Tag Archives: retiree medical

Retiree health cost estimates for 2020

The potential cost of healthcare as a retiree is important to consider well before an employee decides to retire. These costs can change as a result of regulations, inflation, new drugs, health risks, etc. Each year, Milliman develops estimates of retiree health costs in order to educate employees and retirees about the potential cost of healthcare over the course of retirement. This post outlines four different scenarios of projected costs to help prospective retirees plan appropriately.

(1) Projected costs for a healthy 65-year-old couple retiring in 2020

A healthy 65-year-old couple retiring in 2020 is projected to spend approximately $351,000 in today’s dollars ($535,000 in future dollars) on healthcare over their lifetime. Expenses at age 85 are estimated to be 234% higher than at age 65.

(2) Projected costs for a healthy 45-year-old couple

A healthy 45-year-old couple is projected to spend approximately $505,000 in today’s dollars ($1.4 million in future dollars) on healthcare over their lifetime.

Both scenarios (1) and (2) above have calculated these projected costs using the following assumptions:

  • The health statuses of the retiree and spouse are assumed to be average for their entire life spans.
  • The retiree and spouse are assumed to be male and female with life spans of 88 and 90, respectively.
  • Nationwide average premiums and out-of-pocket expenses from a retirement age of 65 through life span for a Medicare Supplement Plan G and a standard Medicare Part D plan are used.
  • Future medical trend is assumed to be 4.9% per year. This assumption is based on long-term estimates from a Society of Actuaries model, supplemented with Milliman research and converted to an annual equivalent rate.
  • For calculations of present values in today’s dollars, investment return of 3.0% per year is used.
(3) Average premium plus out-of-pocket cost at age 65

The estimated 2020 annual premium plus out-of-pocket cost for a healthy 65-year-old is $4,700.

Scenario (3) has calculated the out-of-pocket cost using the following assumptions:

  • The health status of the retiree is assumed to be average. The average is based on a typical commercially insured population based on the Milliman Health Cost GuidelinesTM.
  • A male or female age 65 is assumed.
  • 2020 nationwide average premiums and out-of-pocket expenses at age 65 for a Medicare Supplement Plan G, Medicare Part B, and a standard Medicare Part D plan are used, based on the Milliman Health Cost Guidelines and premium information obtained from the Centers for Medicare and Medicaid Services (CMS).
(4) Portion of Social Security benefit spent on healthcare

A healthy 67-year-old couple is projected to spend 34% of their Social Security benefit on healthcare in 2020.

Scenario (4) calculations are based on the following assumptions:

  • The health statuses of the retiree and spouse are assumed to be average. These averages are based on a typical commercially insured population based on the Milliman Health Cost Guidelines.
  • The retiree and spouse are assumed to be male and female.
  • 2020 nationwide average premiums and out-of-pocket expenses at age 67 for a Medicare Supplement Plan G, Medicare Part B, and a standard Medicare Part D plan are used, based on the Milliman Health Cost Guidelines and premium information obtained from the CMS.
  • The December 2018 average monthly Social Security benefit at age 65-69 of $1,432.02 for retirees and $849.81 for spouses is used, with adjustments to 2019. Social Security cost of living adjustments of 2.8% in 2019 and 1.6% in 2020 are used.
Conclusion

The healthcare marketplace is volatile, partially due to legislative and regulatory changes, as well as the state of the drug pipeline, among other factors. Actuarially derived health cost estimates can help employees plan for the future and ensure that their retirement account is funded appropriately to reach the healthcare needs of the future.

This article first appeared in the Health and Group Benefits News and Developments: April 2020.

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How much does retiree healthcare cost?

Projecting retiree healthcare costs is complex. Milliman’s estimates are developed to help educate employees and retirees about the potential cost of retiree healthcare. Below are some recent findings:

  • A healthy 65-year-old couple retiring in 2019 is projected to spend $369,000 in today’s dollars ($551,000 in future dollars) on healthcare over their lifetime, and expenses at age 85 are estimated to be 250% higher than at age 65.
  • A healthy 67-year-old retired couple is projected to spend 39% of their pre-tax Social Security benefit on healthcare in 2019.
  • A healthy 45-year-old couple who retires at age 65 is projected to pay $532,000 in 2019 dollars, and $1.4 million over their retirement years, for retiree healthcare.
  • The estimated 2019 annual premium plus out-of-pocket cost for a healthy 65-year-old is $5,000.

To see more retiree health cost estimates, read Robert Schmidt’s paper here.

Questions and answers: Are you managing retiree health needs cost-effectively?

Because retirees are often the highest users of healthcare, simple changes in plan design or delivery can go a long way in reducing costs for employers. For example, we had a client that was looking to deliver benefits to its Medicare retirees more efficiently. By moving the entire population to a Medicare Advantage plan, our client not only reduced its retiree medical costs by 10% in the first year due to a reduced premium, but it also was able to provide a richer benefit design.

In reviewing your own retiree medical benefit design strategy, here are a few questions you should ask.

Is my plan coordinating with Medicare in the most efficient way?
If you have an active medical plan that also covers Medicare-eligible retirees, carefully review the coordination of benefits method. When Medicare is primary, the plan commonly coordinates under one of these approaches: carve-out, maintenance of benefits, or coordination of benefits. Because costs to the plan and retiree vary under each of these approaches it is a good idea to examine each one; there may be a way to save money for the plan or the retiree.

