Aging baby boomers are waking up to the fact that Medicare will not pay significant parts of their health care costs once they retire. Additionally, the decline of employer-paid retiree health plans, skyrocketing medical costs and longer life spans are creating worries for many of them.
But these factors also are creating a growing market for products to help boomers plan how they will pay for health care costs after they stop working.
Those costs could spawn an estimated $80 billion in revenues and $12 billion in profits for health insurance companies and other financial services firms by 2014, says an analysis by the consulting firm McKinsey & Company Inc., New York.
What’s needed are health insurance products, advisory services and distribution resources to handle that demand, according to a recent report by McKinsey consultants Lynn Dorsey Bleil, Gregory C. Lewis and Shubham Singhal.
They cite an earlier McKinsey survey of consumer retirement concerns that found health and medical costs to be respondents’ third-greatest concern, after poor equity market performance and high inflation.
The last McKinsey survey found boomers are so concerned about health care following retirement that they are ready to firm up their financial planning for post-retirement health needs five to 10 years before they actually leave the work force. But they are finding that type of expert advice in short supply. This represents an opportunity for carriers and advisors willing to develop the products and expertise to help, the report suggests.
“Our research indicates that pre-retirees are three times as likely as people who already are retired to seek out financial advice and twice as likely to express interest in purchasing products that mitigate risks related to health care costs,” the authors state.
Medicare Part D will still leave boomers vulnerable to high drug costs following retirement. Premiums would average about $375 annually, while a retiree with $2,600 in drug expenses each year could pay up to half that bill themselves, the authors point out.
These and other health care costs represent opportunities for companies willing to devote resources to plan the needed products and develop customer service distribution organizations to serve those needs, the report says.
Health savings accounts are one answer, but qualification rules and limits on HSA account size mean they are not a definitive solution, the authors note.
Long term care and critical illness insurance can help, too, but are also not a complete answer.
“These products come with limits on how and when consumers can buy them and are of little value for managing the delivery of care and for helping to stretch the consumers’ health care dollars,” the authors argue.
To meet the growing need for advice on managing health care costs, insurers can build on their expertise in managed care while creating brand awareness and transforming operations to serve individuals, not just groups, the authors advise.
For example, they suggest, critical illness, accident and long term care products can be packaged with elements of managed care, such as network discounts at assisted living facilities and flexible payment options.
For more routine medical expenses, in addition to HSAs, employers can be encouraged to open voluntary employee beneficiary associations designed to pay for health care costs after retirement–such as insurance premiums.
Prepaid discount cards for health care provider networks are another option.
To market such products successfully, health insurers also would need advisors trained to plan for post-retirement health care needs, the report says.
Because they already are selling in the workplace, health carriers are well situated to reach these boomers, the authors point out. Health insurers’ existing relationships with employers and access to employees put them in a strong position to reach large numbers of pre-retirees with products designed to serve individuals and their families.
“Most people planning for retirement prefer to get their advice in person, and more than half of the pre-retirees we surveyed prefer to receive it in the workplace,” the authors conclude.
They also recommend that insurers develop a specialized retirement health advisory sales force, use direct marketing for simple products such as discount cards and consider partnerships with third-party financial advisors.
McKinsey found only 38% of advisors were prepared to deliver advice about health care, compared to 82% who were able to advise on planning for risks like inflation, poor equity market performance or the possibility of outliving assets.
Both financial services firms and health insurers need to be able to build the ability to offer health cost management advice, McKinsey concludes.
“As compared with health insurers, financial advisors may have a good understanding of a consumer’s finances, but they lack deep insight into health risks–insights required for comprehensive planning,” the authors conclude. “Financial advisors and health insurers should, thus, consider partnerships.”