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Health has often been described as a person's most valuable asset, and never has the adage been more true. With medical costs rising, your health -- or lack of it -- can have a major impact on your financial outlook.
At the same time, the nation's approach to providing and paying for health care is undergoing fundamental changes. The stakes are higher than ever for older Americans trying to control their health-care spending and protect the financial assets they are counting on to sustain them through retirement and provide an inheritance for their children.
"The rules have changed and are continuing to change," says Althea West, a gerontologist and financial educator in St. Charles, Mo. "People are increasingly expected to pay more of their costs out of pocket and become smarter health-care consumers. How you handle the transition will make a huge difference in whether you are able to afford quality health care without seeing your savings evaporate in the process." West and many other experts recommend paying close attention to four areas that will help you cope with the increasing cost of health care. Here are some prevention strategies that may help you maintain a healthier outlook in the face of rising medical costs:
Strategy #1: Control your costs
You can gain some control over your health-care out-of-pocket expenses by choosing the right insurance coverage, keeping track of your bills, and being a cost-conscious consumer.
Cost-effective insurance. Perhaps the biggest mistake people make when choosing health insurance, West says, is focusing solely on the monthly premium. What's important is the total cost of the coverage, including deductibles and co-pays. When you evaluate a policy, experts recommend that you look at your medical expenses for a typical year and then determine how much you would have paid out of pocket under various policies. You may find, for example, that a policy with low monthly premiums will save you money because you have relatively few doctor visits and can afford a higher deductible. On the other hand, paying higher premiums in exchange for a lower deductible and co-pays might be worth it, especially when you consider that your need for health care is likely to increase as you age.
A financial planner or insurance broker can help you make the comparisons, but you have to make sure you are getting unbiased advice and that you are providing accurate figures for your health-care spending in previous years.
For many Medicare-eligible clients, West recommends considering Medicare Advantage policies (formerly Medicare + Choice). These plans, which eliminate the need for Medigap insurance, often offer lower out-of-pocket costs and typically pay for preventative care. On the downside, Medicare Advantage policies may limit your choice of doctors and hospitals. If you do choose a plan with a provider network, check to make sure when having a hospital procedure that all of the professionals who treat you are in the network. Sometimes, for example, a surgeon may be in the network but the anesthesiologist is not.
Drug costs/Medicare Part D. Despite being confusing, Medicare prescription drug coverage, or Part D, can save most Medicare recipients a considerable amount of money, says Fran Conway, Medicare counselor at Advocate Good Shepherd Hospital in suburban Chicago. "In most instances, people are saving hundreds or even thousands of dollars, depending on the medications they take," Conway says. "Some people can cut their drug costs by 50%."
If you have employer-sponsored drug coverage that's better than what Medicare offers, experts recommend that you keep it. Even if the coverage is eliminated, you can sign up for Medicare Part D without a penalty.
The Medicare Prescription Drug Plan Finder can help you evaluate your Part D options. But be forewarned: even well-informed consumers often need help understanding the details. Even though the selection process can be daunting, Conway says it's worth it to determine the policy and the features that are right for your individual needs. "A lot of it depends on the medications you take and how much out-of-pocket you can afford," she says. "What works for one person may be totally inappropriate for someone else."
In addition to choosing prescription coverage that matches your needs, you can save money on drug expenses by asking your physician for samples, using mail-order pharmacies for drugs you take daily, asking your doctor to prescribe generics when they're available, and making sure the drugs your doctor prescribes are covered by your insurance. (If a drug isn't covered, there may be similar medication that is.)
Health-care tax deduction. If your medical expenses in a given year exceed 7.5% of your adjusted gross income, you can claim an itemized tax deduction and essentially lower your health-care costs (even if you are subject to the alternative minimum tax, or AMT). The key is keeping good records of how much you spend, says Frank Corrado of Lighthouse Financial Advisors in Red Bank, N.J.
For people who have major expenses, the tax savings can be significant, he says, noting that last year his mother incurred nearly $40,000 in home health-care expenses, most of which she was able to deduct from her taxable income.
Being a smart consumer. If you think you've been overcharged in the supermarket, you ask for an explanation, right? So why not do the same on a hospital or drug bill, when there are hundreds of dollars at stake? Mistakes do happen, and keeping a sharp eye on your bills and asking questions can help you catch them.
Shopping around and comparing fees is another tactic for people who have high insurance deductibles or who pay a percentage of hospital and doctor charges out of pocket (often called co-insurance). You'll probably be surprised at the wide range of charges. Also, ask providers if they would be willing to lower their fee.
Trying to avoid repeat tests is another way to reduce costs. If you've already had a test done at one location, obtain a copy of the results (it's your right by law) so the test won't have to be repeated if you visit another doctor.
