Pressure on Drug Prices and Early Closing of “Donut Hole”
Slow the Pace of Rising Costs
Legislative Changes Will Increase the Number of Americans Subject to Medicare Surcharges at the Same Time Elimination of Social Security Claiming Strategies Reducing Potential Lifetime Benefits
HealthView Services’ 2018 Retirement Health Care Costs Data Report Reveals:
Projected benchmark healthcare expenses for retirement
Legislative changes impacting retirement healthcare
Healthcare costs as a percentage of Social Security benefits
Out-of-pocket costs for two additional years of life beyond actuarial longevity
The benefits of improving health and investing the savings for retirement
DANVERS, MA, October 3, 2018 – HealthView Services’ 2018 Retirement Healthcare Costs Data Report offers good news and bad news for Americans planning for retirement. In a positive development, the report shows overall in-retirement healthcare inflation declining to a projected 4.22% compared to the 5.47% in the 2017 Data Report. This change is primarily driven by a slower rate of increase in expected drug costs.
This reflects a consumer shift from brand name to less expensive generic drugs, increased rebates between drug manufacturers and plans, and the “Donut Hole” being closed faster than expected. These developments are also accompanied by the growing popularity of shared-savings arrangements, which help to control unit-cost increases on medical services. Taken together, these changes have lowered the actuarially-projected average inflation rate for Medicare Part D to 4.5% in this year’s report from 8% in 2017. Medicare Part B is meanwhile projected to rise at 4.7% and supplemental insurance, including average annual age rating, at 5.65%.
As a result, total lifetime retirement healthcare expenses for an average healthy 65-year-old couple, who live to their actuarial longevity (87 years-old for men and 89 years-old for women), retiring this year are projected to be $363,946 in today’s dollars. This includes Medicare Part B premiums, Medicare Part D premiums, supplemental insurance (Plan G), dental insurance, co-pays and out-of-pocket costs for medical care, prescriptions, dental, hearing, and vision. For Medicare, supplemental insurance, and dental premiums alone, healthcare expenses are expected to be $281,847. Driven by the lower overall retirement healthcare inflation rate, these numbers are around 10% below 2017 projections.
The report highlights legislative changes that are part of the bigger picture context for retirement healthcare expenses. It shows that the elimination of Social Security optimization strategies in 2015 has reduced potential lifetime benefits by $37,000 (in today’s dollars) for a healthy 58-year-old couple.
The Bipartisan Budget Act of 2018 added an additional Medicare surcharge bracket to Part B and Part D premiums starting in 2019. The new bracket will raise the maximum surcharge to 240% of premiums. The act also postponed the indexing of these brackets, which start at $85,000 in modified adjusted gross income for individuals or $170,000 for couples, to inflation. This was originally planned for 2020. With surcharge thresholds expected to remain constant for the foreseeable future, more retirees will be subject to them. A 38-year-old couple jointly earning $90,000, who would not previously have had to pay surcharges if indexing were to come into effect in 2020, will face $218,000 in future surcharges if they are not inflation-adjusted.
“Over the last decade the data continues to tell a consistent story – rising faster than both U.S. inflation and Social Security COLAs, retirement healthcare costs will require a growing portion of retirees’ budgets and must be planned for,” said Ron Mastrogiovanni, CEO of HealthView Services and HealthyCapital. “We are also continuing to see cost shifting to retirees through the elimination of Social Security optimization strategies and legislative changes that will lead to higher average Medicare spending for American retirees, such as the elimination of supplemental insurance Plan F, the most popular and comprehensive plan available.”
HealthView Services’ Retirement Healthcare Cost Index, which calculates the percentage of Social Security benefits required to address total lifetime retirement healthcare expenses, reveals the impact of expected healthcare costs on retirement budgets. The index shows a healthy 66-year-old couple retiring today will need 48% of their lifetime Social Security benefits to address total lifetime healthcare expenses. A 55-year-old healthy couple will need 57% of their benefits to cover healthcare costs, and a 45-year-old couple 63%. Rising COLAs, reflecting a pick-up in consumer prices, plus lower overall health inflation, means the Index is lower than prior reports but continues to highlight the importance of additional sources of retirement income.
Retirees need to plan for healthcare costs increasing significantly during retirement. Although the 66-year-old couple will require 35% of their Social Security benefit at retirement for premiums, copays, and out-of-pocket costs, at age 85 these expenses will in dollar terms be 158% higher, and amount to 56% of their future projected Social Security benefits.
“A key planning challenge is to ensure retirees have the income they will need through retirement to address higher premiums and out-of-pocket expenses as they get older,” added Mastrogiovanni. “This requires new approaches to investment and decumulation strategies to specifically match healthcare expenses.”
The new retirement healthcare data report highlights the cost of longer-than-expected longevity and the impact of health conditions on future expenses. If a 65-year-old couple live an extra two years beyond their projected actuarial longevity, it shows they will incur an additional $37,423 (net present value) in total healthcare costs, excluding long-term care expenses.
The report underscores the importance of including health conditions in retirement planning and how savings from improved health can be used to reduce the burden of healthcare expenses in retirement.
In a case study, it details how a 55-year-old man with Type II diabetes could reduce his average annual healthcare out-of-pocket costs by an actuarially calculated pre-retirement average of $4,259. By investing the savings in an investment vehicle that generates a net return of 6%, he’d be able to increase retirement savings by $56,763.
“The simple idea of improving the management of health conditions and investing the savings underscores a key point – taking retirement healthcare off the table as a concern is an achievable goal,” added Mastrogiovanni. “As the report shows, small steps to better manage health or modest increases in monthly 401(k) contributions can significantly reduce the burden of healthcare in retirement.”
HealthView Services draws upon 70 million health care cases, actuarial, government and economic data to project retirement healthcare costs. The firm’s rigorous bottom-up approach integrates specific variables – including health status, age, gender, income, and state of residence – that will drive future healthcare costs. The final calculations draw upon, and are consistent with, government healthcare inflation forecasts.
Retirement healthcare cost projections include Medicare Part B premiums, which are priced nationally. It is assumed that most Americans paid Medicare taxes while employed and will not be responsible for Medicare Part A premiums. National averages are used for Medicare Part D, supplemental insurance, and dental premiums, which vary by state. Total lifetime projections comprise all out-of-pocket expenses related to hospitalization, doctors and tests, prescription drugs, vision, dental, hearing services, and hearing aids. Calculations assume average actuarial longevity for different health states and ages, as well as retirement income below Medicare Surcharge bracket thresholds.
HealthView Services (http://www.hvsfinancial.com) is the leading provider of retirement healthcare cost data, Social Security optimization, and long-term care retirement planning tools for the financial services industry. The firm provides an array of planning apps, from 401(k)-focused to advisor-facing, all with the goal of creating funding solutions today to cover future in-retirement health care expenses.