Projected Health Care Costs for Medicare Beneficiaries Rose Again in 2023
Jan 31, 2024
Some couples may need to have as much
as $413,000 saved to afford premiums, deductibles and
out-of-pocket drug costs in retirement, according to new EBRI data.
The predicted savings target needed for Medicare beneficiaries to
cover premiums, deductibles and prescription drugs in retirement increased once
again last year, according to new data from the Employee
Benefit Research Institute.
In an extreme case, a couple with high
prescription drug expenditures will need to have saved as much as $413,000 to
have a 90% chance of having enough money to cover their health costs in
retirement, EBRI found.
EBRI also calculated that a 65-year-old man
enrolled in a Medigap plan with the highest prescription drug expenditures in
retirement will need to have saved $215,000 in order to have a 90% chance of
having enough money to cover premiums and median prescription drug costs, and a
65-year-old woman will need to have saved $252,000.
Jake Spiegel, a research associate at EBRI,
says many workers do not feel concerned about paying for medical expenditures
in retirement, because it seems like an issue that is very far away
“One of the reasons we built this model is to
make those costs a little bit more salient, because when you hear a number like
$413,000, … [it] makes those costs a little bit more serious, and it makes it a
little bit easier to plan for in the current time period,” Spiegel says.
Spiegel notes that EBRI did not take into account
long-term care costs in its model, which can be significant, as assisted living
facilities, for example, can be very expensive.
Savings Targets on the
Rise
When Medicare was first established nearly 60
years ago, it was not designed to cover health care expenses in full, EBRI
explained in its report.
While the Patient Protection and Affordable
Care Act of 2010 included provisions to reduce the out-of-pocket expenses
Medicare enrollees would face for prescription drugs, it did not completely
eliminate them. In 2024, enrollees in Medicare will continue to pay 25% of the
cost of both generic and brand-name prescription drugs, according to EBRI.
However, Medicare Part D out-of-pocket
spending will be capped at $2,000 starting in 2025 due to a provision in the
Inflation Reduction Act of 2022.
According to EBRI’s model, a man who turned 65
in 2023 would need an average of $184,000 saved to have a 90% chance of
covering median Medicare Part B premiums and deductibles, Medicare Part D
premiums and out-of-pocket drug expenses. A woman who turned 65 in 2023 would
need $217,000 saved, and a couple would need $351,000 to have a 90% chance of
covering their expenses.
Savings targets tend to be lower for Medicare
Advantage enrollees than for Medigap enrollees, but according to EBRI, there
are tradeoffs to consider. For example, Medicare Advantage enrollees generally
trade lower premiums for higher out-of-pocket spending, and some Medicare
Advantage plans have narrower networks—meaning enrollees may have fewer doctors
to choose from, or may require approval before certain medications or services
are covered.
Despite some of its drawbacks, Spiegel says
enrollment in the Medicare Advantage program is growing every year.
How Employers,
Participants Can Prepare
The high cost of health care in retirement for
Medicare beneficiaries is particularly problematic because fewer employers are
offering retiree health benefits. The federal Agency for Healthcare Research
and Quality reported that in 2021, about 3% of private-sector employers offered
health benefits to Medicare-eligible retirees, down from 10% in 1997.
Larger firms were much more likely than
smaller ones to offer benefits to retirees, EBRI found. Among private-sector
employers with at least 1,000 workers, 14% offered health coverage to
Medicare-eligible retirees, and 23% offered it to early retirees in 2022. But
even among larger firms, the percentage that offer health benefits to either
early retirees or Medicare-eligible retirees has been declining.
Spiegel says it is highly unlikely that
retiree health benefits will return, as they are “enormously expensive for
employers to offer and maintain.”
To prepare for high health care costs in
retirement, Spiegel recommends that workers take full advantage of their
employer match in their 401(k), as well as participate in a health savings
account if their company provides that benefit alongside a high-deductible
health plan.
“[An HSA] can go a long way to help defray the
significant costs of health care in retirement, especially because any health
care costs that you’re paying for in your HSA are going in on a pre-tax basis,”
Spiegel says.
Spiegel adds that employees who have the
benefit of receiving an employer match in their HSA tend to accrue higher
balances and are more likely to invest their HSAs, which “sets them up for
weathering expensive costs” in retirement.
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