By: Mark Miller
A good friend plans to throw herself a Medicare party when she turns 65 a few years from now. She lost her employer-sponsored health coverage a few years ago, and has struggled ever since with limited insurance and high out-of-pocket costs; she thinks Medicare will solve all her health insurance problems.
Medicare is fairly comprehensive, but it doesn't cover everything — and the basic coverage doesn't cap out-of-pocket expense if you become seriously ill or need nursing care. In fact, healthcare expenses can wreck retirement security - a fact underscored by a recent study that found medical expenses are a major contributor to bankruptcy among older Americans.
The study was conducted by Professor John Pottow, an expert on bankruptcy at the University of Michigan Law School. He found that even though the elderly account for a relatively small share of overall bankruptcy filings, the growth rate in their filings has been dramatic. For example, from 1991 to 2007, the percentage of bankruptcy petitioners age 65 to 74 rose 178 percent. Those figures reflect trends before the recession began in 2008, so it's fair to assume the situation has worsened in the past few years due to job losses, diminished retirement portfolios and housing equity.
Healthcare is a major area of expense in retirement, and costs are rising more quickly than overall inflation.
The Center for Retirement Research at Boston College (CRR) reports that the typical married couple at age 65 can expect to spend $197,000 in lifetime uninsured health costs, including insurance premiums, out-of-pocket and home healthcare. That figure excludes any long-term care need. When nursing care is factored in, the typical cost rises to $260,000, with a 5 percent chance of hitting $570,000.
Research by Fidelity Investments shows that retiree healthcare expenses this year are 4.2 percent higher than in 2009, and have jumped 56 percent since 2002. By contrast, overall consumer prices are up just 1.1 percent so far this year. Fidelity also found that monthly healthcare costs average $535 this year, second only to the cost of food.
Medical bankruptcy filings usually result from high out-of-pocket expense, along with the cost of financing those expenses, according to Melissa Jacoby (pictured right), a law professor at the University of North Carolina at Chapel Hill who specializes in bankruptcy issues.
"Chronic conditions, drug costs and nursing home costs are a big area of concern," she says. "And when people put those expenses on a high-interest rate credit card, the financial burden of those costs escalate." Jacoby's research shows that one-third of people filing bankruptcy petitions for a medical reason report that they used a credit card to finance those expenses.
Another key factor, she says, can be a loss of income due to unemployment, since many older Americans are working longer.
The new healthcare reform law aims to provide some relief to the elderly. For example, the notorious doughnut hole — that's the gap in Medicare D prescription drug coverage for beneficiaries with high expenses — will be closed between now and 2020.
The Affordable Care Act (ACA) also improves the Extra Help prescription drug subsidy for low-income seniors, which pays 100 percent of premiums for enrollees with annual income of $16,245 a year (single) or $21,855 (married couples).
ACA also adds free preventive care visits to Medicare starting next year, which should help head off catastrophic cost for some patients through early intervention.
Here are some key ways to plan for health expenses in retirement — and protect yourself from the worst-case risks:
Plug the gaps with insurance. Medicare's hospital coverage (Part A) covers all costs for the first days, and has escalating co-pays up to 150 days. But if you face a catastrophic illness that requires a long hospitalization or skilled nursing care, you're on your own after that.
Many seniors purchase Medigap policies, which cap out-of-pocket expenses and for protection against that type of catastrophic expense. Buy these policies during your open enrollment period, which lasts six months and starts on the first day of the month when you turn 65 and have already enrolled for Medicare Part B (medical services). If you sign up during open enrollment, insurance companies can't turn you down or charge higher premiums due to pre-existing conditions,
Also give careful consideration to buying long-term care insurance (LTC) , which protects against the risk of nursing home expense. About one-third of individuals turning 65 this year will need at least three months of nursing home care sometime in their lives, according to the CRR; 24 percent will need care for more than a year.
It's best to buy LTC coverage in your late fifties or early 60s in order to get a reasonable annual premium and minimize risk that you'll be rejected for health reasons.
Focus on out-of-pocket expense. "When you are choosing insurance plans, really focus on understanding what the benefits are," says Sunit Patel, a Fidelity senior vice president who specializes in healthcare matters. "The key question is, ‘What is my maximum out-of-pocket expense in any given year?"
Save for it. Good retirement plans include specific saving and investing goals for healthcare, Patel says. "Just as you would save to finance college education or a general retirement goal, is there a percentage or a specific account earmarked for healthcare? And, how will you recreate a stream of income that covers the essential expenses, taking into account that healthcare inflation is larger than overall inflation rates?"
Don't bank on good health. Research by CRR actually shows lifetime health care costs are higher for people who think they won't need Medigap or LTC coverage - and pay higher premiums as a result of waiting too long.