A question that every federal employee approaching retirement within the next 10 years should be asking: “How much can I expect to spend in health care-related expenses during my retirement years?”
There are no lack of estimates out there to help answer employees this question. Some estimates are too high and some are too low. But for most federal employees retiring in the near future, the situation could be worse, as will be explained in this column.
As an example of expected health-care spending for retirees, earlier in 2019 Fidelity Investments published its annual estimate showing that a 65-year-old couple retiring sometime in 2019 can expect to spend $285,000 in out-of-pocket health care- and medical-related expenses throughout their retirement.
The Employee Benefit Research Institute (EBRI) recently estimated that a 65-year-old couple in a worst case scenario would need during these their retirement years nearly $400,000 to meet out-of-pocket health care and medical expenses.
3 Sources of Medical Expenses to Consider
There are three sources of medical care that could result in federal retirees spending more than expected for medical care during their retirement years.
Health Care Cost Inflation
The first source is general health care inflation which in the past has exceeded the cost-of-living adjustments (COLAs) that CSRS and FERS annuitants receive most Januaries. Healthview Services, which publishes an annual report on health care costs, projects that retirement health expenses will rise at an average annual rate of 4.22 percent, outpacing general inflation and Social Security COLAs. In comparison, in January 2019 CSRS annuitants received a COLA of 2.3 percent and FERS annuitants over the age of 62 received a COLA of 2.0 percent. During 2017 and 2018, CSRS and FERS annuitants receive COLAs of 0.3 percent and 2.0 percent respectively. These are examples of three years in which CSRS and FERS annuities did not keep pace with the increasing cost of health care.
An important proxy for the 4.22 percent increase in health care expenses is the increase in Medicare Part B premiums. The Medicare program’s trustees recently forecast that the Medicare Part B premium for the first income tier of Part B recipients will increase nearly 7 percent in 2020, from $135.50 per month in 2019 to $144.30 per month in 2020. Part B premiums are forecast to increase more significantly in the years ahead to $226.30 in 2028.
But federal annuitants are better off when it comes to paying for their health care expenses compared to retirees who worked in private industry. Unlike most individuals who work and then retire from a job in private industry, federal annuitants can keep their health insurance benefits (the Federal Employee Health Benefits or FEHB program) in which the federal government pays on average 72 to 75 percent of the annuitant’s FEHB program premiums throughout his or her retirement. This could reduce a federal annuitant’s (and spouse’s if married) expected out-of-pocket health care expenses during retirement by 50 percent.
But federal annuitants need to be concerned with other health care-related expenses; namely, the cost of long term care and prescription drugs.
Cost of Long-Term Care
Planning for possible future long term care (LTC) expenses is a real challenge. Perhaps the biggest challenge is overcoming the emotional issues it raises for individuals and the difficulty in getting a handle on the actual risk of needing prolonged LTC.
Rand Corporation research concludes that 56 percent of individuals between the ages of 57 and 61 will spend at least one night in a nursing home during their lifetimes. These same individuals will have a 10 percent chance of spending three or more years in a nursing home and a 5 percent chance of spending more than four years in a nursing home.
In dollar terms, the longer stays in a nursing home pose major financial risk. According to Genworth’s annual cost of LTC survey, the median annual cost of a private nursing home in 2019 is just over $100,000. In some states, such as Alaska, California, Maryland, Massachusetts, New Jersey, New York, Washington and the District of Columbia, the LTC costs are on the average higher.
There are ways to pay for future LTC expenses. One of these ways is through LTC insurance. But LTC insurance has never caught on as a widespread solution to the problem of paying for LTC. Only 8 percent of individuals in this country have purchased LTC insurance. Federal employees and annuitants are eligible to apply for the Federal government-sponsored Federal Long Term Care Insurance Program (FLTCIP) (www.ltcfeds.com). Like many individual and group LTC insurance plans, the FLTCIP has become fairly expensive in recent years. Many annuitants who applied for the program in earlier years and were approved for coverage cannot now afford the premiums and have dropped out of the program. Other annuitants and employees who are thinking about applying for it are not because of the rising premium costs. With fewer insurance companies offering individual LTC insurance, employees and annuitants have almost no affordable method to pay for their future LTC costs through LTC insurance.
