Retiree health care costs to rise despite Medicare premium decline

Earlier this year, retirees celebrated dual announcements that Social Security benefits would increase by 8.7% next year, the largest annual increase in more than 40 years, while Medicare premiums, which are usually deducted directly from Social Security benefits, would decline slightly, resulting in more spending income in 2023. But will it?

“One year’s data does not tell the complete story," said Ron Mastrogiovanni, CEO of HealthView Services, which provides health care cost data to the financial services industry. “It is important to look at Medicare and the Social Security Administration’s long-term projections for premium increases and cost-of-living adjustments for retirement planning purposes.”

HealthView Services' recent report, "Medicare and Social Security COLAs: Putting 2023 Numbers in Context," highlights the impact of these changes on retirement health care costs.

The report underscores that the scheduled 8.7% increase in Social Security benefits next year isn't a windfall, but a reflection of the increased cost of living as a result of the highest inflation in 40 years. And the $5.20 decline in monthly Medicare Part B premiums — only the third time in the program’s history that premiums have declined — follows an outsized 14.5% increase in 2022.

The lower premium for Part B coverage, which pays for outpatient services and doctors’ fee, reflects lower expected costs related to the Alzheimer drug Aduhelm.

But Medicare Part B premiums are only one component of future health care costs. The HealthView paper notes that premiums for Medicare Part D prescription drug coverage, supplemental Medigap insurance and dental insurance, and out-of-pocket spending on deductibles and co-pays are all expected to increase in 2023. In fact, the $62.40 savings in annual Part B premiums amounts to less than 1% of total projected health care costs for a healthy 65-year-old individual in retirement next year, the paper found.

“Medicare premiums will continue to rise at a faster pace than COLAs and over time, a greater portion of Social Security benefits or other sources of retirement income will be needed to address health care needs,” Mastrogiovanni said.

Using updated Medicare Part B premiums and Social Security COLAs for 2023, the HealthView Services Retirement Healthcare Cost Index shows that at the start of retirement, average health care costs, including all premiums and out-of-pocket expenses, will account for about 45% of Social Security income, before taxes, for a healthy 65-year-old couple retiring and starting Medicare and Social Security next year.

Assuming they both live to 89, health care expenses will consume almost their entire Social Security check by the end of retirement, the issue brief said. The estimate does not include possible long-term care costs, taxes or Medicare high-income surcharges.

“Retirement planning is not about one year of expenses or returns, but ensuring needs can be met through retirement,” Mastrogiovanni added. “The 2023 numbers from Social Security and Medicare provide an opportunity for clients and advisers to discuss retirement plans, the role of Social Security, Medicare premiums and other health care costs that need to be planned for in retirement.”

So what can financial advisers and their clients do to rein in health care costs and include those expenses in retirement income planning?

Advisers can encourage their clients to take advantage of the annual Medicare open enrollment period going on now through Dec. 7. Each year, people with Medicare can review their coverage options and switch plans during open enrollment. Medicare beneficiaries with traditional Medicare can compare and switch Medicare Part D stand-alone drug plans or join a Medicare Advantage plan, while enrollees in Medicare Advantage can compare and switch Medicare Advantage plans or elect coverage under traditional Medicare, with or without a stand-alone drug plan.

Coverage and costs vary widely among both Medicare Advantage plans and Part D prescription drug plans. Plans can change from one year to the next, which could lead to unexpected and avoidable costs and disruptions in care for beneficiaries who do not review their options annually.

For example, changes in provider networks could mean beneficiaries lose access to their preferred doctors, while changes in the list of covered drugs and cost-sharing requirements could result in higher out-of-pocket drug costs. In addition, beneficiaries’ health care needs can change from one year to another, making it even more important to compare coverage each year. Even without a change in their plan or their health status, beneficiaries may be able to find a plan that better meets their needs or lower their costs.

Unfortunately, only one in three Medicare beneficiaries review and compare their Medicare plans each year, according to a new report from the Kaiser Family Foundation. And Medicare’s official information resources, including its toll-free number (1-800-MEDICARE), its website www.medicare.gov, and its annual Medicare & You handbook, are not widely used.

What does that mean? Does the lack of comparison-shopping mean beneficiaries are satisfied with their current coverage or just overwhelmed by too many choices to decide to switch plans? It seems Medicare cost analysis, with the help of available software tools, may provide fertile ground for financial advisers to help their older clients save money and demonstrate the value of holistic financial planning.

(Questions about new Social Security rules? Find the answers in Mary Beth Franklin’s 2022 ebook at MaximizingSocialSecurityBenefits.com.)