Fidelity on Retiree Future Health Care Costs and HSA Participation

By Clive Riddle, April 1, 2011

Fidelity Investments tells us that the total amount a couple just entering retirement needs to have saved for their future health care costs dropped this year from past estimates, due to one-time savings from health reform. Fidelity also tells us that HSAs are a recommended vehicle to help fund these required costs, and almost all their HSA account holders rolled over some account balance from 2010 to 2011 to save for these costs.

Fideltiy this week released their annual estimate of future health care costs for retired couples. Last week, Fidelity released findings on their study on how Fidelity HSA participants are using their accounts. The two topics overlap, as HSA participation is of course, a recommended strategy by Fidelity for persons preparing for retirement.

Fidelity cited their recent survey that indicated 68% of pre-retirees “said the cost of medical care in retirement is one of their three biggest financial concerns (outliving savings and inflation were the other worries).”

Fidelity now estimates “a 65-year-old couple retiring this year will need $230,0001  to pay for medical expenses throughout retirement, not including nursing-home care.  This represents an 8 percent decline from last year, when the estimate was $250,000” and costs increased 4.2% over 2009 costs.

Previously, the estimate has increased an average of 6 percent annually since the initial calculation of $160,000 in 2002. Fidelity indicates the “$20,000 decline in the estimate from last year was driven by Medicare changes contained in the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, both signed into law in 2010.  These changes, which reduced out-of -pocket expenses for prescription drugs for many seniors, resulted in the reduced estimate.” The health reform changes include a required 50% discount on brand name drugs that are applied to beneficiaries “donut hole” benefit level, and ultimately phases out the donut hole by 2020.

Brad Kimler, EVP of Fidelity’s Benefits Consulting business tells us “while the savings generated through the health care reform laws is a welcome relief to many seniors, it should be considered a one-time adjustment, at least for the time being. Today’s workers still face the prospect of significant medical expenses in retirement and must begin to include those costs in their retirement plan strategies. Looking forward over the next few years, Americans should expect health care expenses to continue to increase annually due to a number of factors including higher costs for medical services, the introduction of new technology and an increased utilization of health care services like diagnostic testing,”

The Fidelity Retiree Health Care Costs Estimate “assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program Medicare.  The calculation takes into account cost sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance).  It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Medicare.  The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.”

Fidelity, in commenting on their retiree health benefit cost estimate, hold out HSAs as a recommended savings tool. William Applegate, VP, HSA products for Fidelity Investments tells us “the continuing rise of health care costs combined with health care reform really drove the adoption of HSA-qualified health plans  by employers last year and thus the growth of HSAs. As for participants, it is clear that many are using the health-savings product to help manage not only their current medical expenses but also plan for future expenses, with nearly all participants carrying some balance over to the following year.”

Fidelity’s analysis of their 74,000 HSA participant accounts indicated the following patterns and behaviors:

• On average, HSA participants had contributions of $2,620 made to their accounts in 2010  including their own contributions and employer contributions.  
• 17% of  participants contributed, through both their own and employer contributions, more than $5,000 to their account in 2010
• 46% of participants had contributions of $2,500 or more in 2010
• 36% of participants used more than 90 percent of their annual HSA contribution on qualified medical expense reimbursements,
• 40% of participants used between 10 percent and 90 percent of their HSA contributions and carried over the rest.
• 24% of participants used less than 10 percent of their annual contributions and invested the balances for future health expenses.
• Overall, 95% of participants carried over some balance from year to year

Comments

[Ryan Joseph]

Many thanks to Fidelity Investments for sharing the blog on HSA and its significance. As per the analysis, 95% of 74,000 HSA participant made investment through Fidelity have carried over some balances for future health care expense. It shows HSA is a good plan to meet health expense. Even wherever i have read about HSA, most of the time I have experienced it as a beneficial high deductible health plan.