Five Tips for Reckoning with Rising Healthcare Costs

All it takes is a glance at the bills from your medical and health insurance providers — and the dent that paying them makes in your bank account — to know that healthcare costs are rising steadily from year to year, with little sign of abating.

 

Just how much are they increasing? Consider the following national estimates:

• Annual family premiums for employer-sponsored health insurance rose an average of three percent, to $18,764, in 2017, continuing a six-year run of relatively modest increases, according to the benchmark Kaiser Family Foundation/Health Research & Educational Trust (HRET) 2017 Employer Health Benefits Survey. Since 2012, average family premiums have increased 19 percent, more slowly than in the previous five years (2007 to 2012), when they increased 30 percent.
• People buying health insurance on an exchange or in the private market saw their cost for coverage increase a stunning 25 percent before subsidies, according to the National Conference of State Legislators.
• According to an estimate from HealthView Services, total projected lifetime health care premiums (Medicare Parts B and D, supplemental insurance, and dental insurance) for a healthy 65-year-old couple retiring in 2017 are expected to be $321,994 in today’s dollars ($485,246 in future dollars). Adding deductibles, copays, hearing, vision, and dental cost sharing, that number grows to $404,253 in today’s dollars ($607,662 in future dollars).HealthView Services predicts that retiree health care expenses will rise at an average annual rate of 5.47 percent for the foreseeable future, nearly triple the 1.9 percent U.S. inflation rate from 2012-2016.

The best antidote to rising healthcare costs, and the uncertainty surrounding federal healthcare policy as the Trump Administration continues efforts to roll back the Affordable Care Act (AKA Obamacare), is to plan ahead, says FPA member Charles C. Weeks, a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional with Barrister Wealth Management in Philadelphia, PA. “There are steps people can take to deal with the cost increases and the complexity” of healthcare policy.

Here are five such steps recommended by Weeks and other financial professionals:

1. For people with a high-deductible health plan, take advantage of the health savings account (HSA) attached to that plan. HSAs are souped-up savings accounts designed mainly to give consumers with high-deductible plans a tax break for out-of-pocket medical expenses. But not only are these plans good for covering a wide range of healthcare expenses, from dental care to prescriptions to doctor visits to hospital care, they come with a triple tax advantage: tax-free contributions, tax-free growth, where any increase in the value of money in the account is tax-free, and tax-free withdrawal when the money is withdrawn and used for qualified medical expenses.

What’s more, notes Weeks, that triple tax advantage makes an HSA a highly appealing vehicle for setting aside funds to cover healthcare expenses later in life. HSA providers now offer investment options within their HSAs, allowing an account-holder to put HSA contributions into mutual funds, where instead of earning nothing or next to nothing in interest, as they would with a traditional HSA account, it carries the greater long-term upside potential of an investment linked to the stock market. The ability to leave money in an HSA from year to year makes that investment option especially appealing. Essentially it functions like an Individual Retirement Account for healthcare and medical costs. HSA money even can be used to pay for a long-term care insurance policy, which protects a person from potential financial devastation if they should require expensive care for an extended period during retirement.

Additional flexibility comes from a provision in which withdrawals from the HSA at age 65 and older that are not used for qualified medical expenses would be taxed as ordinary income, but not penalized, just like a traditional IRA, Weeks points out.

His advice: If possible, enroll in an HSA if you’re eligible, and contribute as much as the law, or your budget, allows each year (the annual contribution limit for 2018 is $3,450 for individuals and $6,900 for families). Allocate all or a portion of those contributions into to an investment account inside the HSA, then, rather than spending down the money in the investment account, leave it in there to potentially grow through your working years. “Start early, don't spend any of the [invested HSA] funds until retired, and put the funds into accounts at firms that have good growth investment options,” adds FPA member Sallie Mullins Thompson, CFP® in New York, NY.

3. To cover out-of-pocket healthcare/medical expenses, for people who lack an HSA or have one but prefer to leave the funds in it untouched (per the above savings strategy), Weeks suggests using a combination of cash reserves that reside in a money market or savings account, along with a brokerage account containing stock market investments. While selling investments to raise funds for healthcare costs may entail paying capital gains taxes, the ability of those investments to grow and keep up with inflation can make this approach worthwhile. Prevailing low interest rates, savings accounts and money market accounts typically won’t provide enough of a return by themselves to keep up with health care cost inflation, notes Weeks.
4. Get creative to manage costs. Comparison-shopping can result in significantly lower costs, not only for a base health insurance plan, but for other related costs, such as for prescription drugs. In researching prescription drug prices with a family member, FPA member Monica L. Dwyer, CFP®, found that “some of the pharmacies will compete on price. For example, WalMart, CVS and Walgreens will all post different prices for drugs that they sell. We found a website called command they do the shopping so that you know where to find the cheapest prices.”

Voluntary benefits available through a workplace healthcare plan — add-ons such as wellness benefits, dental and vision care, etc. —can be cost-effective in the right situations.

When a sizable medical bill hits, many medical providers offer payment plans to their patients, allowing them to pay down a balance in installments, typically with no interest or finance charge.  That, too, is an option worth exploring, according to Weeks.

5. Avoid using plastic to pay for healthcare/medical expenses. The high interest rates that many credit cards charge can quickly create a large and potentially unwieldy debt burden, says Weeks.
6. For a person nearing retirement or already retired, earmark a portion of retirement funds specifically to cover healthcare and medical expenses, and keep those funds partially in a brokerage account and partially in a cash reserve. “Many people underestimate what their medical costs will be or they underestimate how quickly those costs will inflate during their retirement. Or, they wrongly assume things are covered [by Medicare] when they are not.”