Advisors, Medicare and the Election: Reading Between the Headlines

What You Need to Know

Retiree health care expenses are still rising even as presidential candidates and voters have shifted attention elsewhere.
Biden’s efforts to control drug costs have gotten positive press, but the reality is more nuanced.
Medigap plans have been shifting rising costs to consumers for years.

Normally in an election year, the future of Medicare would be among the top concerns of voters.

This is shaping up to be no ordinary year, with wars in Europe and the Middle East, and legal battles in courtrooms across the country dominating headlines.

A lot can (and will) happen between now and Nov. 5 that could bring competing visions of Medicare to the top of candidates’ and voters’ priorities.

But for many candidates, the fear of touching a third-rail issue will crowd out any meaningful discussion of this critical program.

That does not mean that Medicare will not be on the ballot or that advisors should not be paying close attention to what comes next.

Clients continue to ask basic questions:

Will I be able to count on Medicare and Social Security in retirement?

Should I plan on receiving reduced benefits?

The Quiet Squeeze

As we detailed in our recent Medicare Part D National Data Report, while provisions in the Inflation Reduction Act will lower drug-related out-of-pocket (OOP) expenses for some and likely slow the rate of increase of these costs, average premiums across three of the largest national carriers surged in 2024 by 16% to 53% across all 50 states.

By lowering the catastrophic cap from $8,000 this year to $2,000 in 2025, the financial exposure for the 25% of Americans who currently exceed the lower limit in drug-related OOP costs may be significantly reduced.

However, many of the 25% will actually pay more in combined premiums and OOPs for Part D coverage based on medications and how far their costs are above the $2,000 maximum, and all will pay higher premiums.

This underscores a basic reality when it comes to health care costs: When you squeeze the toothpaste tube at one end, it comes out somewhere else.

Although higher premiums will for many be a price worth paying, it’s not a political talking point.

The Real Costs

With the attention that has been given to steps the Biden administration has taken to tackle rising drug-related out-of-pocket costs, which also include negotiating drug prices for the first time, it should be no surprise that there is a palpable sense that retirement health care expenses will be lower in the future.

The reality is far more nuanced.

The changes are likely to reduce the rate of increase in out-of-pocket costs — a significant benefit — but if we look at all components of retirement health care costs (Parts B and D premiums, supplemental insurance, other out-of-pocket expenses), our actuarial data projects a steady overall increase in costs, consistent with the long-term trend of 1.5 to 2 times the consumer price index (CPI).

Hopefully the rate of increase going forward will be lower than the historical trend.

But since costs will rise over time, driven by health care inflation, age ratings of supplemental insurance, and increased utilization of services, these factors should be considered as part of the planning process.

Our data show a healthy 65-year-old couple starting retirement on Jan. 1 this year should plan to cover $16,113 in actuarially calculated annual health care costs in 2024 and $50,724 at age 87.