What would you say about a planning tool that quantifies how improved management of a chronic health condition can reduce a client's medical expenses, increase their life expectancy and boost disposable income? What if you took it a step further and used the tool to show clients how investing those savings in a 401(k) could bolster their retirement security and allow them to delay claiming Social Security benefits until a later age?
How about: Show me the money?
That's what HealthyCapital, a joint venture between the Mercy health care system and HealthView Services, a provider of health care cost data for financial services firms, did. The results are impressive.
The firm studied how providing 401(k) plan participants with specific health care cost data could encourage them to manage their health conditions and increase retirement savings. The findings are detailed in a new report, "Health & Retirement Savings: Leveraging Healthcare Costs to Drive 401(k) Contributions & Improve Health." The report provides some interesting lessons for both 401(k) plan advisers and financial planners who work with retail clients.
People tend to be better at saving for important and tangible financial goals, such as a house or car, than for retirement in general. The data indicate that participants feel covering health care costs in retirement is an important and specific priority. When the projected cost information is shown, it provides plan participants with a specific objective and can motivate them to increase their savings.
Many leading financial services firms currently incorporate HealthView's cost projections, based on 70 million actual medical cases, into their planning tools for 401(k) participants. The new HealthyCapital tool goes further by incorporating age- and disease-specific cost estimates into an actionable plan that details health care costs before and during retirement and how those savings can boost retirement income to cover health care costs.
For example, a 50-year-old man diagnosed with high blood pressure could save an average of $2,234 per year in out-of-pocket health care costs and add three years to his life expectancy by properly managing his health. By improving health and investing the savings, a 45-year-ld women with Type 2 diabetes and high cholesterol could reduce her annual pre-retirement health care costs by more than $3,300 through simple changes, such as limiting her salt intake and continuing to take medications as prescribed, increasing her life expectancy by eight years. Investing those savings could add more than $100,000 to her future 401(k) balance.
"Most of the money spent on health care is on those with chronic conditions," said Ron Mastrogiovanni, CEO of HealthyCapital and HealthView Services. But 50% of Americans who are prescribed a medication will cease proper use of that medication within six months, according to the Food and Drug Administration. The biggest factor in improving health is individual behavior, which affects 40% of health care outcomes — more than doctors' visits or genetics, according to the New England Journal of Medicine.
Imagine that you could show your clients "here is where you are today and here is what could happen if you follow your doctor's orders and make these changes in your behavior," Mr. Mastrogiovanni said in a telephone interview. "Especially when facing competition from robo-advisers, this tool brings added value to the critical issue of health care costs and gives advisers a clear competitive advantage."
"We see this tool as having a huge impact on Social Security claiming strategies, too," said Michael Daley, product marketing manager at HealthyCapital.
"With the demise of key Social Security claiming strategies, life expectancy is the biggest factor when deciding when to claim benefits," Mr. Daley said.
For example, a 50-year-old man with Type 2 diabetes has a life expectancy of 72 if his condition is poorly managed, compared to 80 if it is well managed. It makes a big difference to his retirement income if he claims Social Security at 62 assuming a shorter life expectancy, or 70 if he expects to live longer.
In the 401(k) market place, employers could be big winners, too, reducing their benefit costs and possibly freeing up more dollars for employee salaries.
The report includes this example. Assume a self-insured employer with 5,000 employees provides a $200-per-person incentive for workers to participate in a wellness program, and the company incurs a program cost of $45 per employee per year.
About half of the eligible employees are likely to sign up. Of those, assume half have a chronic health condition, reflecting the general U.S. population. Of those with a chronic health condition, about half may actively engage in the wellness program.
That brings the total active participants with chronic conditions to 14% of the employee population. Even with that small participation rate, the company could save an estimated $2.5 million per year in net reduced healthcare costs, according to the report.
"In the employer marketplace, this unique approach can provide a solution to lower benefit costs and increased 401(k) contributions," Mr. Daley said. "This could be an interesting way for 401(k) providers to attract new prospects and keep existing clients."