Even the rich fear retiree health costs

Even the affluent are spooked about their future health-care costs.

Merrill Lynch surveyed its clients with assets of more than $250,000. The company found that more than 3 out of 4 listed medical expenses as their No. 1 concern in retirement. About 2 out of 3 said they had not estimated retirement health-care costs. Not coincidentally, the vast majority plan to continue to work past retirement age.

Seniors spend about 10 percent more of their incomes on health care than working-age adults, even excluding prescription-medication costs. The elderly have greater medical needs, and their fixed incomes are less capable of absorbing rising medical costs.

Health care is a major retirement expense, and rising at a significantly higher rate than consumer inflation. According to Fidelity Investments, health-care expenses for those 65 or older rose more than 4 percent in 2010, compared with 1.1 percent for consumer prices overall. Retirees are paying 56 percent more for medical expenses than in 2002. Health-care expenses average $535 a month, second only to food costs.

The Center for Retirement Research at Boston College estimates that a married couple age 65 will spend $197,000 out of pocket for their remaining life expectancy. The figure rises to $260,000 when nursing care is included.

The good news is that health reform will close the “doughnut hole” in the Medicare Part D prescription drug benefit. Medicare beneficiaries pay out-of-pocket for medication after the initial coverage limit is met and before catastrophic coverage begins. In 2009, Medicare did not cover the first $295 of prescription expenses or those incurred between $2,700 and $6,154 annually. The latter gap gradually will close by the end of the decade.

The bad news is that Medicare inevitably will shift more costs to retirees in future years. Retirees spend about 10 percent of their income on health-care expenses. That is expected to rise to 19 percent by 2040.

The recession’s continuing toll in California

Medical debt is an under-recognized household burden. In 2009, 2.6 million Californians had some form of medical debt, which 400,000 more than in 2007, according to the UCLA Center for Health Policy Research.

Access to care is normally measured nationally by the percentage of Americans who are uninsured. This deflects attention from people who are underinsured or dealing with burdensome medical debt. The typical benchmark for being underinsured is paying 10 percent or more out of pocket for health care. People under financial strain often forgo needed medical care.

Unlike other expenses, medical costs are difficult to budget for. The uninsured are especially disadvantaged because they receive bills up to 2.5 times what public and private insurers pay. Unlike individuals, health plans can negotiate lower prices for treatment costs. Only 1 out of 8 uninsured families can pay their hospital bills in full.

Nearly half of the uninsured did not fill at least one prescription in the past year and more than half had medical problems for which they did not seek care. One out of 5 had medical debts exceeding $8,000. They lose one-third to one-half of their assets to medical expenses when tragedy strikes. According to a government study, most uninsured people have “virtually no” savings and had media financial assets of just $20.

Medical bills are playing more prominent roles in personal bankruptcies. Medical expenses contributed to nearly two-thirds of bankruptcies filed in 2007, according to a Harvard research study. The share of bankruptcies associated with medical bills increased 50 percent between 2001 and 2007.

The authors were blunt: “The U.S. health-care financing system is broken, and not only for the poor and uninsured. Middle-class families frequently collapse under the strain of a health-care system that treats physical wounds, but often inflicts fiscal ones.”

Lead researcher David Himmelstein, who advocates a single-payer system, said in a statement: “Unless you’re Warren Buffett, your family is just one serious illness away from bankruptcy. For middle-class Americans, health insurance offers little protection.”

Three-quarters of those filing for bankruptcy had medical insurance when they became ill or injured. Many found that they were underinsured and had large out-of-pocket expenses. One-quarter of employers cancel coverage immediately when an employee suffers a disabling illness, and another quarter do so within a year. Medical bankruptcy is rare in developed nations other than the United States. Besides having better medical safety nets, Europeans pay about half as much as Americans do for out-of-pocket expenses.

Some conditions are financially devastating. According to the study, people with multiple sclerosis paid an average of more than $34,000 out of pocket in 2007. Those with diabetes paid nearly $27,000 and those with serious injuries paid about $25,000.

Himmelstein also examined the impact of the 2006 Massachusetts health-reform law. The percentage of bankruptcies tied to medical bills changed little after reform, indicating that federal reform will not have much effect.

Himmlestein said, “Massachusetts’ health reform, like the national law modeled after it, takes many of the uninsured and makes them underinsured – typically giving them a skimpy, defective private policy that’s like an umbrella that melts in the rain. The protection’s not there when you need it.”

Other researchers say such bankruptcy figures are overblown. They estimate that medical bills contribute to less than 20 percent of bankruptcies and primarily affect those with incomes closer to poverty level.

