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Life Health > Health Insurance > Medicare Planning

As Medicare Premiums Whipsaw, Focus on the Big Picture

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What You Need to Know

  • Medicare Part B premium increases make the headlines.
  • Medicare deductible changes get less media attention.
  • Other changes in out-of-pocket costs? Crickets.

With the industry starting to focus on 2024 Medicare premium increases, it’s important to see the forest, not just the trees.

As advisors know, Medicare can be a bear for its complexity.

The Trees

There’s not only the alphabet soup of Part A, B, C and D, but also the sub-alphabet of supplemental insurance programs, as well as the annual changes to premiums and to Social Security benefits from which, for most of your clients, Part B is deducted.

That’s before advisors take a deeper dive into the role of modified adjusted gross income (MAGI) on potential surcharges, along with its two-year look back on income, rules around enrollments, and variables based on state of residence. Then there are the relative merits of Original Medicare versus choosing a Medicare Advantage program.

Given this context, it should be no surprise that a narrow focus on annual changes to premiums alone risks missing the bigger picture.

The Forest

You also need to take Part D premiums, supplemental insurance, out-of-pocket (OOP) costs, and premiums related to dental, vision and hearing into account. All of those come out of your clients’ retirement budgets.

Based on the 2023 numbers, once you include all of the costs, Part B premiums account for only around 14% of a retiree’s health-related expenses.

The Forest, Over Time

Annual changes to premiums and benefits matter to clients.

But, for planning purposes, they need to be seen in context.

Whipsawing premiums — currently driven by inflation and expectations around the cost of Alzheimer’s drugs — underscore the need for a longer-term and holistic perspective.

Looked at over two years, 2023′s 3.06% Part B premium decrease and 2022′s Part B premium increase of almost 14.55% represent an average increase of 5.74%.

Over the last four decades, health care costs have risen about 1.5 times as fast to twice as fast as the Consumer Price Index, or CPI.

And, for another reality check, although the Inflation Reduction Act’s reduction of catastrophic prescription spending maximums to $2,000 and reduction in insulin costs will be beneficial for some clients, they will have a limited impact for most.

The price control negotiation process the Biden administration announced this week for 10 of a planned 25 drugs will help reduce expenses for many more retirees, with a range of health conditions.

How to Watch What’s Happening

With out-of-pocket costs for medications accounting for an average of 20% of all retirement health care expenses (including premiums and OOPs), these changes need to be seen in the context of overall costs and the variables that need to be considered.

This is not a simple task.

My firm offers a health cost planning tool. To make that work, we draw on data from 530 million medical claims, annual program changes, government projections, actuarial data, Medicare premium inflation figures, supplemental insurance cost figures, and out-of-pocket costs for hearing, vision and dental expenses to provide dynamic projections of annual and lifetime expenses.

These costs will be incurred over time, and that in itself is another important reason for taking the long view.

Funding

For advisors and clients, what may be most important is determining the savings required to generate enough income to match a client’s health care expense decumulation curve.

Exclude Medicare Part B premiums, which will be deducted from Social Security benefits.

If you leave out Part B costs, the present value of the other retirement health care costs for an average, healthy 65-year-old male/female couple retiring in 2023 and living to age 87 will amount to $376,872.

If the clients will be making annual withdrawals to cover health care costs starting this year, and we assume a 6% return on the portfolio, the clients will need to have $260,995 in the portfolio today to fund the projected care costs.

Market performance, asset allocation, changes to annual Medicare premiums, and a client’s health condition will affect the amount of savings needed to address additional health care expenses.

As we discuss in our new white paper “Automating Retirement Planning & Decumulation to Address Healthcare (and Other) Expenses,” automation provides the key to taking all of these factors into account, to generate reliable data for planning, to help clients understand if their portfolios are fully funded, and to set withdrawals to match annual expenses.

A comprehensive view of retirement health care costs, combined with the efficiency automation brings to the projection of expenses, the planning process and the decumulation process, offers a path to more successful retirement outcomes and to freeing up advisors’ time to focus on strategies for achieving those outcomes.


Ron Mastrogiovanni (Photo: HealthView)Ron Mastrogiovanni is the CEO of HealthView Services, a provider of the Health Planner Plus system and other retirement, health care, Social Security, and long-term care data and planning tools.


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