Money & Policy

5 Ways to Avoid High Retirement Health Costs

Follow these tips to calculate and save on future health care needs

Much is made about what health care might cost in retirement. Indeed, studies suggest that a 65-year-old couple retiring today would need on average anywhere from $220,000 to $360,000 of their nest egg earmarked just for healthcare costs in retirement.

But the truth of the matter, as Medicare’s annual enrollment period gets underway, is that those costs might be even higher given a number of factors that could come into play in your household. What are they and what might you do to either avoid or trim higher-than-expected health care costs in retirement?
According to Paula Muschler, an operations manager as Allsup Medicare Advisor, a provider of Social Security and Medicare services for individuals based in Belleville, Ill., where you live, your income level, which plan you choose and your health can all play a role in what you end up paying for health care in retirement. “That’s why it’s critical to use the opportunity in both the years ahead of retirement and the months before you turn 65 to study your options,” she said.
“The health care landscape is changing rapidly and consumers face more choices and more responsibilities,” said Ceci Connolly, the managing director of PricewaterhouseCooper’s Health Research Institute, which provides intelligence, perspectives, and analysis on trends affecting all health-related industries. “That means educating oneself and staying current is more important than ever.”
Save for Health Care Costs Before You Retire
One way to cut or reduce your health care costs in retirement is to start saving for those expenses long before you retire. “For those with years before retirement, now is the time to save for health care,” said Muschler.
Others share that point of view. “If at all possible, proactively save for retiree health care expenses while active, said John Grosso, leader of Aon Hewitt’s Retiree Health Care Task Force, a Lincolnshire, Ill.-based consulting firm. He advised contributing the maximum amount to your tax-favored retirement accounts, such as your IRA, 401(k) and 403(b), while actively employed.

(MORE: Women: Get Real About Retirement Health Costs)

In addition, consider using a high-deductible health plan with a Health Savings Account (HSA). Grosso recommends contributing each year the maximum into an HSA, which allows tax-free savings and tax-free withdrawals for health care expenses.
Pre-Medicare, Grosso noted that retirees can withdraw funds from their IRA, 401(k), 403(b), etc., use them to fund the HSA and “wash out” the taxation so that these assets are never taxed, if used for qualified health care expenses. “This is something retirees need to take advantage of to secure a “federal health care subsidy” through the tax code,” he said.
By the way, only a small segment of seniors — 29 percent of women and 35 percent of men — set aside retirement funds for health care costs, according to Allsup’s research. “This can be critical because Medicare coverage can have significant out-of-pocket costs for beneficiaries,” she said. “Depending on the Medicare plans someone chooses, their premiums, deductibles and out-of-pocket costs can amount to hundreds or thousands of dollars a year.”
People, Muschler said, also should address health care planning during their retirement discussions with their financial planners. Just 29 percent of women and 27 percent of men do that today, according to Allsup research.
High Income Equals More Expensive
Like it or not, your Medicare Part B and Medicare prescription drug coverage (Part D) become even more expensive when you are what’s called a high-income beneficiary. To be fair, just 5 percent of Americans older than 65 fall into this category, according to Ross Blair, senior vice president of eHealthMedicare.com, a San Francisco-based provider of health insurance plans.

(MORE: How to Get the Most Out of Your Health Savings Account)

