Five ways to confront changing healthcare costs in retirement

The cost of health care is one of the biggest out-of-pocket costs facing retirees–and for some, the challenge is getting tougher.

Fifteen million retirees on Medicare get supplemental health insurance coverage from their former employers–and another 2 million retirees not yet eligible for Medicare receive primary coverage from their former workplaces, according to research by the Kaiser Family Foundation (KFF). But employer coverage is on the verge of major change that will leave retirees footing a larger share of the bill.

For retirees over age 65, employer coverage typically supplements gaps in Medicare’s coverage–paying for vision or dental care, capping out-of-pocket costs, or covering prescription drugs. For under-65 retirees, some employers provide primary health insurance.

But the number of employers covering retirees has declined sharply over the years, to just 28% in 2013, compared with 66% in 1988, according to KFF. Coverage levels took a sharp downward turn between 1988 and 1991, when the Financial Accounting Standards Board began requiring private-sector employers to reflect the benefit costs for current and future retirees as liabilities on their books. Since then, more employers have been dropping coverage due to the rising cost of health care.

Sudden changes are rare, so if you have a promised benefit from a former employer, it’s not likely to disappear. More often, benefits are discontinued for newly hired workers.

New Trends in Employer Coverage

The declining coverage levels also reflect changes in the economy, notes Tricia Neuman, senior vice-president at Kaiser and director of the foundation’s Medicare policy program. “Retiree health has typically been offered by large corporations in older industries,” she says. “As new companies come on the scene, they’re less likely to offer retiree health care from the start.”

But many employers that continue to provide health benefits are restructuring their programs for current and future retirees. The big trend is the shift to a defined-contribution model, where retirees receive a specific amount toward buying a plan, often in a private insurance exchange offering a range of policies. Earlier this year, AT&T  made news when it announced plans to move its Medicare-eligible retirees to a private insurance exchange in 2015, following similar moves by IBM and Time Warner.

The change can be unsettling for retirees accustomed to receiving a defined-health benefit and who now need to navigate more complex choices in an insurance marketplace. However, most of the private exchange offerings include one-on-one advice and guidance services aimed at helping retirees make optimal insurance choices.

But the change to marketplace coverage does shift cost risk from the employer to retirees–and it follows a period where out-of-pocket costs have risen sharply. Kaiser reported recently that between 2000 and 2010, average annual total out-of-pocket spending among beneficiaries in traditional Medicare increased by 44%, to $4,734. During that time, total out-of-pocket costs increased at an average annual growth rate of 3.7%.

Health-care cost inflation has been quiet lately. Fidelity Investments, which publishes an annual report on retiree health-care costs, reported last month that a 65-year-old couple retiring this year will need to have saved $220,000 to meet health-care expenses during their retirement–the same estimate the company made last year. And Fidelity’s 2012 forecast reflected an 8% drop in projected costs. (Fidelity includes Medicare premiums, deductibles, and coinsurance in its totals but excludes any long-term care expense, over-the-counter medications, and dental care. The forecast assumes 20 years in retirement for women and 17 for men.)

Those figures reflect a slowdown in Medicare’s own cost growth. Medicare’s trustees reported recently that the monthly premium for Part B (outpatient services) will stay at $104.90 in 2015 for the third consecutive year; separately, the federal government forecasts that average monthly Part D (prescription drug) premiums will rise just $1, to $32 next year. Average premiums have been right in that range for the past four years.

Impact of the Affordable Care Act

For retirees younger than 65, the erosion of employer coverage used to be a major headache. Their main option was to buy an individual insurance policy, and they could be turned away by insurance companies due to pre-existing conditions, or face high prices for insurance policies offering weak coverage.

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