In this month’s newsletter, I share with you advice from my colleague Renee N. Duba, a certified financial planner with Sonder Private Wealth Management. Inc. In a recent article about the impact of inflation on purchasing power, authors at Sonder observed that, in 1916, nine cents could buy a quart of milk. Fifty years later, nine cents would buy only a glass of milk. Now, more than 100 years later, nine cents will buy only about 7 tablespoons of milk. That’s a different and yet very vivid way of looking at long-term cost increases, of which we’re all aware. For details on how inflation affects seniors, in particular, I have invited Renee to share with us the following information about retirement and Medicare.
While the United States has not seen skyrocketing prices for basic goods and services for many years, it is important for families to understand how inflation affects long-term financial security. Most adults recognize that rates of inflation for education and healthcare run much higher than the overall rate of inflation in our economy, as measured by the Consumer Price Index (CPI). Yet, while the funding of education for our children is a finite endeavor, funding our healthcare needs is not. Like an old car that has ever-increasing repair needs, our bodily health tends to require ever-increasing health care consumption as we advance in years.
Healthcare costs in the United States are the highest in the developed world. For example, the U.S. pays more for doctors and drugs than in 10 other developed nations. On average, Americans spend $1,443 per person on pharmaceuticals, compared to a global average of $749. As a certified financial planner, I wish to enlighten ADSLA’s readers specifically about Medicare Parts B and D, their long-term impact on your retirement income, and how you can best plan now to achieve financial security during your retirement years.
Part B: Doctor and Outpatient
According to the 2018 Medicare Trustees Report, Medicare Part B premiums are expected to increase by about 8.2% each year over the next 5 years. Medicare premium increases are based on per-capita cost growth of Part B benefits, which reflects the growth in the cost and utilization of medical care by seniors, and not changes in the CPI.
Even though seniors who have their Part B premiums deducted from their Social Security income each month are protected by the “hold-harmless provision,” which provides some (not total) protection against increases in the Part B premium, the rule does not apply to Part D (prescription drug coverage) premiums. The bottom line here is: You can count on the fact that any cost of living increase you receive in your monthly Social Security income at retirement will be used to pay higher Medicare Part B premiums. Moreover, a larger portion of your total Social Security benefit will be consumed by increases in Part D premiums and Part B and Part D deductibles and co-pays.
Further increasing the financial burden on retirees, there has been an ongoing shift from providing care in Inpatient/hospital (Part A) to Outpatient settings (Part B). Since Part B expenditures are funded in part by supplemental Medicare insurance premiums, we can expect a greater portion of Medicare spending to be covered by seniors through their supplemental coverage premiums, deductibles and co-pays.
Since 2005, Medicare deductibles have also been increasing each year. Analysts project that future increases will grow on average at rates approaching 5% per year.
Part D: Prescription Drugs
Prescription drug prices have risen greatly over the past decade, but even more so for drugs most commonly prescribed to seniors. In 2015 alone, the average retail prices for more than 750 prescription drugs widely used by older Americans—including brand-name, generic, and specialty drugs—increased an average of 6.4% compared with to a general inflation rate of 0.1%. Increases on brand-name drugs were even higher, with retail prices increasing by an average of 15.5% in 2015—the fourth year in a row with a double-digit increase.
Clearly, seniors are at a major disadvantage when it comes to prescription drugs. Not only are older Americans probably taking more medications, the ones they most commonly take have had the greatest price increases over the past 5 years. This in turn pushes up the overall cost of living for seniors.
Part A: Inpatient, Hospital–In Brief
The 2018 Medicare Trustees report cautions that the fund that supports Medicare Part A expenditures will be depleted by the year 2026, assuming constant cost growth and utilization. Part A is funded primarily by payroll taxes and by taxes levied on Social Security income paid to high earning beneficiaries. The decline in the funds that support Part A expenditures is attributable to recent tax cuts and low wage growth, paired with higher hospital administrative costs and an increasing number of retirees. The Trustees observe that unless the Medicare payroll tax rate is increased and/or spending on hospital services drops quickly and significantly, the program may be unable to meet its expenses in just 8 years from now.
Amazon to the Rescue?
You may have heard about a new not-for-profit joint venture between Amazon, JP Morgan Chase and Berkshire Hathaway to create a new health care system for their combined 1.2 million employees. They recently named Atul Gawande, who is a surgeon, writer, and Harvard professor of medicine, to lead the yet-to-be-named venture. It will focus on ways to reduce excessive administrative costs, high care prices and under/overuse of certain drugs and therapies. Should the venture succeed, the plan might be replicated to reach more Americans.
In the meantime, help in controlling the cost of drugs may be imminent: Recently, Amazon announced the purchase of PillPack, a New Hampshire based company that provides mail order custom medication packaging by the dose. If Amazon’s impact on the sale of books and other retail items is any indicator of what’s to come, it’s a good bet that drug prices may soon be coming down.
How We Can Help
Planning ahead is always a good practice. We know that because of the effects of inflation, our clients will need to have meaningful financial resources beyond Social Security income benefits in order to support their retirement living needs. I encourage my clients to build investment portfolios with the right mix of growth and risk management assets that fits each client’s unique goals and needs. As Andrea can join me in attesting, inflation and healthcare utilization are just two of many variables to consider when planning ahead. If you have questions about your retirement assets or senior living needs, we would love to help!
Do you need a second opinion? Let Andrea Donovan Senior Living Advisors help. Call us at (708) 415-2934 or email us. Please visit our website. Please watch my video to learn how the process works and learn what some clients have to say.