A Prescription for Saving

A Prescription for Saving

There has certainly been an onslaught of newsworthy developments over the past few months – the tragic terrorist attack in Brussels, the chaos of the presidential campaigns, the possible dissolution of the European Union amidst the refugee crisis and Britain’s potential exit. Perhaps preoccupation with these incidents sidetracked me from broaching a topic that I’ve wanted to discuss for quite some time: the skyrocketing cost of medications.

 

Let’s begin at the bottom.

My mother always repeated the old adage: “If you can’t say anything nice, don’t say anything at all.” For the most part, I’ve tried to live by that creed; however, when it comes to former big pharma CEO, Martin Shkreli, it’s pretty hard to bite my tongue.

Joshua Roberts | Reuters Martin Shkreli, former CEO of Turing Pharmaceuticals, prepares to testify before a House Oversight and Government Reform hearing on Capitol Hill, Feb. 4, 2016.
Credit: Joshua Roberts | Reuters

In case you missed it or forgot, Shkreli first became a household name last summer when he spiked the price of Daraprim – a drug used treat infections in people with HIV – from $13.50 to $750 per pill. His trademark smirk was splattered across every news outlet in the country, and he was soon referred to as “the most hated man in America.” (In an ironic twist, Shkreli was arrested a few months later on securities fraud charges. I guess that’s karma.)

While the Shkreli case is an extreme example, it is nonetheless emblematic of a continuing trend of prescription drug prices rising at a multiple of inflation – or, as in the case of Daraprim, more than 5,000%.

A recent Wall Street Journal article addressed the issue of drug costs in a Q&A with representatives from several health-related organizations, including insurance companies, drug-industry trade groups, and Medicare/Medicaid. The forum yielded some interesting theories about potential solutions, including greater transparency for consumers, empowering Medicare to negotiate drug prices, and increasing competition and shorter application-timelines for older medications.

Regrettably, the greatest takeaway from the piece might be that there is no easy solution – or end in sight – to the high cost of prescription drugs.

What can the average American do?   Aside from trying to stay as healthy as possible, most workers will be at the mercy of whatever their insurance policy covers. The truth is the vast majority of employers probably spend little time worrying about prescription costs, but as we get older and the body breaks down, affording medications can become a regular household discussion.

Unfortunately, the double-edged sword of medical science that lengthens life (two more years, according to the latest report from the Society of Actuaries) comes at a price – an expensive one.

So while there may be little that can be done in the short term, we certainly have some control over a few long-term variables, including understanding the role of longevity and drug-cost projections, having a consistent savings plan, choosing the right investment products, and starting early.

 

Before we look at numbers, here’s a quick refresher on Medicare Part D drug coverage.

Each Part D plan has its own list of covered prescriptions. Plans charge a premium, but costs can vary based on type of coverage, state of residency, and income. (There is also a coverage gap “donut hole,” but that will be phased out by 2020.)

According to HealthView’s most recent data, Part D will rise by 8% for the foreseeable future, which is three times the historical U.S. inflation rate of 3%.

Let’s examine the Part D premium costs in five-year increments (based on the national average) of a married couple that is projected to live to age 87 and 89:

 

Savings Required to Fund Basic Medicare Part D Premiums (by Time Horizon)  
Age Life Exp. Retirement Age Coverage Total Cost Required Monthly Savings*
60 87/89 65 Medicare Part D Premiums $159,763 $998
55 87/89 65 Medicare Part D Premiums $234,745 $627
45 87/89 65 Medicare Part D Premiums $344,917 $522
*Based on 6% rate of return

 

At first glance, the table may seem incorrect. Why would the 60-year-old couple have to save more money per month than the 45-year-old couple, which has a much higher total outlay? The answer lies in the difference in investment time horizons and Part D inflation between the two groups.   Because the 60-year-old couple only has five years to prepare, they need to save more in a shorter period of time.   However, their total costs are lower because they will not be subjected to the projected 8% Part D inflation rate that the 45-year-old couple could face over the next two decades.

 

Now, let’s step back and look at the big picture.

Medicare Part A (hospitals) is free for most, and Part B (doctors visits) is deducted from Social Security. While the numbers in the table may initially seem high, they also reveal that a 45-year-old couple only has to save $522 per month to cover all of their basic Medicare premiums throughout retirement.

 

That’s almost worth repeating. In fact, I will.

Based on the latest data, a 45-year-old couple only has to save $522 per month to cover all of their basic Medicare premiums throughout retirement.

 

So where should our average middle-aged American couple consider placing their investment?

Health savings accounts (HSAs) provide significant flexibility to investors who want to set aside a certain amount of income to pay for future medical expenses. Funds are not subject to federal income tax at the time of deposit, can accumulate if unused, and grow at a rate of return based on the asset mix. Those who can take advantage of an HSA with a company contribution can benefit even more.

Part D is subject to Medicare means testing, which means that premiums can grow exponentially based on retirement income. Therefore, mixing in products such as life-insurance, non-qualifies annuities, and a Roth can help reduce the possibility of surpassing means-testing thresholds and getting hit with surcharges that range from 37% to over 200%.

While affording prescription drugs in the future will certainly be difficult, it’s a challenge worth facing because it could eventually lead to a longer life. Professional planning, consistent savings, and an early start might make the pill a little easier to swallow.

 

 

 

 

 

2016-04-20T14:53:10+00:00