The Healthcare Scare

Medicare, as it should be, is a top priority for the next Congress

With Medicare set to hit insolvency in 2018 or 2019, according to most predictions, and doctors' fees and insurance premiums escalating to new highs, healthcare is perhaps the most important issue on the American agenda today. Research conducted by Hartford, Connecticut-based Hartford Financial Services in partnership with Massachusetts Institute of Technology's (MIT) AgeLab show that it is also the greatest worry for retirees and pre-retirees.

"We asked people aged between 45 and 75 what their highest concern was, and 83% responded that it's healthcare inflation," says Maureen Mohyde, a director in The Hartford's corporate gerontology department. "I would say that this concern is only going to continue growing in coming years, as retiree healthcare coverage disappears and people experience more and more unexpected healthcare costs both during their working and retired lives."

But even if retirees and pre-retirees cite healthcare costs as their primary concern, most people are still not aware of how high these costs really are going to be, says Paul Fronstin, senior research associate at the Washington, D.C.-based Employee Benefit Research Institute (EBRI). In fact, most Americans do not even know what constitutes Medicare, how much it covers, and at what age they are eligible for it, Fronstin says. The majority of people believe Medicare is an all-inclusive system that provides retirees with complete coverage, and they are shocked when they realize how much they are going to have to spend over and above Medicare to pay for their healthcare needs in retirement, he says.

Financial advisors are stepping up to the plate in terms of impressing the importance of healthcare costs upon their clients, but experts believe that healthcare and its associated costs need to be dealt with in the same way as retirement finance, through a concerted and thorough public/private partnership.

The combination of Social Security (even if it is arguably in bad shape), individual savings accounts, and sponsored retirement plans backed by legislation to ensure they work properly have ensured that retirement funding is now a "classic example of successful private/public partnership," says Jerry Ripperger, director of consumer health for Des Moines, Iowa-based Principal Financial Group. "We need a similar dialog for healthcare," he says.

Things are moving in the right direction on the healthcare front, Ripperger says. Medicare is on the next Congress's agenda, employers are beginning to provide health reimbursements and health savings accounts (HSAs) are getting more attention. "Healthcare is one of the big line items for insurance companies and financial services companies," he says.

While it is impossible to tell what will happen with Medicare, many private sector healthcare experts believe it would be good to have in place measures that encourage people to put away money for qualified healthcare costs into an account and not have it taxed. The HSAs, as they now stand, are set up so that only individuals enrolled in health plans with high deductibles can make contributions, says William Sweetnam, a partner at Washington, D.C.-based law firm Groom. "We've seen that people contribute to an HSA for their retirement then they take the money out to deal with current healthcare costs," Sweetnam says. "If HSAs are going to work then we need legislation to make them work."

Currently, the only way to build up healthcare income without paying taxes is through an HSA, Fronstin says, but "there are many limitations to it and it is only part of the solution."

However, the solution--the eventual public/private partnership for healthcare that would encompass potential Medicare reform together with the possible extension of private healthcare savings initiatives--will depend entirely upon who becomes the next U.S. president and what kind of legislative body comes into being after the November election, he says.

Even if politics will finally determine what happens with healthcare in the U.S., it's important to remember that estimating retiree medical costs is only a recent undertaking, Mohyde says, and "it is exponentially more difficult to calculate retiree healthcare costs than trying to estimate replacement income for retirement."

Estimates of how much retirees would need to cover their healthcare expenses beyond Medicare are now starting to get more refined, but there is still a great deal of uncertainty on how much would actually be needed, she says, which makes the situation all the more tough for advisors, legislators, and private companies to deal with.

But Ripperger believes that the American people can also do their bit toward keeping their healthcare costs at reasonable levels: "Americans need to manage their health so that finance is less of an issue," he says. "The reality is that no matter how we pay for those healthcare expenses, they will continue to grow at a much more rapid rate than inflation, so in addition to figuring out ways to set aside money for our healthcare, we also need to take control of our health."

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