by Amy E. Buttell
Once a fairly straightforward process, transitioning clients to
Medicare from employer-based or individual insurance coverage has
become a process fraught with costly pitfalls, where sheer
ignorance or a simple mistake can carry financial and medical
consequences throughout the retirement years. With healthcare costs
rising faster than inflation, gigantic holes appearing in the
company retiree benefit safety net, and life spans increasing,
retiree healthcare costs are consuming a larger share than ever of
your clients' savings.
Many planners have tracked such costs for years, and incorporate
healthcare inflation and cost modeling into their retirement
savings and spending projections. Such efforts are more important
than ever, given that a major unanticipated out-of-pocket medical
expense can result in tens of thousand of dollars of additional
costs, wrecking carefully prepared retirement savings and spending
projections. So it's incumbent upon the entire financial community
to embrace the task of guiding clients successfully from either
employer-based, COBRA, or individual coverage into Medicare, and to
help them make changes in their coverage as plans, and their
individual health situations, change.
Whether you want to take time to get up to speed
yourself—and it's not an insignificant time commitment to
do so—or use an in-house expert or refer your clients to
an outside expert, you need some basic familiarity with the issues
to know the right questions to ask to help your clients
successfully navigate the transition.
"I firmly believe that financial planners need to become
knowledgeable in this area," says Tim Kober, CFP®,
founding principal of Cedar Investment Advisors LLC, a financial
planning firm in Portland, Oregon. "If your target clients are baby
boomers, you can't ignore this issue. They are getting ready to
retire, and healthcare will be their number one expense in
retirement outside of basic living expenses. So being ignorant in
this area means that you're doing a huge disservice to your clients
by not being well versed in their number one expense."
Retirement Healthcare Cost Overview
Depending on the state of your clients' health and what happens
with healthcare reform and healthcare inflation, their overall tab
in retirement for out-of-pocket expenses, including Medicare
premiums, deductibles, and co-pays on prescriptions, as well as
costs that aren't covered by Medicare, is likely to be a minimum of
$100,000 and could easily hit $300,000. This excludes costs and
premiums associated with long-term care.
Kathryn Votava, Ph.D., president of GoodCare.com, a healthcare cost
consulting firm in Pittsford, New York, pegs typical out-of-pocket
expenses for a retiree at $6,500 to $7,000 per year, double that
for couples. That lines up with the Kaiser Family Foundation's
factsheet on Medicare spending and financing, which showed that in
2005, the most recent year for which figures are available, the
average per capita Medicare spending per
beneficiary—excluding the 4 percent of beneficiaries who
died in that year, because they tend to spend the most
money—was $6,351.
Here's a run-down on the parts of Medicare, enrollment periods, and
associated out-of-pocket costs:
- Medicare Part A: the Medicare hospitalization benefit, which beneficiaries receive without paying a premium. Doesn't include fees for doctors or procedures. There is also a deductible for hospitalization. The enrollment period is the seven-month period beginning three months before the client's 65th birthday.
- Medicare Part B: the Medicare benefit that pays for procedures, physicians, and other medical services. Premiums range from $96.40 to $330.30 per month, depending on the beneficiary's income, including income from tax-exempt investments. Medigap insurance premiums help beneficiaries cover the expenses not covered by Part B; otherwise, beneficiaries are responsible for co-pays and deductibles. The enrollment period is the same as for Part A.
- Medicare Part C: Medicare Advantage Plans, which beneficiaries pay for through their Part B premiums, offer an alternative to traditional Medicare and Medigap insurance. Insurance companies offer Medicare Advantage Plans and charge varying co-pays and deductibles. They operate within specific areas and aren't very portable, unlike Medicare and Medigap plans. The annual open enrollment period is January 1 through March 31.
- Medicare Part D: the prescription drug benefit. Premiums vary, but average about $50 a month. Deductibles range from $0 to $310. If you have a lot of prescription drug bills, you could end up paying as much as $4,550 in out-of-pocket costs due to the donut hole, the part of Part D that isn't covered by insurance. The annual open enrollment period is mid-November through December 31.
