Health care-related expenditures have been, and continue to be, one of the biggest expenditures a retiree will face during his or her retirement years.
A 65-year-old who retired in 2020 can expect to spend $295,000 in health care and medical expenses during a retirement lasting on average 20 to 25 years 1 . This does not include the additional cost associated with long-term care. As an example of long-term care costs, according to long-term care insurance company Genworth, the annual median cost for a private room-stay in a nursing home in 2020 was $105,852 2 .
There are three drivers of rising medical care expenditures that are contributing to the challenge of paying for health care in retirement. The first driver is general health care inflation which in the past has exceeded the cost-of-living adjustments (COLAs) that Social Security recipients and CSRS and FERS annuitants receive in most years.
For example, during the year 2020, general health care-related costs increased on the average 6 percent. In comparison, in January 2021, CSRS and FERS annuitants and Social Security recipients received a COLA of 1.3 percent.
During 2019 and 2020, CSRS and FERS annuitants received COLAs of 2.0 and 1.6 percent, respectively, while health care-related costs increased on average 4 to 6 percent each year during 2018 and 2019. These are examples of years in which monthly CSRS and FERS annuities and Social Security monthly retirement benefits did not keep pace with the annual increasing cost of health care.
Contributing to part of the 6 percent increase in health care-related expenses during 2020 was the increase in monthly Medicare Part B premiums. Most federal annuitants over age 65 and their spouses are enrolled in Medicare Part B (Medical Insurance).
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The Medicare program’s trustees had forecast that the Medicare Part B premium for the first income tier of Part B recipients would increase nearly 7 percent in 2020, from $135.50 per month in 2019 to $144.30 per month in 2020. During 2021, the first income tier Medicare Part B premium cost increased to $148.50, an increase of 2.91 percent from the 2020 first income tier premium cost of $144.30. Note again that the 2021 Social Security COLA (most Medicare Part B enrollees have their monthly Part B premiums deducted from their monthly Social Security retirement check) was 1.3 percent.
While not required, federal annuitants when they become age 65 are highly encouraged to enroll in Medicare Parts A and B. The reason is that between being enrolled in the Federal Employees Health Benefits (FEHB) program and Medicare, a federal annuitant will minimize and more likely eliminate any out-of-pocket health-care related expense including deductibles, co-insurance and co-payments for doctor, hospital, and lab bills.
But federal retirees are in fact better prepared and able to pay for their health care expenses during their retirement compared to individuals who worked and retired from private industry employment.
The reason is that unlike most individuals who work and retire from private industry employment, federal employees are eligible to keep their group health insurance (offered through the FEHB program) throughout their retirement in which the federal government pays on average 72 to 75 percent of the federal retiree’s (and spouse’s) FEHB program premiums throughout retirement. The federal government’s contribution towards the cost of a retiree’s health insurance premiums throughout retirement can reduces a federal annuitant’s (and spouse’s FEHB premiums if married) expected out-of-pocket health care expenditures during retirement by at least 25 to 50 percent.
But federal annuitants should be concerned with the other two drivers of increasing health care expenses: namely, the cost of long-term care and prescription drugs.
The cost of long-term care (LTC) can be expensive and varies greatly depending on the type of LTC (institutional care versus non-institutional care) an individual needs, the place or setting in which the care is provided, and the area of the country in which an individual resides. Planning for possible future LTC expenses can be a challenge. Perhaps the biggest challenge in addressing one’s possible future LTC needs is overcoming the emotional issues LTC raises for individuals and the difficulty in getting a handle on the actual risk of needing prolonged LTC.
Rand Corporation research concluded 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, longer stays in a nursing home can pose a major financial risk. According to Genworth’s annual cost of LTC survey, the median annual cost of a private nursing home during 2019 was just over $100,000. In several states including Alaska, California, Maryland, Massachusetts, New Jersey, New York, Washington and the District of Columbia, the annual private nursing home expenses average close to $150,000. With a nursing home stay of 3 to 5 years, total costs are over half a million per individual.
There are ways to pay for possible future LTC expenses. One way is through LTC insurance. But LTC insurance has never caught on as a widespread solution to the problem of paying future LTC expenses. Only 8 percent of individuals in the US have purchased LTC insurance. Federal employees and annuitants are eligible to apply at any time 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 retiree’s financial assets should be considered, both as a source of income and a contingency reserve for paying larger, unexpected health care expenses including LTC expenses. 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 purchase of private fixed income annuities to help pay for possible LTC would be useful. The advantage of using one’s own assets (“self-insuring” for possible LTC expenses) is that if one does incur a need for LTC – for example, dies, then these assets can be passed on to beneficiaries).
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 in their early to mid-80’s.
Most Americans are well aware that prescription drugs are expensive. How expensive? According to the nonprofit research organization Rand Corporation, prescription drugs in the United States on average cost around 2.5 times more than those same drugs do in other Western countries.
Most health insurance plans under the FEHB program do an adequate job of covering most “routine” federal retiree prescription drug expenses such as medication for high blood pressure. 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 has 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.
But federal retirees need to be aware that there is always a chance of their needing expensive specialty prescription drugs to treat certain health problems including cancer. Many of these specialty prescriptions can cost in order of thousands of dollars and are not covered, or covered to a small extent, by most FEHB program plans. 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 and possible financial ruin including bankruptcy.
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 expensive specialty prescription drugs has changed the situation.
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 $4,130 (during 2021) in the total out-of-pocket spending amounts. In particular, once prescription drug spending reaches $4,120 (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 annuitants should be aware 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 a portion of their TSP and IRAs and other savings to pay for possible catastrophic prescription drug expenses. Another recommended and tax-beneficial way to pay for health care expenses in retirement is through a health savings account (HSA). In so doing, they can protect themselves and their families and hopefully avoid financial ruin during their retirement years. An HSA must be funded before an individual enrolls in Medicare. In addition, the individual must be enrolled in a high deductible health plan (HDHP).