But if you are among that group, here’s what you can expect:
If you file your taxes as married filing jointly and your modified adjusted gross income (adjusted gross income plus tax-exempt interest income) is between $170,001 and $214,000, you’ll pay 40 percent more for your Medicare Part B medical insurance than if your income was $170,000 or less. Plus, you’ll pay an additional $11.60 per month on top of your plan’s Part D premium.
And if your income is above $428,000, you’ll pay more than three times for your Medicare Part B than the average American and another $66.60 per month on top of your plan’s Part D premium.
How to Avoid or Reduce Extra Costs
One way to mitigate costs is to revisit what’s called your Income Related Monthly Adjustment Amounts (IRMAA) determination, especially if you experience a big change with your income as you age, said Muschler. This refers to premium increases that Medicare charges beneficiaries who have income levels over income thresholds.
According to Muschler, IRMAA uses someone’s modified adjusted gross income from two years prior to determine if they have to pay the higher premium. “So, if you were working then and had income, for example, of $150,000 but have since retired and your income has dropped to $50,000, you could be charged the higher premium unless you seek an IRMAA reconsideration,” she said.
In addition to retiring or reducing your work income, other life changes, such as death of a spouse or divorce, may allow you to seek an IRMAA reconsideration and reduce your Medicare costs because of a reduction in your income, said Muschler.
Barry Picker, of Picker & Auerbach, CPAs, a Brooklyn, N.Y.-based accounting firm, said people with large retirement distributions can take the hit one year with a Roth conversion and reduce modified adjusted gross income in prior years. “Also, I believe that if you have a one-year jump (in modified adjusted gross income), say because one sold their residence at a large profit, you can appeal the increase. Plus, people may be able to manipulate income without reducing it by bunching income every other year. “That might save some money,” said Picker.
If you had a major life-changing event and your income has gone down, you may use the Medicare form, Medicare Income-Related Monthly Adjustment Amount—Life-Changing Event, to request a reduction in your income-related monthly adjustment amount.
Pick the Right Coverage and Plan
According to Blair, Medicare beneficiaries may want to enroll in additional coverage through private insurance plans since original Medicare (Part A and Part B) doesn't cover all health care costs or most prescription drug costs. These plans, said Blair, include Medicare Advantage (Part C) plans, Medicare Part D prescription drug plans and Medicare supplement (Medigap) plans.
“The type of coverage a beneficiary should enroll in depends on their own needs and budget,” said Blair. “For example, a beneficiary may be interested in a Medicare Advantage plan because it can come with additional benefits such as vision, dental, and/or hearing benefits,” he said. “These plans can also combine health and drug coverage into one plan with one monthly premium, which could be as low as $0 a month. The beneficiary would still be responsible for their Part B premium.”
On the other hand, Blair said a beneficiary could be interested in a Medicare supplement plan, such as the standardized Medigap Plan F, which is available in 47 states and the District of Columbia (not Massachusetts, Minnesota or Wisconsin).
Medigap Plan F, which generally covers all eligible health care costs after the beneficiary has paid for his/her premium, could be a good option for beneficiaries looking to get comprehensive coverage, Blair said. “It is important for beneficiaries to understand their options and select the right type of coverage for their individual needs,” he said.

Consider Medicare Advantage Part D Plans
Grosso suggests that you consider Medicare Advantage Part D plans. “There are a wide variety of options, plan designs, and premiums in the market and many can offer very valuable coverage at cost-effective prices,” he said. “Medicare allows retirees to change these plans each year without penalty during the open enrollment period so retirees need to take advantage of this opportunity at times to move to plans providing better value.”
Gross said comprehensive Medigap plans will make sense for those with significant ongoing health care needs, but too often retirees elect these plans just because they are comprehensive and ‘over-insure’ themselves, which results in retirees spending more than they should on premium costs. “Medicare Advantage is typically the better deal,” he said.
Even after a beneficiary has selected what type of coverage is right for them, selecting the right plan is also important, said Blair. “These plans are offered by insurance companies nationwide, and the availability and coverage associated with these plans will vary by state and county,” he noted.
In the main, experts recommend that you shop around for the best health care plan each year and be willing to change carriers, if needed, to get the best deal. “‘Patients’ are becoming ‘customers’ and that means they need to hunt for good value from the health industry,” Connolly said. “That means demanding useful comparison data on cost and quality. We all need to be savvier health care shoppers in the same way we shop for cars, appliances, hotels and other services.”
“It’s important for beneficiaries not to get fixated on the premium charged by their plan, but rather to compare the total annual cost of coverage, which includes premium as well as all applicable deductibles, co-pays and coinsurance amounts for the medications they take,” Blair said.