Strategy #2: Plan for high costs
"Health care may be one of the biggest financial challenges you have in retirement," says Paula Hogan of Hogan Financial Management in Milwaukee. "Early in retirement people are generally in good health, but as they get older they're startled by how much of their income goes to health care." The numbers back her up. Total national health care spending rose 7.9% in 2004 (the most recent year for which data are available). That was three times the rate of inflation.
Plus, a 2004 survey showed that the average retiree spent 22% of his or her income on health-care costs, and Fidelity retirement specialists have calculated that a retiree without an employer-sponsored health care plan may need $200,000 to pay projected out-of-pocket health care costs not covered by Medicare. And that doesn't include the possibility of long-term care expenses.
The solution is two-fold: a retirement income plan that factors in rising costs and an asset allocation strategy that seeks to provide a level of investment growth that will support your longterm needs. (The Fidelity Retirement Resource Center offers several useful planning tools.) Many planners recommend that after protecting yourself with adequate insurance and providing for a steady income stream, you should invest a portion of your retirement portfolio in stocks.
"Planning for longevity is a really big deal," says gerontologist West. "There's a good chance for many people that they'll live to be 95 or 100 years old. Instead of planning for a retirement of 15 to 20 years, they should be thinking about making their money last 30 or 40 years."
Strategy #3: Protect your assets
Experts agree that an extended stay in a long-term care facility is one of the fastest ways to deplete what seemed like an adequate nest egg. In 2005, the national average daily rate for a private room in a nursing home was $203, or $74,095 per year2 -- and the chances are good that you'll experience those costs firsthand.
The U.S. Department of Health and Human Services says that people who reach age 65 have a 40% chance of entering a nursing home. The average stay is 2.4 years, which works out to nearly $178,000, not including inflation (2.4 multiplied by $74,095). About 10% of the people who enter a nursing home will stay five years or more.
Long-term care insurance. To protect their assets from the cost of long-term care, a growing number of people are purchasing long-term care insurance, says financial planner Corrado. "You have to look at the potential expense of long-term care as another type of threat to your portfolio," he says. "Just like you have strategies to reduce your investment risk, you also need to reduce your health care risk, and long-term care insurance is one way to do that."
Another point to consider, adds gerontologist West, is the devastating financial effect that one spouse's long-term care stay can have on the other spouse. To receive Medicaid assistance for long-term care, the government requires that a couple spend their assets down to the federal poverty level, and that can severely limit the spouse's choices for the future. "Especially in cases where the spouse is considerably younger, you're putting that person in a position to live for many years in poverty," West says.
Living will and durable power of attorney. The ability of medical science to prolong life is amazing, but it can also be extraordinarily expensive. That fact, plus the ability to control one's end-of-life experience to the extent possible, are the reasons that experts urge people to consider a living will, also known as an advance health care directive. Gerontologist West notes that many people adopt a living will to prevent being kept alive artificially when there is no reasonable hope of recovery. If you choose to have a living will, she says, you should take steps to ensure it is followed by giving copies to your loved ones, attorney, and doctor. Also express your wishes verbally so there can be no mistaking your intentions, she adds.
Strategy #4: Maintain a healthy lifestyle
Staying healthy is the best way to lower the cost of health care, and there's a growing body of evidence showing just how much you can save.
Moreover, research funded by the HealthPartners Research Foundation in Minnesota found that inactive adults aged 50 and over who increased their physical activity to 90 minutes per week were able to reduce medical costs by $2,200 per year. Another study, by the Dallas-based Cooper Clinic, found that men who were out of shape and eventually became fit were able to lower their chances of being hospitalized by 42% and to reduce their medical visits by 46%. All it took to climb out of the low-fitness group was 30 minutes of physical activity three to five days a week, according to the study's authors. Other ways to improve your health are quitting smoking and eating a low-fat, low-sodium diet.
Putting it all together
Complexity is perhaps the most daunting aspect of protecting yourself from rising health-care costs. The many parts of an effective overall health-care strategy -- insurance, care delivery, staying fit, estate planning, and financial management -- are often treated as separate elements, West notes. But they must all work together to ensure you are getting the most for your money and putting yourself in a position to live the retirement lifestyle you want.
"We're in a period of transition," West says. "Costs are increasing and more of the burden is shifting to individuals. People need to prepare themselves for how much health care is going to cost and for how long they are going to live."
How Fidelity can help: Learn more about long-term care insurance offered via Fidelity.
1 Smith, C., C. Cowan, A. Sensenig and A. Catlin. "National Health Spending in 2004." Health Affairs 25:1 (2006): 186-196. 2 MetLife Market Survey of Nursing Home & Home Care Costs, September 2005.
Unless otherwise noted, the opinions of the author are not necessarily those of Fidelity Investments. The experts are not employed by Fidelity but may receive compensation from Fidelity for their services. Views and opinions are subject to change at any time based on market and other conditions. Fidelity Brokerage Services, Member NYSE, SIPC
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