Retiree Health Care: The Issue That’s Too Big to Ignore

A common retirement planning mistake is to underestimate costs for retiree health care. Adequately preparing for our own health care in retirement is an issue too often treated like “the elephant in the room.”

Everyone knows the elephant is there, and everyone knows that it will have to be dealt with eventually, and yet everyone ignores it. It’s just too difficult, too expensive, too confusing to face right now. Maybe someone else will look after our retirement health care needs. Surely the government or our employer will address the problem. Maybe the elephant will just go away. Very unlikely. Given the issues confronting us, we had best confront the beast today rather than waiting until it’s too late. Here are some of the key issues involved in planning for health care expenses in retirement.

Issue #1: Increasing Medical Costs

The Kaiser Family Foundation documents what we know too well: health care costs are far outpacing other costs. Total U.S. health expenditures per capita have more than doubled since 1990. The annual increase during these years averaged 5.9%, nearly twice the Consumer Price Index. Private employer insurance premiums soared to an average of $10,880 for family coverage in 2005.

Many reasons are given for rising medical costs: new medical procedures and technologies; rising drug expenses, including cost of research and regulatory approval; administrative inefficiencies and legal problems; an aging population using more services; and, increasing consumer expectations.

It seems unavoidable that the typical retiree’s out-of-pocket health care costs will continue to increase faster than other prices for a long time.

Issue #2: Medicare’s Financial Troubles

There has been ample discussion about the financial problems of Social Security and some pension systems, but there has been less discussion about the enormous financial trouble facing Medicare.

The 2006 Medicare Trustee Report predicts that Medicare expenditures will outpace both workers’ earnings and economic growth. With no benefit cuts, by 2028 Medicare expenditures will exceed those of Social Security. It is hard to see how these increased costs can be covered without cutting benefits or charging much more for Medicare services.

Medicare now picks up about half of a typical retiree’s health care costs. With expected increases in program costs and limited taxes to support them, it is inevitable that tomorrow’s retirees will be paying a higher portion of their own health care costs.

Issue #3: Retiree Health Care Benefit Challenges

New accounting standards are forcing local governments for the first time to report future costs for promised retiree health benefits. Costs for retiree health care benefits have been rising along with health care costs, creating a funding challenge even without the new accounting rules. As a result, many employers are facing large financial burdens from their retiree health benefits that were not anticipated when the programs were set up and are re-examining these benefits.

Employees who are eligible for these programs should understand their costs, limitations, and benefits. As these programs are re-evaluated, some retiree health care programs are seeing tightened eligibility rules. Others are increasing out-of-pocket costs to retirees. And, some are even terminating benefits for future retirees entirely, perhaps replacing the benefit with a self-funded savings program.

Issue #4: Coverage Before Age 65

Many public employees retire before age 65 when they would be eligible for Medicare. During their working years, most public employees had generous health benefits with a considerable employer contribution. It can be a shock to shop for health care when you’re no longer employed. Leaving the employer’s plan may mean that those with pre-existing conditions, or whose spouses have such conditions, will find it difficult to purchase health coverage on their own.

Fortunately, under the Federal COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) law, coverage in the employer’s group plan may continue for 18 months after separation, at the employee’s full cost plus an administrative charge. Such coverage can be expensive, commonly running $1,000 a month for a couple. For those who are age 65 and enrolled in Medicare, Federal law requires insurance companies to allow purchase of guaranteed renewable Medigap insurance at standard rates during an initial six-month enrollment period. Costs of this supplemental coverage vary widely and can be compared at www.medicare.gov.

Issue #5: The Specter of Long Term Care

Every current and future retiree should consider how they would pay for long term care, if needed. Long-term care refers to a range of services for those with chronic illness or disability, including those resulting from old age. The costs of extended long-term care can be devastating.

Today, the cost for a private room in a nursing home averages more than $70,000 annually. According to the U.S. Department of Health and Human Services, a person age 65 has a 40% chance of spending some time in a nursing home.

Neither Medicare nor regular health insurance pays long-term care expenses. If your income and resources are very limited you may qualify for Medicaid. Eligibility and benefits vary from state to state.

Long-term care insurance policies vary widely in cost and coverage. Policies are not standardized and are therefore difficult to compare. In its book, Planning for Long Term Care, the United Seniors Health Council suggests considering a long-term care policy if it costs no more than 7% of your retirement income, you have assets of at least $75,000 per person (excluding home and car), you have yearly retirement income of more than $35,000 per person, and you could afford a 30% premium increase.

Your continuing independence in retirement may depend as much on the adequacy of your health care coverage as on any other single matter. Ignoring the elephants in the room will not make them go away.