Shop Around for the Best Drug Plan 
Of note, 78 percent of Medicare beneficiaries do not compare prescription drug plan prices when shopping for plans, and that could cost them, according to a recent eHealth study.
It’s especially important to shop for the right plan during the Medicare annual enrollment period, which runs from now through Dec. 7. During that time, eligible beneficiaries can enroll in any Medicare Advantage and/or Part D plan of their choosing as long as they live in the contract area of the plan, Blair said. “Unlike more traditional health insurance, Medicare plan availability, costs, and benefits change each year,” he noted. “Your own budget and health/medication needs may also change each year. Hence, the right plan for you one year may not necessarily be the same plan in the following year.”
Muschler agrees that it’s important to use Medicare’s annual enrollment period each year to review your options and switch to plans that better meet your needs and at a lower cost. “Many people continue with the same plan year after year, even when another plan with lower costs and coverage better suited to their needs is available,” she said.
In addition, Blair recommends that beneficiaries compare their 2014 Medicare plan options during the Medicare annual enrollment period to make sure that they are enrolled in the right coverage for them next year. He suggests reviewing during Medicare’s annual enrollment period all your health care expenses, including doctor, prescriptions, vision and dental care, to determine if it might make sense to switch from a low-premium plan to a higher-premium plan that results in lower overall costs.
More Ways to Trim Retirement Healthcare Costs
So what else can you do to trim healthcare costs in retirement?
  • Enroll in the right Part D plan. “The average beneficiary could have saved over $600 in 2013 on their Medicare prescription drug costs by enrolling in the Part D plan with the lowest out-of-pocket costs to them,” said Blair. For more on this, read 2013 Medicare Annual Enrollment Period: Eight Costly Mistakes for Medicare Supplement Insurance Customers.
  • Be a smart Medicare shopper when you initially enroll. “Getting a jumpstart with Medicare planning can be important, so you don’t miss any deadlines and incur Medicare penalties, some of which can last your lifetime,” Blair said. “You have three months before you turn 65, the month when you turn 65 and three months after as your initial enrollment period.”
  • Find help from a Medicare specialist. He or she can help you handle a comparative review of your options, Muschler said.
  • Consider using mail order to refill prescriptions with a Medicare Advantage or prescription drug plan. Blair said this is typically the lowest cost way to refill prescriptions. Beneficiaries can often get a 90-day supply of their medication for the same copay as two 30-day refills.
  • Make sure that if the branded drug you’re taking goes generic, the pharmacist immediately switches the prescription to the generic for immediate savings. Blockbuster drugs like Lipitor are already available via generic, but three more popular drugs will be going generic during 2014 — Nexium, Lunesta and Celebrex.
  • Look for health insurance discounts. “Consumers might look for discounts for healthy behaviors — incentives to join a gym, quit smoking, and the like,” said Connolly.
  • If you’re pre-Medicare, review the options available on the 2014 public health care exchanges. You may have an opportunity to secure a federal premium and cost-sharing subsidy based on your income. “Retirees with incomes up to four times the Federal Poverty Level can secure federal subsidies,” Grosso said. 
Location, Location, Location
Where you live or choose to put down stakes could make a big difference in how much pay for health care costs in retirement. “Costs can vary by location, so area is important to some extent with respect to health care costs,” said Grosso.
In its report, Variation in Health Care Spending: Target Decision Making, Not Geography, the Institute of Medicine found that regional differences in Medicare and commercial health care spending and use are real and persist over time. What’s more, the report found there is much variation within geographic areas, no matter how broadly or narrowly these areas are defined.
According to published reports. Hawaii, Vermont, Maine, New Mexico, Idaho, Oregon, South Dakota, Iowa, Montana, and North Dakota are the 10 least expensive states for Medicare costs.
Unhealthy Equals Expensive
It probably won’t surprise you to learn that being unhealthy will cost you in retirement. “Having chronic health conditions can result in high health care costs,” said Blair. “An individual may need frequent care and may need to take medications.”
Blair noted that original Medicare covers some hospital and medical costs, but not all costs and not prescription drug costs. “Hence, it may be important for these individuals to also compare Medicare plans in their area and enroll in one that will help them cover some of the costs related their chronic conditions that are not covered in full by original Medicare,” he said.
Blair noted too that some individuals with chronic conditions may find a Medicare Advantage Special Needs Plan (SNP) to be suitable for their needs. Medicare SNPs, said Blair, are a specific type of Medicare Advantage plan that limit enrollment to individuals with specific diseases and/or chronic conditions, which may include cancer, cardiovascular disorders, dementia, and end-stage renal disease.
Blair said SNPs tailor their benefits, provider networks, and drug formularies to best meet the specific needs of certain group of individuals. 

Consider Your Conditions

There are other things that you can do to trim costs, according to a recent survey from eHealthInsuance.com.
For instance, less than 9 percent of individuals who take prescription medication for diabetes, heart disease, Alzheimer’s disease, and chronic obstructive pulmonary disorder (COPD) are in the Medicare Part D plan with the lowest total out-of-pocket costs available to them, according to review of more 46,000 unique user sessions on eHealthMedicare.com and PlanPrescriber.com.
The eHealthInsurance study, which reviewed unique user sessions that occurred on eHealth’s Medicare plan comparison and enrollment websites, during the 2013 Medicare annual enrollment period, found that 92 percent of Medicare enrollees who take medications for one of these four major illnesses were not in the lowest cost plan for the specific prescription drugs they were taking, according to a release.
The eHealthInsurance study found that individuals taking prescription medications for these specific drugs would save an average of $716 on prescription drugs in 2013 by switching to the Medicare Advantage prescription drug plan or stand-alone prescription drug plan with the lowest total out-of-pocket costs for their medications. 
To be sure, it might seem like a full-time job doing all this work just to cut health care costs in retirement. But doing so will be well worth time and effort, say experts. After all, would you rather spend your nest egg on living or on health care?
Robert Powell is a MarketWatch Retirement columnist. He has been a journalist covering personal finance issues for more than 20 years. Follow him on Twitter @RJPIII.

By Robert Powell
Robert Powell writes about retirement issues for MarketWatch.com and produces the Retirement Weekly subscription newsletter.@RJPIII

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