Planning for Retirement Healthcare
Just as retirement planning is integral to the financial
planning process, so should healthcare expense planning be, both
before and during retirement. "The incremental, or the first stage,
of planning, is just to start building awareness of what their
medical needs may be in retirement, what the dollar amount attached
to that might be," says Linda Pietroburgo, CFP®, a
principal at Moneta Group, a St. Louis, Missouri, wealth management
firm. "Many of my clients have aging parents and are dealing with
that issue, so I use it as a teachable moment. I'll ask them what
their parents did, planning-wise. And a lot of their parents didn't
do anything. Then I'll say, 'See how difficult that makes the
process, because there is no plan.'"
From that initial conversation, you'll want to continue to discuss
their current health insurance status, health issues, and health
expenses. Votava recommends that planners include an insurance
check-up as part of the yearly financial planning review process
for clients under age 65, and a review of the Medicare coverage
annually once they turn 65.
This gives you a platform for beginning to estimate what their
costs are likely to be in retirement. You'll be able to identify
special healthcare issues that might require more spending in
retirement and consider how those issues may affect their ability
to save or to work until age 65, as well as issues with aging
parents that might affect their finances.
For Kober, a vital part of this conversation is how a client's
overall health ties into his or her healthcare spending, both
before and during retirement. "If I'm doing a retirement plan for a
50-something who is in pre-retirement, I'll show them some
projections on healthcare costs as part of their retirement income
projection and say, 'If you're unhealthy, you're not going to be
taking that big cruise you're dreaming of. You're going to be
spending all that money on healthcare,'" he says.
"For many people, health maintenance is an abstract concept and no
one has ever really connected the dots for them in terms of the
financial consequences of the decisions they make regarding their
health," Kober continues. "As financial planners, we help guide our
clients' futures and need to be able to show, in a very tangible
way, the relationship between maintaining their health and what
their retirement lifestyle plan is going to be."
Because healthcare costs increase at a rate higher than inflation,
it's important to tweak your planning assumptions for both the
accumulation and de-accumulation phase of retirement assets. Joe
Elsasser, CFP®, a financial planner with Safe Income
Planning in Omaha, Nebraska, uses ESPlanner to help him project out
healthcare expenses in retirement.
"I've found that because health insurance has been out of the scope
of traditional financial planning, many software tools don't
address it very well," Elasser says. "One of the things I like is
that you can incorporate a separate healthcare inflation rate and
modify that as well as a Part B premium as part of the Social
Security check, because people forgot all about the Part B
premium," he continues. Votava recommends using an inflation rate
of 8 percent on future healthcare expenses.
Early retirement is a much more difficult issue for many clients
than it used to be, because health insurance coverage is a major
expense. If there are pre-existing conditions, premiums may be so
exorbitant that early retirement isn't feasible. For those who want
to retire before age 59-and-a-half, the lack of access to
retirement funds is also an issue, because tapping those funds
means paying early withdrawal penalties.
"When we initiate any kind of financial planning process with a
client, one of the questions we ask early on is what their ideal
retirement age is," says Randy Brown, chief wealth adviser at
Briteline Wealth Management in Fullerton, California. "Anytime
their ideal retirement date is pre-age 65, pre-Medicare
eligibility, you really have got to start to take into
consideration health insurance, long-term care insurance, and those
kinds of things," he continues. "Because you really wouldn't want
to wipe out your retirement savings with one long stay in the
hospital."
Another Medicare-related issue relevant to planning is the ages of
a married couple, because one person usually is eligible for
Medicare before the other, which can present a problem if the
non-Medicare eligible spouse doesn't have employer-based coverage
or other affordable coverage.
"Solutions are specific to the location due to differences in how
the states treat portability policies," says Kober. Some states
allow residents to obtain coverage on a guaranteed access basis
from the insurance company that issued their employer-based or
COBRA plan. Those individuals can't be refused access to insurance
because of a pre-existing condition or have their insurance
cancelled, although premiums may be much higher if a pre-existing
condition exists, Kober adds.
