You may even find yourself eating better and exercising more!
Most people really underestimate their healthcare costs
One recent survey of pre-retirees found that nearly one-half of them thought they would each pay about $50,000 for health care in retirement. But that’s way too low according to most experts. When people see large estimates like Fidelity’s, they may understand how important it is to monitor their coverage.
Also, when you see an estimate like Fidelity’s you may decide to choose a less expensive type of coverage when you first enroll in Medicare. As a general rule, people’s health is robust and their medical expenses are low during their early retirement years.
You might decide to choose a less comprehensive type of coverage during these years – some type of managed care plan, for instance. Then you would have the option of changing to a more comprehensive (and expensive) plan later if you begin to see additional doctors and use more medical services.
#2 Matching healthcare coverage with your needs through retirement
The goal of a longterm healthcare plan is to continually match your coverage to your needs and financial situation as you go through retirement. And even if you aren’t worried about the cost of health care, you’d certainly like the idea of saving thousands of dollars during retirement.
What does it mean to match your coverage to your needs? Imagine that at some future point your doctor prescribes for you a new brand-name drug that it is not on your plan’s drug formulary. If you do not change drug plans during the next annual enrollment period, you will pay perhaps a thousand dollars more the following year than you need to.
Or perhaps you start seeing a different specialist who is not in your current plan’s network. In that case you should try to find a plan that will cover you when you go to that specialist. And if that specialist does not belong to any Advantage plan networks (an increasingly common occurrence) you will need to compare the costs of remaining in your current plan and paying more to see the specialist or switching to a Medigap policy, perhaps a less comprehensive one that does not have any network restrictions.
#3 Maximizing your Medicare supplemental coverage
As you think about a long-term plan or strategy to control your health care costs, it’s also important to understand the different types of Medicare supplemental coverage. Perhaps the type of coverage that is best for you in early retirement may no longer be a good choice in later retirement. For each type of supplemental coverage, here are some points to be aware of as you think longer term about your health care spending.
These policies are the most expensive type of Medicare supplemental coverage. Their long-term risk is that they will become unaffordable in later years. Most Medigap insurers adjust their premiums for age as well as for health inflation. For that reason, older retirees pay much more than do younger ones for identical coverage.
Here’s an example of how much you may pay for Medigap coverage over longer periods of time. Let’s say that when you are 65 you buy Medigap Plan F with a first year premium of $2,275 (the national average). Medigap F is the most popular Medigap policy, but you should compare Medigap plans for yourself here. If your premiums increase by 4% a year, they will cost you almost $68,000 over the next 20 years and almost $95,000 over the next 25 years.
That’s in addition to the amounts that you pay for your Part B premiums, prescription drug coverage and for services that Medicare does not cover like routine dental and vision care.
Medigap policies aren’t cheap!
Because Medigap policies are expensive, you could decide to wait until later retirement to buy one. That’s when you are most likely to need these policies’ very comprehensive benefits. But there is some risk in waiting.
There’s an initial six-month guaranteed issue period for Medigap policies that begins when you enroll in Part B. In most states if you’ve past that window you’ll need to answer health questions to purchase a policy. And if you have serious health problems, your premiums could be high or you might be denied coverage. Three states – Connecticut, Massachusetts, and New York – prohibit insurance companies from asking you health-related questions.
If you can afford them, however, Medigap policies have excellent benefits (that’s why they’re expensive). You will have the same coverage in all 50 states, and you can see any doctor who accepts Medicare. 98% of physicians accept Medicare.
Medicare Advantage plans
Medicare Advantage plans are managed-care plans – HMO’s, PPO’s, and private fee-for-service plans. They’re best suited for people in good health. That includes most seniors, 50% of whom say that their health is either excellent or very good. Another 40% say their health is either good or fair.
Medicare Advantage plans are appealing because they’re relatively inexpensive. According to the Kaiser Family Foundation, almost one-half of all Advantage plan enrollees will pay zero premiums for health and prescription drug coverage in 2016. That means that if you’re enrolled in a zero-premium Advantage plan, you start each plan year more than $2,000 ahead of the amount you would pay in premiums for a Medigap policy.
Those savings will be reduced as you pay your Advantage plan’s deductible and also make co-payments for most medical services. In most Medigap plans, by contrast, you will rarely have any co-payments.
Medicare Advantage plans are less expensive
Advantage plan enrollees will typically save considerable amounts of money compared to buying a Medigap policy. That’s why Advantage plan enrollment has tripled during the last decade. Almost one-third of all Medicare beneficiaries having signed up for these plans. Also, Advantage plans cannot charge higher premiums or decline coverage to people who have health problems. The only exception is people who have end-stage renal disease.
There are two tradeoffs that you make when you choose an Advantage plan. The first is that in exchange for the low costs, you are accepting a higher out-of-pocket risk. In some plans this can be as much as $6,700 a year!
If you had a serious illness you could wind up paying more than you would with a Medigap policy. That’s one reason that Advantage plans are usually better fits for people whose health is good.
Medicare Advantage plans are more restrictive
Another tradeoff is that you will have more restrictions in an Advantage plan than with a Medigap policy. You’ll need to stay within your plan’s network of providers or pay a steep price when you go out of the network. Advantage PPO plans so provide some coverage when you go to an out-of-network doctor. Unfortunately they often charge between 30% and 50% of the cost for some out-of-network treatments.
You should take several things into account before you enroll in an Advantage plan. The first hurdle is to find a plan that has all of your doctors in its network. Second you’ll want to look for low costs for the prescription drugs that you take.
Next try to select a plan that has at least 500 providers in its network. This gives you more choices if you need to see new specialists.
Finally look for a plan that has at least a four-star quality rating from Medicare. In 2016 68% of Advantage plan enrollees are in a plan that has a rating of four stars or higher. It may be difficult to find a plan that meets all of these criteria. You’ll need to decide which of them are most important to you.
To summarize, Medicare Advantage plans are solid options for retirees whose:
- health is good,
- who can find plans that have all of their doctors in their networks, and
- have low costs for their prescription drugs.
But they are riskier choices for people who regularly see several doctors and have expensive medical treatments. Later retirement when you may see more specialists it could be difficult to find plans that have all of your doctors in their networks.
Employer-sponsored retiree health plans
Some 30% of retirees have an employer plan to supplement their Medicare coverage. A large employer may offer six or eight plan options to choose from, ranging from a low-cost HMO plan to a fairly expensive traditional Medicare supplement. Employers typically pay a portion of the premium, reducing the amount that retirees pay.
Employer plans are group coverage, so that older retirees pay the same premiums as younger ones (the same is true of Advantage plans). That’s a nice benefit for older retirees, who would otherwise pay much higher premiums. And because employer plans are group plans, retirees can switch plans during open enrollment without having to answer health-related questions. That’s an incentive to choose a less expensive plan in early retirement and then later switch to a more expensive traditional Medicare supplement.
Managing healthcare costs in retirement summarized
Medicare open enrollment is October 15th to December 7th. Regardless of the type of coverage you have you’ll typically save money if you re-evaluate your plan each year.
This is particularly true for prescription drug coverage, which can change quickly as plans move drugs on and off their plan formularies. Even if you don’t save money you’ll have the satisfaction of knowing that you have good coverage.
Thank you David for a great article on managing healthcare costs during retirement. I’d recommend giving David a call if you want an expert review of your healthcare plans and costs.