In its place, a federal employee’s financial assets should be considered, both as a source of income and a contingency reserve for paying larger, unexpected health care expenses such as LTC. For example, employees may want to set aside as their “rainy day” LTC account part of their Thrift Savings Plan (TSP) in case they need those assets to pay for LTC. Taking home equity into account as well as the possible addition of private fixed income annuities to help pay for possible LTC would be useful. Finally, federal employees and annuitants should keep in mind possible LTC costs in determining when to start receiving their Social Security retirement benefits. To maximize their Social Security retirement monthly check, they will need to wait until age 70 to start receiving their Social Security. If they do wait until age 70 and then live until at least age 82.5, actuarially they would have made the right decision. Keep in mind that most individuals who need LTC will start such care starting at about age 82 to 85.
Cost of Prescription Drugs
Most health insurance plans under the FEHB program do an adequate job of covering most routine federal annuitant’s prescription drug expenses. Federal annuitants over the age of 65 are not required to enroll in Medicare Part D (the Medicare prescription drug program). But it is reassuring that if a Federal annuitant and spouse over the age of 65 have to enroll in Medicare Part D as a result of incurring catastrophic drug expenses, they may do so during a Medicare Part D “open season” and not be subject to a late enrollment penalty. The reason for the no penalty is because the FEHB program is conserved as “creditable” for the purpose of prescription drug coverage.
Federal retirees need to be aware that there is that small but real risk of financial ruin for annuitants who will need expensive specialty prescription drugs. While a Kaiser Family Foundation report found that risk will impact a relatively small number of retirees, those who are affected could face serious financial problems.
If an annuitant does in fact incur a need for specialty prescription drugs, they most likely will have to enroll in Medicare Part D. But unlike most employer-sponsored health insurance plans, Medicare Part D does not impose a cap on the total out-of-pocket expenses an enrollee must pay each year for expensive prescriptions. While this was a minor problem when the Medicare Part D program started in 2006, the introduction and advent of very expensive specialty prescription drugs has changed the situation. The Kaiser Family Foundation study illustrated the expected annual out-of-pocket costs for 30 specialty drugs treating four conditions: Cancer, Hepatitis C, Multiple Sclerosis and Rheumatoid Arthritis. Median out-of-pocket costs ranged from $2,622 for Zepatier used to treat Hepatitis C, and $16,551 for Idhifa used to treat leukemia.
While Medicare Part D covers most outpatient prescription drugs, there are high deductibles and a 25 percent coinsurance, up to an initial coverage limit of $3,820 (during 2019) in the total out-of-pocket spending amounts. In particular, once prescription drug spending reaches $3,820 (at which point the coverage gap begins) a Medicare Part D enrollee will pay 25 percent of the Part D’s prescription plan costs for covered-brand name prescription drugs and 37 percent of the prescription plan’s cost for generic drugs. The amount paid by the enrollee – as well as any discount paid by the drug company – count as “out-of-pocket” spending, helping the Part D enrollee get out of the coverage gap.
Federal employees and retirees should beware that it is difficult to protect against the risk of the need for expensive specialty prescription drugs. Medicare Part D plans charge similar monthly premiums for specialty drugs with 25 percent to 37 percent coinsurance. It is also difficult to predict a need for one of these specialty drugs ahead of time.
Like preparing to pay for possible LTC costs, employees and annuitants are encouraged to set aside part of their TSP and IRAs and other savings to pay for possible catastrophic prescription drug expenses. In so doing, they can protect themselves and their families and hopefully avoid financial ruin during their retirement years.