Transition Points into Medicare
Clients will usually transition into Medicare from one of three
places: employer-based coverage, COBRA, or individually purchased
coverage. Transferring from employer-based coverage through
retirement at age 65 is the most common, although more people are
continuing to work after they turn 65. Regardless of what insurance
platform your clients are on as they approach 65, the enrollment
process for Medicare is pretty straightforward, although you
shouldn't assume that clients know what they are supposed to do or
can figure out the options that are in their best interest.
"It's not all that complicated, but you've got Part A, B, C, and D,
and all those letters that are overlapping, and it tends to get
overly confusing," says Tom Hebrank, CFP®, CLTC, of
Advanced Planning Solutions, a firm specializing in long-term care
and retirement planning.
Brown views assisting clients with the transition process as one
way his firm can add value in a world of information overload. "One
way we add value is to go out and help clients sort through what's
available," Brown says. "If you're a senior and you're thinking
about healthcare, you go to a site, put in your parameters, and it
comes back with a list of 200 possible plans. Every one of those
looks slightly different from the other one. We can help sort that
out by excluding the ones that don't work well for certain
situations and bringing it down to a manageable list. The
transition can get so overwhelming for people that they just pick a
plan so they don't have to worry about it anymore."
Clients can enroll in Medicare in a seven-month window that begins
three months before they turn 65. For someone who is already
retired, or whose retirement dates coincide with going on Medicare,
they'll need to sign up for Medicare and decide whether they want
to go with traditional Medicare and a Medigap or a Medicare
Advantage Plan and a prescription drug plan. Some Medicare
Advantage Plans include prescription drug coverage, others
don't.
If you're dealing with clients who are still working, most will
have a choice between employer-based coverage and Medicare, because
employers are forbidden from forcing Medicare-eligible individuals
off corporate insurance plans onto Medicare, according to Karen
McLeese, vice president of employee benefit regulatory affairs at
CBIZ Benefits & Insurance Services in Leawood, Kansas. While it
won't create a problem with Medicare eligibility to postpone
enrollment in Medicare in favor of an employer plan, those
individuals need to sign up for Medicare within that seven-month
window around retirement. If they don't, it can affect the timing
of their eligibility for Medicare and their costs once they do
enroll, she adds.
Clients who are on COBRA or some type of individual insurance are
usually thrilled to move onto Medicare as soon as they are
eligible, because Medicare is usually cheaper and provides better
coverage. But if they don't move into Medicare in a timely fashion,
they may run into the same issues as those coming off
employer-based coverage—they may miss the Part B
enrollment period, have to wait and fund medical coverage during
that gap, and be penalized with a higher Part B premium.
Many clients will need help in deciding what type of plan to go
with when they initially sign up for Medicare: an Advantage Plan or
traditional Medicare with a Medigap supplement, as well as help in
figuring out what prescription plan is most suitable. Choosing
particular options—such as a Medicare Advantage Plan
versus traditional Medicare with a Medigap plan—can make
switching to the other plans more difficult later, so advisers need
to understand the consequences of making specific
recommendations.
"It's important to understand the transfer restrictions to and from
each type of plan," Kober says. "You can transfer out of a Medigap
plan after the first year, but you can't transfer into a Medigap
plan on a guaranteed issue basis. What is the local environment
regarding acceptance of Medicare payments? If many local doctors
won't accept Medicare as primary, then a Medicare Advantage Plan
might be a better fit."
If some clients are snowbirds, a Medicare Advantage Plan isn't a
good option, because those plans are only accepted in specific
locales; a traditional Medicare and a Medigap policy is generally
the best option. Advisers have to tread carefully recommending
specific Medicare Advantage or Part D plans, because they might run
afoul of the Center for Medicare Services (CMS) rules governing the
sale of Medicare Advantage and Part D plans, says Hebrank. That's
why it can make sense for planners to either have a person
certified to sell such plans in-house, refer to an outside expert,
or avoid specific recommendations.