Am I taking full advantage of prescription drug subsidies?
Given the high use of prescription drugs in the retiree population, this area may be your best opportunity to reduce costs. Are you taking full advantage of the prescription drug subsidies from the Centers for Medicare and Medicaid Services (CMS)? Consider delivering Medicare prescription drug coverage through an employer group waiver plan or with retiree drug subsidy coverage.

Am I leveraging the experts in administration?
Some companies have moved Medicare-eligible retirees to a Medicare Advantage Prescription Drug Plan (MAPDP), which offers additional benefits beyond Part A and Part B coverage. The federal government pays private insurance companies to offer these plans. Because MAPDPs are fully insured, the insurer would take over the entire administration of the Medicare plan and is well-versed in managing this population, resulting in possible savings and increased efficiencies in plan administration.

Does a pre-Medicare plan make sense?
If the size of your pre-Medicare retiree population is large enough, the most cost-effective solution could be to offer a pre-Medicare retiree-only plan. Retiree populations are different and a pre-Medicare retiree-only plan can be designed with those needs in mind, in a way that efficiently maximizes benefits. For example, retirees are generally on fixed incomes, so a plan designed with set deductibles, copayments, and out-of-pocket maximums is more desirable.

Am I using all the utilization management tools available?
Utilization management programs can be helpful in reducing the cost of covering pre-Medicare retirees. For example, chronic diseases are likely more prevalent in your pre-Medicare retirees than your actives. Helping retirees manage these conditions can benefit not just your covered population but also your bottom line.

Do any of the plan changes that I am making have unintended consequences for my retiree population?
Seemingly small changes can have significant financial impacts for your organization when you look closely at how it affects your retirees—even though retirees likely make up a smaller portion of your total population. For example, for plans that receive the retiree drug subsidy, changes that increase cost sharing or contributions for prescription drugs for retirees may cause the plan to lose eligibility for the subsidy. Instead of cost-shifting, it may make more sense to focus on managing plan costs. You will have the added advantage of possibly lowering retiree medical accounting liabilities—e.g., Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 715-60 liability—by potentially reducing projected plan costs, long-term trend, and delaying the impact of the 40% excise tax on high-cost health plans.

When it comes to retiree medical coverage, it is important to ask the right questions. Given the increasing cost of healthcare and retirees’ high utilization, you may be able to make changes that positively affect your retirees and lower the cost of covering them.




High-deductible/health savings account plans continue to increase

According to a survey by Americas Health insurance Plans (AHIP) the number of individuals insured by high-deductible health plans (HDHPs) in conjunction with health savings accounts (HSAs) grew 18.4% this year to 13.5 million from 11.4 million in 2011. AHIP data shows that this type of consumer-driven health plan (CDHP) has increased gradually since it was introduced in 2004. Read more about AHIP’s survey at Workforce.com. You can also read the entire survey here.

One question arises from the aforementioned survey: Do CDHPs help reduce costs? Jack Burke and Rob Pipich’s detailed analysis on high-deductible plans found that when adjustments are made for typical risk and benefit factors, CDHPs deliver cost savings that are modestly better than non-CDHPs. Here is an excerpt:

“Most employers we examined showed savings in the CDHP plan before adjusting for risk and plan design characteristics; however, the bulk of the apparent savings was explained by these adjustments. After adjustments, the reduction in combined employer and employee costs averaged 4.8% before accounting for the utilization-dampening impact of the high deductible. Accounting for the high deductible made the reduction 1.5%. Some employers showed significantly greater reductions.”

This 1.5% reduction is what’s known as “induced utilization” and is a key element of CDHPs. For more, read Milliman’s complete Consumer-Driven Impact Study.




COLAs increase health benefit amounts

With the release of the September 2011 Consumer Price Index (CPI) by the Bureau of Labor Statistics, the Social Security Administration (SSA) and the IRS have announced cost-of-living adjusted figures for Social Security and retirement plan benefits, respectively, for 2012. The 2012 adjusted figures for high-deductible health plans (HDHPs) and health savings accounts (HSAs) were released by the IRS earlier this year.

While the focus of the latest Client Action Bulletin is more squarely on retirement benefits and Social Security, there’s also information about health benefit amounts. Read more here.




GASB 45: Lessons learned for small employers

Joanne Fontana pens an article in Accounting Today looking at lessons learned after more than three years of providing GASB 45 valuations to small employers. Here is an excerpt capturing the difficulty of these smaller valuations:

We’ve learned that, while smaller government employers may have fewer OPEB [other post-employment benefit] plan members, their OPEB plans are by no means simple. In fact, we’ve seen significant variation in how employers using the AMM [Alternative Measurement Method, which is well-suited for small employers] handle contribution methods and levels toward retiree health premiums, eligibility requirements for OPEB, and the structures of the OPEB plans themselves. Some states provide funding toward retiree premiums in addition to those provided by the employer, which must be accounted for in the valuation. Others use age-banded rating for their OPEB premiums. Still others are required to use community-rated premiums.

All of these variations have implications on how to correctly calculate the OPEB liability, whether using the AMM or a traditional valuation. None are directly addressed in the GASB standard, but are nonetheless expected to be properly considered by the individual completing the valuation. So, again, it is imperative, even when using the AMM, to have someone who understands these complexities and can expand the basic AMM approach to appropriately calculate the liability.