The short overview will attempt to summarize a very complex topic, provide some perspective as to the maximum and typical costs, and relieve concerns that health care costs have the potential for catastrophic impact on the overall financial position if proper insurance is maintained.
While some individuals have healthcare benefits from a former employer or other entity, this overview assumes that you do not have any of these options. If you are eligible for a company sponsored plan that offers lower cost benefits in retirement, it is often best to continue with that plan.
Healthcare Costs Before Age 65
If you retire prior to age 65, you will need to purchase a health coverage policy through a private providers, or if eligible, through one of the state-sponsored or federal healthcare insurance providers (“Obamacare”). Since there is a very low maximum income requirement to participate in any of the federal exchange programs, this article focuses on the cost of private insurance.
Private insurance costs will vary based on services and level of coverage provided, deductibles, and other factors, but generally consumers can focus on a few key items to get a basic understanding of the total anticipated cost of health care:
Premiums – This is the amount you will have to pay each month for the insurance coverage.
Deductible – This is the annual amount that you must pay before insurance begins to pay for coverage. If the annual deductible is $5,000, then you may be responsible for up to the first $5,000 of deductible expenses (Co-pays). You may still be required to cover additional Co-Insurance expenses after the annual deductible has been satisfied until you reach the Maximum annual out-of-pocket.
Co-Pay – This is the payment you may have to make for each visit to a physician, hospital, or Emergency Room. Due to the high cost of care at the ER, Co-pays may be significantly higher for those visits.
Co-Insurance – Until your annual Maximum out-of-pocket is met, along with an office visit Co-pay, you may also be responsible for a percentage of the actual cost of care (10% - 60%, depending on the plan), even for in-network care.
Maximum annual out-of-pocket – This is the most important number to understand. This represents the maximum total that you may have to pay each year for health care including deductibles, co-pays, and co-insurance. Once this amount is reached, which under federal guidelines for 2015 cannot exceed $6,600 per year per person ($12,600 for a family of 2 or more) you will have no additional health care costs for treatment within the network.
In network/out of network – In most plans you will see a difference between in-network and out of network costs. “In-network” is an contracted provider of care for the plan. If you have reached the maximum annual out-of-pocket amount you will have no additional personal expense if the care is done by the providers approved by the insurance plan. For this reason, it is important to understand what is included “in-network” for any given plan.
For planning purposes, we anticipate that the maximum annual cost of health care for a couple per year until age 65 to be no greater than $27,500 per year. However, our planning software that uses actual client data estimates the actual cost per couple at $17,500 per year.
Healthcare Costs After Age 65
Once you are eligible for Medicare, you can utilize the Medicare plan for coverage and purchase additional private insurance for some of the gaps in coverage (often referred to as Medigap insurance.) There are a full range of choices and options available when choosing to supplement Medicare coverage, but the biggest difference in cost of Medicare is dependent on your Adjusted Gross Income, or “AGI,” so the numbers will vary by individual, and even year-to-year (based on a 2 year look back) for the same individual.
For the purposes of this article, we will simply note that the cost of a plan through Medicare including Medigap coverage will not exceed the cost of a private plan acquired prior to age 65, and can be less by as much as $12,000 per year (for a couple) versus a private plan.
For planning purposes we anticipate that the maximum annual cost of health care for a couple per year after age 65 to be no greater than $15,800 per year for a couple earning above the highest income threshold of $400,000+ per year, with the actual total cost experienced by a typical couple to be less than $9,000 per year.
But what about…?
The above overview assumes purchasing a private health insurance plan and using services providers “within the network,” or using only providers that accept Medicare. Experimental drugs or treatments, using providers outside the network, or other factors may increase the maximum cost of care dramatically. However, this is impossible to calculate as part of a financial planning analysis. Talk with your Client Advisor team if you would like to see some additional amount modeled for any type of extreme scenarios that are outside of the typical client experience.