A study of medical financial burden and mortgage foreclosures found a strong link. Seven of 10 homeowners had a significant medical episode in the two years prior to foreclosure proceedings. More than one-third had outstanding medical bills greater than $2,000 and 1 out of 8 used home equity to pay for care.


Meet U.S. health care, circa 2020

The high-deductible health plan (HDHP) will be commonplace in 2020 because many will not be able to afford anything else.

People with HDHPs almost invariably use less health care. They usually use self-diagnosis, followed by self-rationing. They generally cut back equally on unnecessary and necessary care. Patients tend to give less weight to the future state of their health than to present costs.

RAND Corp. conducted groundbreaking research in the 1970s that illustrates what happens with high consumer cost-sharing. The so-called Health Insurance Experiment randomly assigned 5,800 working-age adults to different levels of cost sharing, ranging from free to 95 percent. The results showed:

  • As the percentage paid by the patient rose, physician visits decreased.
  • The total amount of treatment received was unaffected once they began medical care, meaning consumers tended to lose control of costs.
  • Health outcomes were unaffected regardless of cost-sharing and medical usage.

Another, more recent RAND study showed that HDHP enrollees cut back on care regardless of their income or health.

A recent study found that families with HDHPs between $1,000 and $6,000 were 3-4 times more likely to delay or skip health care than those on traditional plans.

As Health Care in 2020 points out continuously, this will be our nation’s health-care landscape in a few short years, regardless of what happens to the health-reform law.

The elderly are skimping on care

About 1 out of 5 older Americans are cutting back on health care spending, according to Employee Benefit Research Institute.

They are buying more generics (good), splitting or reducing dosages (not so good), and delaying or skipping physician appointments (likely pretty bad). About 1 out of 3 who are cutting back say they are in poor health.

This happens in a bad economy, when people need to decide which essential expenses can wait. However, skimping or eliminating health care is rolling the dice on health and risking more costly care later on.


The financial burden of disability

Treating chronic disease consumes more than 75 percent of U.S. health-care dollars, and is expensive for patients and their families. But when the condition morphs into disability, it can be devastating.

According to a Spanish study, the cost of moderate disability is about 40 percent of household income. That rises to 70 percent of income when the disability is severe. About 90 percent of those with a serious disability is in a state of moderate poverty, and more than half is in a state of extreme poverty.

Those with severe disability and no insurance virtually sentenced to a pauper existence.

Shopping with a blindfold

The Government Accountability Office recently cited the barriers faced by consumers in getting cost information. For example, insurance companies refused to share rates negotiated with health-care companies, calling the information proprietary.

One of the key principles behind high-deductible health plans (HDHPs) is to create more discerning health-care consumers. In theory, health-care providers will compete for customers on price and quality, lowering the former and increasing the latter. However, the existing tools to do this are primitive and mostly useless.

For example, California requires hospitals to publish their official prices, known as charge masters. However, these have little value because hospitals charge any of dozens of prices for the same procedure, depending on negotiations with different health plans. UCLA Medical Center included this unexplained entry on its published charge master: GRMS EXT PIECE HOWMED STRYKER. Price $10,290. That, by the way, is a prosthetic bone.

Contrast this with other consumer goods, for which prices are clearly marked and easily compared. Product details are listed and readily available. Expert and consumer reviews usually exist. These tools do not exist in health care.

More than 30 states are considering or attempting to pass legislation to increase price transparency. Three bills were introduced in Congress in 2010 to do the same.

There has been little urgency to help HDHP enrollees up to this point. They remain a small, if growing, segment of the insured population. Most patients are fully insured and pay a small portion of their health-care costs.

Patients shopping based on price are at a disadvantage because they do not know what they need. Every disease or condition needs a different mix of care. Attempting to figure that out without a physician’s guidance can be a foolhardy exercise. Consumers have a much easier time with simple procedures such as those offered in retail health clinics, or for prescription prices.

And, of course, few feel like shopping when they are ill.

Patients also have a difficult time trying to determine quality of care. This is an example of how efforts to provide the consumer with more detailed information may backfire. Many erroneously believe higher cost of care means higher quality. That line of thinking might encourage providers to raise their prices simply to enhance the perceived value of their services.

Consumers do not even shop around for health services not customarily covered by insurance, such as LASIK surgery and dental crowns. These services are ideal for comparison shopping: they are not urgent; there is no need for further diagnosis; there is usually one price per provider, and the out-of-pocket cost can be steep.