Many people count on Medicare to help them pay for healthcare coverage after retirement. But Medicare isn’t designed to fully cover healthcare expenses, which can lead many retirees to face much higher healthcare costs in retirement than they expected. In fact, Medicare only covers on average 62 percent of a beneficiary’s costs, according to an Employee Benefits Research Institute report.1
And a variety of factors -- including retirement age, gender and health status -- have major impacts on their healthcare costs in retirement. These are factors that can be hard to take into account in planning for retirement financial needs. Part of the problem is the rapid increase in healthcare expenses and the introduction to the market of new, expensive prescription drug treatments which many seniors will need as they age.
On average, an employee needs about 4.4 times pay at retirement to pay for unsubsidized retiree medical coverage at group purchasing rates — about 25 percent of total needs.2 Of this amount, our research shows that retired employees will need to pay about 2.2 times in additional costs over what the employee was accustomed to paying as an active employee. And healthcare costs are expected to increase 5.5 percent per year, far outpacing the expected inflation rate of 2.25 percent per year.
These rising healthcare costs for retirees threaten their overall financial wellbeing. Most retirees live on a fixed income, and many of them don't have significant savings for retirement. Without careful planning, ballooning healthcare costs in retirement can leave retirees financially vulnerable. Retirees need the right tools and experienced advisors to help them plan financially to meet their healthcare retirement needs.
An inefficient employer-sponsored retiree medical strategy, one that requires more costs from the retiree than necessary, puts retirees at risk in retirement financially. Plan sponsors should ensure that they understand the burden their retiree group is facing and help them stretch their retirement dollars as far as possible by finding the most efficient retiree medical strategy that best meets their health and financial needs.
Here’s how employers can help reduce the financial strain of these retirement healthcare costs on their retired employees.
Perform a Comprehensive Review of Retiree Healthcare Strategy
Employers who want to address the financial strain of retiree healthcare costs should first comprehensively examine their current retiree healthcare strategy to understand the various group and individual market strategy alternatives available that can drive efficiencies for retirees.
Many employers have not adequately examined their current retiree medical strategy to determine if they are providing retirees the tools and resources they need to be protected financially in the long run. Retirees in the post-65 age group will potentially have 30 years or longer on their medical benefits after retirement, which means the long-term implications of employer decisions about benefits can have a much greater impact on their financial well-being than it does for employee’s pre-retirement who will most likely be on a plan for relatively shorter periods of time. This is why specific attention needs to be paid to the unique financial and health needs of retirees when determining the benefits strategy.
Identify Options for Delivering Financially Cost-Effective Retiree Medical Benefits
Employers need to identify the most efficient way to deliver a retiree medical benefit to Medicare-eligible retirees in the current market. Group-based Medicare Advantage, group-based Medicare Part D EGWP Plans, group-based indemnity plans, and group-based commercial drug plans with a retiree drug subsidy (RDS) have weaknesses that don’t fully address retirees’ current and future financial burdens and unique healthcare needs.
These legacy group strategies allow employers to control the group plan so that all retirees have the same benefit at the same costs across the board. By not relying on local, unique plans, designs, and premiums available in the individual market, group strategies allow employers to more easily ensure equal, consistent benefits and coverage throughout their organization nationally. But these group-based plans don’t offer the same significant cost-saving opportunities that the more individualized plans can offer.
Group plans that are part of union negotiations can be another roadblock that employers can encounter in fully vetting all plan and benefit strategies. Employers may need to carefully examine what factors could potentially impact their strategic decisions when it comes to finding solutions that effectively reduce long-term retiree medical costs.
Leverage the Individual Marketplace
Ultimately, leveraging the individual Medicare marketplace supported by a private exchange is the strategy most likely to result in significant immediate and long-term savings for retirees.
Often, local, unique plans available in the individual marketplace are optimal financially from both a retiree and employer perspective. For example, a dollar in the group structure could be worth 70 cents in the individual market, simply due to individual market efficiencies.
Because of the significantly larger risk pool in the individual market (over 50 million retirees) those individual market plans are competing for significant numbers of retirees, which drives economies of scale that all retirees can benefit from. With the influx of significant numbers of new retirees every day into the individual market, plans in the individual marketplace also include a younger, healthier risk pool that drives down premiums, relative to group-based strategies offering coverage to an older, unhealthier employer risk pool.
These plans also benefit from increased competition in the marketplace that spurs innovation in healthcare delivery, which drives down cost. Effective healthcare cost management strategies in Medicare Advantage and Medicare Part D plans contribute to the reduced costs of these plans as well. All of these factors lead to a potential 20 percent to 50 percent efficiency opportunity in the open market.
To help reduce the immediate and longer-term cost burdens that retirees face when it comes to their medical benefits, employers need to create a comprehensive strategy that takes their specific retirees’ needs into account and leverages all strategy alternatives available that will result in cost savings for their retired employees. In many cases, an individual market-based strategy supported by a private exchange will drive optimal cost and value for both plan sponsors and retirees.