Wednesday, November 26, 2014
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Retirement healthcare costs: Not as scary, but still daunting

The remarkable recent lull in retirement healthcare inflation isn´t fading - not yet, at least.
The remarkable recent lull in retirement healthcare inflation isn't fading - not yet, at least. iStockphoto

CHICAGO (Reuters) - The remarkable recent lull in retirement healthcare inflation isn't fading - not yet, at least.

A 65-year-old couple retiring this year will need to have saved $220,000 to meet healthcare expenses during their retirement, according to a report issued today by Fidelity Investments. It's a daunting sum, but it's unchanged from last year and comes on the heels of an 8 percent drop in Fidelity's 2012 forecast.

Fidelity includes Medicare premiums, deductibles and co-insurance in its totals but excludes any long-term care you might need, over-the-counter medications and dental care. The forecast assumes 20 years in retirement for women, and 17 for men.

Fidelity has been gauging retirement healthcare costs since 2002, and the recent moderate figures reflect several positive trends in Medicare. Overall per capita Medicare spending rose just 0.4 percent in the government's fiscal year 2012. And the Congressional Budget Office projects that inflation-adjusted spending per beneficiary will rise at an average annual rate of 1.5 percent in the coming decade, compared with 4 percent from 1985 to 2007.

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  • Have a question about the health care law? Ask our expert
  • The CBO cites constraints on payments to healthcare providers under the Affordable Care Act, a slowdown in the quantity and intensity of healthcare services utilized and the influx of baby boomers turning 65 in the years ahead. These younger, healthier seniors will reduce the average age of beneficiaries, and cut average healthcare spending in the program.

    Fidelity noted that the cost of prescription drug coverage has moderated as many widely used brand-name medications have become available in cheaper generic forms. The ACA also is cutting the cost of prescription drug coverage by gradually closing the "doughnut hole" - the coverage gap that begins when spending on drugs (the combination of what the individual and the insurance company spend) reaches a predetermined threshold. This year the gap begins when spending hits $2,850 and ends at $4,550.

    While in the gap, you pay 100 percent of costs but get a 52.5 percent discount on most brand-name drugs, and a 28 percent break on generics. The gap will be closed in 2020.

    Few experts are ready to say healthcare costs have been tamed, and many attribute the slow rate of growth to a weak economy. "We do think the cost trend will pick up speed again eventually, whether it's next year or the year after that," says Sunit Patel, senior vice president of Fidelity's benefits consulting group.

    HealthView Services, which develops software for gauging healthcare costs, issued a study this week predicting that retiree healthcare costs will rise 5 percent to 7 percent annually in the years ahead, outstripping inflation increases for Social Security.

    "I can't debate that some of us think we've seen the end of huge inflation rates in healthcare," says Ron Mastrogiovanni, HealthView's CEO. "But from a financial planning perspective, people absolutely need to make sure they can cover whatever might be coming."

    One way to do that, he says, is to maximize Social Security benefits through delayed filing. Mastrogiovanni also points to Roth IRAs as an effective tool for healthcare saving. Roth accumulations and withdrawals are tax-free, and the accounts aren't subject to required minimum distributions after age 70 1/2 (during the life of the owner).

    Another option that may gain ground in the years ahead is the health savings account (HSA) - a tax-advantaged vehicle offered alongside high-deductible health plans. Employers and employees make pre-tax contributions to the accounts, and balances can be used to meet deductibles. HSA balances can be rolled over from year to year, and the accounts are portable. Accumulations and withdrawals also are tax-free.

    The benefit model pairing high-deductible accounts and HSAs has become widespread, with 82 percent of employers saying they will offer them by next year, according to a survey by Towers Watson and the National Business Group on Health. Enrollments also are rising quickly - 33 percent of workers are using them this year in plans where they're available, up from 15 percent in 2010.

    The Internal Revenue Service limits total contributions by employers and workers to $3,300 for individuals or $6,550 for family coverage. And accumulations in these accounts are small now - the average balance last year in HSAs at Fidelity was $3,114.

    But that could change in the years ahead. "An HSA is the most effective way to save for healthcare expenses, if you can manage it," said Patel. "It's the only vehicle available where contributions go in, accumulate and come out tax-free."

    (The opinions expressed here are those of the author, a columnist for Reuters.)

    Mark Miller Reuters
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