5 Key Retiree Healthcare Trends

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Healthcare expenses are one of the largest line items in many retiree budgets. Joining me to discuss five key statistics in the realm of retirees and healthcare spending is Mark Miller. He is a Morningstar.com contributor.

Mark, thank you so much for being here.

Mark Miller: Thanks for inviting me.

Benz: Mark, on your website RetirementRevised as well as on your newsletter, which is also called RetirementRevised, you spend a lot of time on various aspects of retirement planning. One of the key ones that you focus on is healthcare spending. You brought five statistics that relate to trends in retiree healthcare spending; one is projection from a group that does research into this topic: 4% projected annual increase in overall healthcare outlays over the next decade.

Miller: Well, 20 years. The forecast changes every year, right now the current projection is 4.2% annually.

Benz: So, higher than the general inflation rate?

Miller: Higher than general inflation. Interestingly, their forecast moved down a little bit this year for the next two decades from 5.4%, mostly because of moderation in the cost of prescription drugs. That might surprise a lot of people since there is so much talk out there about the soaring cost of drugs. But it depends which segment of the drug business you're talking about. You know there are lots and lots of drugs that have gone generic, the most commonly taken medications for things like high cholesterol, blood pressure, and the like that the costs are extremely low. So, more and more of that. You still have expensive new drugs coming on--biologics and the like--but that's moderating costs as a general matter. So that that was good news.

I mean, another general good news point I would make about the cost of healthcare in retirement is that much of it is insured costs, not all but a lot of it is covered under Medicare which has the effect of making these costs more predictable and smoother, which is what insurance does. That's something you can obviously keep in mind. Could you hear these very scary numbers out there about the lifetime costs will be this hundred thousands of dollars …

Benz: $270,000 for married couple.

Miller: Yeah, maybe, but you're not paying it all out at once so let's not go too far with that.

Benz: Right. Another point that I think is worth making is that they're not brand new costs; you may have paid them through your paycheck in the past, but most of us did have some healthcare costs prior to retirement.

Miller: Yeah, but like even the projections from age 65 or in retirement, some of the numbers can look quite daunting.

Benz: Yeah. Let's look at another statistic. This one really jumped out at me--48% is the amount of Social Security income that is expected to be consumed by healthcare expenses?

Miller: This is always an interesting number. This study that we're talking about comes from an outfit called HealthView Services, which has made its whole business around analyzing these issues of healthcare costs in retirement. Looking at it as a share of Social Security income is a great way to do it I think because for so many people Social Security is the key source of income in retirement. The cost of your Part B premium for outpatient services comes out of your Social Security benefit. So there is very much of a direct relationship. 

The calculation here is that for healthy 66-year-old couple retiring this year, lifetime healthcare expenses will consume 48% of those benefits. They take it down the path to look at well what does it mean for healthy 55-year-old couple today and so forth. For a 55-year-old healthy couple looking down the road of retirement, the projection is that healthcare will eat 57% of Social Security benefits. For the healthy 45-year-old couple, 63%. You kind of see that there is this unhealthy trajectory going on in terms of the escalating costs of healthcare.

Benz: Right. Let's discuss a related topic which is long-term care expenses. Genworth comes out with its annual study that unpacks various numbers related to long-term care--3% growth in overall long-term care costs as of …

Miller: When you lump together all these potential services and average it out.

Benz: Okay, so…

Miller: 3% from last year to this year.

Benz: People receiving care in all types of settings.

Miller: Yeah, so a little higher than general inflation.

Benz: Let's take a look at another number related to long-term care--7% increase, this is a big one, in terms of assisted living costs?

Miller: Yeah, big one and that's triple the rate of inflation. Semi-private room, Genworth says, the average increase was 4%. We've got several that are well outside of inflation.

Benz: Before we go too much further for people who aren't steeped in the long-term care lingo, people might be confused about the difference between a nursing home and assisted living. Can you quickly unpack what the distinction is?

Miller: Different levels of care; they're often provided in the same facility. Assisted living is somewhat lighter amount of medical attention, a little bit more independence. But it's I would say, nursing home light, whereas nursing home is the most intensive services. They are often provided in the same physical setting, but just segregated.

Benz: And increasingly people want that sort of seamless transition from one need of care to another.

Miller: Exactly.

Benz: Mark, let's talk about those long-term care expenses. Those are higher than the general inflation rate. Any conjectures about some of the things that are driving those costs higher?

Miller: Well, Genworth conjectured about it in the study, which was interesting they turned up. One thing that they pointed to was a shortage of skilled labor that's driving up wage costs in the industry. This is based on their conversations with care providers. The labor market, as we know, is much, much tighter than it had been over some of the last decade. I suspect, this is just personal conjecture now though, that tighter immigration policy is a factor, since the significant part of the long-term care workforce is immigrant. That could be playing a role. Genworth doesn't say so one way or the other. But that would be my conjecture on it. Then they pointed also to some regulatory issues in the background that may be increasing costs for some of these facilities.

Benz: Daunting statistics overall. Can you provide any guidance for retirees who are attempting to kind of plan for some of these expenses? You mentioned that looking at those very big ticket total healthcare outlays maybe sort of counterproductive. But do you have any sort of advice on how people should approach this?

Miller: As we've discussed before the long-term care insurance market, the commercial market, is not in great shape. There has been a lot of players that have stopped writing new policies, costs have been going up in some very unpredictable ways. You wrote this really interesting column recently, I thought, about the question of self-funding or self-insurance, pointing out I think rightly that it's not really self-insurance …

Benz: If you're the only one in the risk pool, what's the point, yeah.

Miller: Yeah, that's a risk pool of one. But that self-funding is something that one can do. I think that's out of reach for most households, as you pointed out in the piece, you've got to set aside about $2 million to make this work.

Benz: Well, it depends. But, yes, given these inflation rates the numbers can inflate in a hurry if, say, you're in your 50s and you're trying to plan for costs 30 years from now.

Miller: Right. Nonetheless personal assets certainly are way to go. Some people look at their home as an asset that can be translated into funding a need of this type. You could use different types of annuities, for example, a deferred income annuity might be an appropriate way to bolster income in the out years. There is the self-funding approach. 

I always say that I think long-term care is sort of the missing piece of the puzzle in our health insurance in retirement. A lot of attempts have been made to get at this. How do we do a better job of smoothing out the risk and we don't have good answers yet. 

A really reasonable approach in my mind would be adding a basic benefit in Medicare that would cover just basic level of risk, and then let people add supplemental coverage to that, much as they do in Medicare with Medigap. I think actually it would be really a great move both in terms of giving people peace of mind; I think it would give a shot in the arm to the commercial side of this business, because all of a sudden you'd have this massive public platform focused on insuring against this risk. But Congress hasn't listened to me on this yet.

Benz: Mark, it's always great to get your perspective. Thank you so much for being here.

Miller: Thanks, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.