With the oldest baby boomers turning 66 this year, many are worried sick about the rising cost of health care. And no wonder. Health care expenses in retirement can run hundreds of thousands of dollars — not exactly pocket change.
As Adam Koos, president of Libertas Wealth Management Group in Dublin, Ohio, observes: “Five years ago, I’d be the one bringing it up in conversation as we talk about expenses. Now, I find clients are bringing it up before we even get to that line item. There’s a sense of urgency around this that didn’t exist before.”
Yet many financial advisors are currently “ill equipped,” as one expert puts it, to deliver the health-care-cost planning advice that clients have begun to demand as part of the advisor-client engagement.
“This is hard for advisors to hear because they want to think they are meeting all of their clients’ needs. Unfortunately, they’re not,” says Kathryn McCabe Votava, founder of GoodCare.com, a health care consulting firm headquartered in Washington, D.C. and Pittsford, N.Y. “A fair number of them include it at the big-picture level — the biggest-picture level — but get a smidgeon below that, and they are ill-equipped. Simply put, this has never been a part of their training.”
Moreover, the knowledge gap is occurring just as wealth care and health care are converging for millions and millions of Americans. As Sean Dowling, president of Stamford, Conn.-based Dowling Group Wealth Management, frames it: “They’re two sides of the same coin. What good is growing a portfolio if you don’t protect it from events that are not only likely but can be catastrophic to an investment plan?”
What has pushed health care onto the advisor’s plate? For starters, cost-conscious companies are continuing to shed their retiree health coverage, causing individuals across income brackets to procure benefits for themselves. On top of that, health-care costs are rising at a rate of 7 to 8 percent a year, faster than inflation. Finally, with personal responsibility comes choice — and the choices involving Medicare, other health insurance and long-term care can be hugely complex. It goes without saying that there’s a notable downside to making the wrong choice.
When Ron Mastrogiovanni, a co-founder of the wealth-management-solutions firm FundQuest, began helping his elderly parents with health-care decisions a few years ago, he was shocked at what he didn’t know.
“I found out I had no idea what someone who’s retired goes through in terms of health care, Medicare, Social Security. It was completely foreign to me and I was considered an expert in retirement planning,” says Mastrogiovanni, who now heads HealthView Services, a Danvers, Mass.-firm that builds software solutions for the health-care and financial-services industries to address out-of-pocket health-care costs that retirees will face.
Mastrogiovanni said advisors until recently never had to become experts in health-care cost planning, but that they need to do so now.
“The question becomes: How can we effectively plan if we are excluding the largest expense we face in retirement? We’re in the financial planning business and we’re able to estimate the cable bill in 2032 but we’re ignoring the largest expense? That’s ridiculous,” he says. “We have to get up to speed.”
The Road Ahead
No doubt advisors who do step up to the plate will engender significant client loyalty. Consider: the Merrill Lynch Affluent Insights Survey in August revealed that 70 percent of affluent Americans cite the rising cost of health care as their top financial concern — as they have since the survey began in October 2009.
After Sandra Adams, a lead planner with the Center for Financial Planning in Southfield, Mich., staged a client seminar featuring a Medicare analyst, she received a call from a longtime client. “She told me it was the best thing I’d ever done for her. He ended up saving her $200 to $300 a month and you see that immediately in your cash flow,” said Adams, a certified financial planner. “With pension plans going away, my clients are making decisions they didn’t think they’d have to make. This is the new normal.”
Just as revealing, while 89 percent of affluent individuals 65 and older in the Affluent Insights Survey believe they are at least somewhat knowledgeable about Medicare coverage, only 47 percent were able to accurately identify costs covered by Medicare Part A. Another knowledge gap.
“It’s somewhat alarming. It’s also an opportunity for the financial advisor to make sure that gap is addressed,” said Bill Hunter, director of personal retirement product management for Bank of America Merrill Lynch. For the last year, Hunter added, the brokerage firm has worked “aggressively” to provide advisors with training on Medicare and long-term care, among other retirement planning topics. “We’re laser-focused on this,” he said. “Retirement income is tied at the hip to health-care costs. You can almost use the terms interchangeably.”
Adapting to the changing landscape, forward-thinking advisors are adding health-care-cost planning to their business model. It’s not one size fits all.
In Butler, Pa., advisor Curt D. Knotick, president of Accurate Solutions Group, helps his clients out with long-term care insurance and refers them to an independent insurance company for questions about Medicare. He does not get a referral fee from the insurance agency. And even though many of his clients have pension plans from their union shops, Knotick advises them to prepare for the worst. “Just because something is promised as a benefit in retirement, it doesn’t mean it’s going to necessarily be there,” he notes.
