How do you budget for health care expenses in retirement? It’s a simple question without a simple answer. You know it’s more than just Medicare. You also know that costs will surely rise during your 20-30 year stay in retirement.
Your health care budget can be broken down into three categories: Medicare, supplemental insurance and out-of-pocket expenses. Your Medicare premium, like most things governmental, is complicated to figure out. Medicare Part A is hospitalization and currently there is no premium but there are deductibles and co-insurance.
Part B covers doctors and out-patient services. There is a premium charge for this. You pay a higher premium if you don’t have the premium deducted from your Social Security and you pay a higher premium if last year’s income was above $85,000. You’ll need to check with Medicare for your specific premium but it most likely will be between $96.40 and $115.40 per month. Those making over $85,000 pay more than $115.40. We’ll use $105, or $1,260 a year for our example.
Part C integrates Medicare with fixed payment HMOs and PPOs plans and these premiums vary widely. Finally, Part D covers prescription drugs and the premium varies by the type of coverage but most likely will be in the range of $60-75 a month.
There are a lot of costs Medicare doesn’t cover. Besides co-payments and deductibles, it doesn’t cover nursing home costs and most home health care costs. It limits payments to doctors and hospitals and those providers who don’t accept Medicare for full payment expect you to pay the difference. It doesn’t cover vision, dental, over-the-counter medications and health products and most non-traditional care like acupuncture, Chinese herbs and such.
Medicare supplement plans can help with a lot, though not all, of these out-of-pocket expenses and are recommended for all those who can afford the premium. These generally cost about $250 a month or $3,000 a year. But, they still don’t cover a lot of what you spend throughout the year.
One trusted financial service company estimated retirees spend $4,500 a year on various uncovered health related costs. This brings your total estimated annual health care costs to $8,760 a year or $730 a month. Now if you’re healthy you won’t incur many of the out-of-pocket costs and you may choose not to buy the supplemental insurance. Although the monthly cost will be less you expose yourself to substantial financial risk should your health suddenly turns for the worse.
This gives you a starting point. But where things start to get scary is what is likely to happen to these costs in the years ahead. Congress intentionally kept Medicare premium increases below actual cost increases over the last several years. While actual costs were increasing at 8-10% a year little if any of this cost was passed on to participants. A skeptic might say it was election related.
Congress also likes accounting tricks. To make Obamacare affordable, it assumed $500 billion in Medicare cost reductions. To make Medicare appear solvent, it used the same $500 billion to lower estimated costs. It said it would lower payments to doctors and hospitals.
Yet each of the last 8 years, when it came time to vote to reduce payment to doctors by 27.4 percent, they said maybe next year as the AMA warned of doctors fleeing Medicare. The reduction in reimbursements has yet to take place on the scale Congress has used in their cost estimates leaving Medicare to rack up the deficits.
High unemployment has lowered Medicare payroll contributions. Four to five million new retirees each year for the next twenty years will further lower those contributions while the new group of retirees claims their earned benefits. US deficits are out of control and its debt is staggering and Medicare is one of the big drivers.
Cost reductions to providers will limit the supply of services as many providers will no longer be able to afford to subsidize Medicare patients. To compound the problem of lessening supply is the closing of emergency rooms around the country and the shortage of doctors coming out of medical school. Those doctors who do graduate tend to move toward the high price specialty medicine to pay off their student loans leaving fewer general practice doctors.
With supply shrinking and demand for services increasing due to an aging population ramps up the cost and limits the availability of care. Costs will rise and be shifted in some form to you. If all you have is Medicare, you’ll likely wait longer for services and be denied certain services due to overcrowding of facilities and the backlog of getting bureaucratic approval.
These trends will require you to budget greater amounts for health care in the future. Today it may eat up 10-15% of your monthly budget but as things look its appetite grows voraciously. Those who pay attention and plan can get by. Those who don’t may one day face an end-of-month dilemma of food or medicine. Now that’s Mediscary.