As for Part D, it makes sense to do a check-up every year right
before the open enrollment period and see whether you can find a
better plan, even if your situation relative to prescription drugs
hasn't changed, says Kober. "This is a shocker for most clients if
they are used to $10 co-pays regardless of the drug's actual
costs," he adds. "One useful strategy is to purchase generic drugs
'off the record' so that the retail cost doesn't accumulate towards
the donut hole," he continues. "The Medicare drug plan finder is
the only way to determine actual drug costs, which can and will
vary significantly based on the current list of prescriptions. The
costs also change every year, so it's important to review clients'
policies during open enrollment."
Acquiring Medicare Expertise
Because Medicare is so complex, more planners are developing an
expertise in Medicare and Medicare transition issues, hiring an
in-house expert, or referring clients to an outside expert. Kober
has amassed knowledge by volunteering with Oregon Senior Health
Insurance Benefits Assistance, which is part of the national State
Health Insurance Assistance Program (SHIP). In that capacity, he
volunteers with individuals in Oregon, helping them navigate the
various parts of Medicare to find the best programs for their
individual situations.
Medicare provides background and training information for SHIP
volunteers and others who want to become conversant in the plan
through the National Medicare Training Program. Some financial
planners who deal with this issue regularly have insurance
backgrounds and are certified to sell Advantage Plans. Others have
gained knowledge on their own, like Kober.
Elsasser plans to hire an in-house expert in the coming year. He'll
look for someone who is certified and trained in the ins and outs
of the various parts of Medicare, including Advantage Plans and
Part D. "Realistically, the situation would be that this individual
will go through and re- evaluate every client's Part B plan,"
he says. "They'll address whether a Medicare Advantage Plan
continues to be in line with their needs, whether their Part D
needs have changed, and other issues."
For a small practice, bringing such expertise in house may not be
realistic, so it may make more sense to go with an outside
consultant. When seeking an outside expert, the vetting process is
"pretty similar to how you vet all your consultants, by looking at
the backgrounds and credentials of those who are experienced in
providing that type of service," adds Votava. "Some case managers
may provide this type of service as experts who know the ins and
outs and how to help people shop for Medicare, but make sure they
are experts in Medicare because many case managers are not. The
'Health on the Net' certification is an international certification
for case managers and other healthcare consultants, so you should
look for that on the Web sites of the consultants you're
vetting."
Many consultants have a health background, like Votava, and consult
with financial advisers, businesses, and directly with consumers.
Others, like Hebrank, developed expertise initially through the
long-term care insurance market, but branched into Medicare and
other senior planning-related issues.
Staying on Top of Changes, Concerns
If you've incorporated healthcare retirement spending into your
clients' financial plans, are aware of their health spending and
health issues, and have helped them complete the transition into
Medicare without incident, your clients will be in pretty good
shape heading into the early phase of their retirement. But don't
get complacent, as health and related financial issues are more
likely to pop up as your clients age.
"People don't realize how their needs change as they live beyond
their 70s," says Hebrank. "You may need to move into assisted
living, which would be covered by a long-term care policy. If you
need a couple of drugs when you are in your 60s, odds are you will
need more into your 70s, and that will cost more. You may be
covered by retiree health insurance, but your company may
discontinue it, so you may have to spend more out-of-pocket than
you had anticipated."
Your clients may rely more heavily on you for help with their
financial and healthcare issues as they age, and even if you have
expertise with Medicare issues, they may require more help in a
crisis or if a specific issue crops up that is outside of your
experience or area of expertise.
"For an adviser, it's important to know when to refer a client to a
specialist," Votava says. "A client who experiences unexpected
expenses may de-accumulate assets more rapidly than they had
planned, which isn't good for the client or for the adviser, in
terms of losing assets under management."
Your clients will need you to help untangle the issues and figure
out the best plan for them because one sure thing about Medicare is
that it changes all the time. And additional changes may be coming
as a result of healthcare reform that is pending in Congress.
"I think financial advisers are well-suited to understand these
issues and at least know the questions to ask, or help their
clients gather the information they need about Medicare and help
them go through it," says McLeese.
Amy E. Buttell, a freelance writer and editor, lives and works in Erie, Pennsylvania. She earned an accounting certificate from Mercyhurst College in 2009. Her online home is www.amybuttell.com.
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