Tony Mazzali, president of CG Financial Services in Haslett, Mich., has created a health-care division with several people in the firm focused either substantially or partially on group health care, individual health care, Medicare and long-term care. “We were getting a fair amount of demand for it,” says Mazzali. “Everyone wants to talk about their health insurance.”
Jeff Cortright, president of Phase 2 Investment Advisers, has dug deep into health-care planning. It’s now what he calls a core specialty — no surprise given the average age of his clients: 62. “They’re right at that Medicare transition. This is an integral part of making sure they don’t run out of money in their retired life,” says Cortright, who spent three months learning the ins and outs of the Medicare market.
Cortright, based in Grandville, Mich., looks at health-care expenses on an ongoing basis and he also collects information about a client’s family health history. If, for example, there’s a history of cancer, he will steer a client away from a Medicare package that has a significant co-payment for chemotherapy or radiation. Cortright also re-evaluates his clients’ Medicare selections during the annual re-enrollment period. Cortright gets paid in two ways: through a referral fee from insurance companies he represents or a fee charged to the client.
At Legend Financial Advisors in Pittsburgh, advisors help clients vet continuing care retirement communities not only by accompanying them on a tour but by reviewing contracts and discussing options. The firm has strong contacts in the medical insurance world and any difficult situation is referred out. “The problem is that it’s so complicated. How much time as a firm do you allocate to it? There’s a point where we have to say this is getting beyond us,” says Jim Holtzman, an advisor and shareholder. “If you think of it as a nine-inning game and we can get you to the seventh or eighth inning — if you can get the client that far — it’s pretty good.” Generally, health care consulting is included in the flat fee that clients pay for financial planning. If it’s a one-off, an hourly consulting fee is charged.
Advisors are also outsourcing to firms like GoodCare.com, HealthView Services and HealthCPA of San Mateo, Calif. In the case of HealthCPA, the firm helps clients pick the right insurance plan and then assigns a billing advocate to manage it.
With the ongoing national debate about Medicare funding and health care reform, experts expect health care to remain a top financial concern.
As Joan Antoniello, vice president of corporate and personal insurance planning for Weiser Capital Management in New York City, notes: “This is just the beginning. You’re going to see changes in the Medicare system, whether it’s reimbursements to doctors, changes in co-pays or deductibles. With the national dialogue happening now, I think that is inevitable. My advice to clients? Stay as healthy as possible and take care of yourselves so you have minimal health-care costs in retirement.”
Health-Care Costs: A Planning Primer
- The good news about health-care costs is that you can plan for them. Here’s how: First, forget “the number:” Experts suggest breaking costs down with your clients rather than telling them health care in retirement can cost hundreds of thousands of dollars. “There’s a danger in using a number because it seems so insurmountable,” says Bill Hunter, director of personal retirement product management for Bank of America Merrill Lynch. Instead, frame it as a monthly expense. GoodCare.com, a health consulting firm, puts “routine” expenses for people with average incomes at $6,000 to $6,500 per year for Medicare premiums, co-payments, supplemental coverage and dental and vision services.
- Start early: When your clients are in their 40s, put health insurance and long-term care on the table, according to GoodCare.com founder Kathryn McCabe Votava. Also, have clients track their health-care expenses.
- The Medicare hit: As your clients move toward Medicare enrollment, study their tax returns to see if you can help them adjust their income downward. “Medicare premiums are tiered according to income,” says Votava. “A lot of people are getting caught unprepared.” The lowest tier: a modified adjusted growth income of $170,000 for a couple filing jointly or $85,000 for singles.
- Enrollment alerts: Within one or two years of a client’s 65th birthday, alert them about Medicare and Social Security selections as a way to drive conversation. Some advisors have the alerts built into their CRM systems.
- Buyer beware: Many advisors steer clients away from Medicare Advantage coverage. “On the surface they look like the most reasonably priced, often offering wrap-ins like a gym membership, vision and hearing care,” says Clarissa Hobson, a certified financial planner with Carnick & Co. in Colorado Springs, Colo. “It looks like you’re getting all these extras but the coverage lacks.” As examples, the Advantage plans will dictate which physicians you can see and, if you require a doctor’s attention outside of your home state, the coverage may not apply.
- The fine print: Make sure your clients check their medical bills against the “Explanation of Benefit” forms produced by their contract provider. “We see mistakes all the time,” says advisor Neil Finestone, CEO of Finestone Partners in Beverly Hills, Calif. “We see a lot of inaccurate billing for services supposedly covered at a contracted rate. How many errors go undetected?”