Both the popular press and the benefits/HR trade publications have been sounding the alarm—older workers are not adequately saving for their health care costs in retirement. There are many reasons for this “retiree medical adequacy” gap—including limited resources and competing needs (e.g., housing, children’s education, and retirement income needs) and confusion over the best asset-accumulation vehicles (e.g., 401(k)/403(b), Roth, IRA, and HSA).
Many of the challenges to retiree medical adequacy are based on financial constraints and filling these financial gaps will be difficult in an era of limited wage growth and increasing longevity. However, there is another gap that can be addressed much more readily—the understanding gap.
The transition from pre-Medicare coverage to Medicare is complex, with few unbiased resources to assist in that process. Moving to Medicare requires moving from an integrated plan design (where coverage for hospitalization, physician costs, and prescription drugs is provided under a single plan) to an alphabet soup of different coverage alternatives (with different deductible and copayment rules):
Medicare Part A (hospitalization), Part B (physician costs), Part C (optional Medicare Advantage managed care plans), Part D (private prescription drug coverage), and a variety of Medicare Supplement plans (A through N).
And, the limited information that is available provides little useful insight to help older workers truly plan for their retiree medical expenses. For example:
Media reports often focus on a single amount as the “average” needed for retiree health care costs. This average amount is often $200,000-$250,000 for a married could (depending on the source). According to the Employee Benefit Research Institute, the projected savings needed (by a couple) for retiree health care costs ranges from $147,000-$326,000.
Medicare.gov provides estimated annual medical costs for those buying Medicare supplement policies—and across the entire range of Medicare Supplement products (with their divergent coverages) the government estimates annual costs of between $6,400-$6,700/year.
To anyone familiar with retiree medical costs and the range of insurance products available, these numbers provide no real actionable insight to support the planning process.
Using Retiree Health Choices’ proprietary cost calculator I can estimate that the full annual cost for an individual with limited health care needs (3 PCP visits and 2 specialist visits) ranges from $2,400 (for coverage under a Supp Plan A) to $3,700 (for coverage under a Plan F)–while the cost for a retiree with more extensive needs (5 PCP visits, 5 specialist visits and 1 hospitalization) can range from $2,800 (for a Supplement Plan N) to $5,200 (for a Supplement Plan K).
Similar ranges affect those with Medicare Advantage policies—with the greatest variation occurring because of the differences in the coverage of hospitalizations.
Better planning tools will ultimately lead to better planning. We have an abundance of tools to support 401(k) savings and investments; until such tools are available to plan for retiree medical costs older Americans will simply be guessing and not planning.