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Calculating health costs in retirement

By March 24, 2017No Comments

When it comes to calculating health costs in the retirement it may not be as complicated as first thought as the tools, for the most part, are there.

Why this may not be as difficult as first thought is that for retirees their health coverage is through Medicare, which just happens to be one of the best types of coverage for those who design the proper plan.

To be have full coverage one needs to enroll into Original Medicare as well as obtaining a Part D drug plan and then also purchase a Supplemental plan (MediGap Plan F, usually). Through this coverage,as long as the retiree has a medically necessary need and is admitted as an inpatient costs will be covered (some states like MA may still impose a cost).

to determine the costs at this point all we need to know is what are the current costs and then what will they inflate at which the federal government even tells us.

Please note that there is an alternative to Original Medicare too, Medicare Advantage Plans. These plans are administered by private health insurers and can be built to meet specific needs of the client, so projecting them on average is more complex.

It is strongly recommended that anyone enrolling into Medicare should seek the professional help of a health insurance professional who is licensed in both types of plans as either plan can be great.

Within Medicare according to the Medicare Trustees Report, 2016 MBT, on page 205 is the historic and future rates for Parts B and D

As you can see from the report:

1967 – 2017 Part B inflated at 7.89%. Please note that this percent is factoring in what Part B is today, in 2017. The goal of the MBT was to have the premium be even higher at $149.00 a month.

  • Over the last 20 years Part B inflated on average at 6.06% as the premium was $43.80 a month in 1998.
  • Within the last 5 years Part B inflated on average at 6.31% as the premium was 104.90 a month in 2013.
  • Last 3 years Part B inflated on average at 13.02% as the premium was $104.90 a month in 2015.
  • In 2017 the Part B inflated on average at 10.01% as the premium was $121.80 a month.

As for the future Part B is expected to inflate at 4% and this is due to the ability of a $3.00 a month surcharge imposed on all Part B beneficiaries.

To quote page 87 of the MBT report “The BBA further requires that, starting in 2016, the Part B premium otherwise determined be increased by $3.00, which is to be collected and repaid to the general fund of the Treasury. The additional repayment premium amounts will continue until the balance due (defined in the BBA as the transfer to the Part B account from the general fund plus forgone income-related premiums) has been repaid”.

Without this $3.00 a month surcharge, which did not happen in 2016 or 2017 the Part B premiums are going to have to inflate even higher than predicted by the MBT.

Part D does not have the track record of Part B as it was created in 2003 under the Medicare Modernization Act.

The future inflation rate for Part D on average is 8.91% as the National Base Premium (NBP) is currently $35.63 a month and is projected to be $70.50 a month by 2025.

The NBP is not an average rate for Part D, those average rates are determined by private health insurers who sell those plans. In 2017 the average monthly premium is $53.17…not including the deductible, co-pay or any drugs not on the formulary.

Medigap policies are more difficult to peg due to the private insures who administer them as they see fit to meet the needs of their clients. These please plans can cover the deductibles, co-pays and excess charges of Parts A and B.

On average Medigap Plan F policies cost $191.50 a month in 2016 for 65-year-old person. In 2017 the national average is $200.12 a month for a 65-year-old person.

The inflation rate was 4.5% for the same age policy, but the caveat is that for many Gap beneficiaries their premiums will increase as they age.

With the above stated the national average Plan F policy for a 66-year-old in 2017 is $202.57.

So, if a 65-year-old person bought a policy in 2016, depending on their state, they may have seen an increase of 5.7% as they will have to pay that age 66 premiums.

Granted there are cheaper Gap plans even within the same letters, but they all have about the same inflation rates.

Break down of the BEST POSSIBLE Medicare inflation rates:
  • Part B – projected 4% including that $3.00 a month surcharge, which didn’t happen.
  • Part D – projected 8.91%
  • Gap plans – projected 5.7%

So, if we take today’s cost of Medicare and use what the federal government tells us they are going to do to us using the BEST possible inflation rates we know:

  • Medicare Part B – $134.00 a month
  • Medicare Part D – $53.17 a month for a national plan on average
  • MediGap Plan F policy $200.12 a month

Total – $387.29 a month or $4,647.48 annually

Now using those inflation rates per coverage, the total cost when this 65-year-old person is 85 is $14,317.89 a year.

The average inflation rate is 5.7862%.

Where the rubber meets the road and where many will get a flat tire though, is the fact that Medicare also places a surcharge on Part B and D premiums for those earning too much income.

The surcharges start at roughly 40% more of premiums and can go as high as 220%. If you happen to have a financial plan that shows your income increasing year over year, but not your health coverage costs, well then someone is not meeting the standards of the Fiduciary Law.

Only question left, is there a financial firm helping people plan for this?