Health-care expenses in retirement surge

Mar 13, 2006 @ 12:01 am

By Sara Hansard

WASHINGTON - The cost of health care in retirement has jumped more than 5% over the past year, according to estimates announced last week by Fidelity Investments.

A 65-year-old couple retiring today will need $200,000 to cover their health-care costs for the remaining 17 to 20 years of their lives, Boston-based Fidelity estimated. The 2006 estimate rose 5.3% from last year's estimate of $190,000.

Since Fidelity's initial estimate of $160,000 in 2002, the number has increased an average of 5.8% a year.

The estimate includes the cost that individuals must pay for Medicare premiums (32% of the cost), as well as additional health-care costs, such as "Medigap" insurance to cover health-care expenses not covered by Medicare, deductibles and excluded benefits (36%), and out-of-pocket prescription drug costs (32%).

The estimate assumes that

the couple won't have employer-

sponsored retiree health care, and it doesn't include over-the-counter medications, most dental services or long-term care.

U.S. companies rapidly are cutting retiree health benefits, Fidelity noted, and health insurance premiums are growing at a rate more than two and a half times the rate of consumer inflation, making it more imperative that people plan for their health-care costs during their retirement years.

"Today, health-care costs have the potential to significantly erode an individual's retirement savings," Brad Kimler, senior vice president of Fidelity Employer Services Co., said in a press release. Fidelity Employer Services is a division of Fidelity Investments that administers human resources benefits for companies.

Like many financial services companies, Fidelity is touting the relatively new health savings accounts that many employers have begun to offer this year.

HSAs, which first were authorized under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, are tax-advantaged savings accounts for health-care costs not covered by health insurance.

Money in HSAs can be carried over from one year to another, but they can be used only if the insured person has a high-deductible health insurance policy. The accounts can be moved from one employer to another.

The maximum contribution for HSAs this year is the lesser of either the deductible of the high-deductible health plan or $2,700 for singles and $5,450 for families. As of this year, the high-deductible health plans must require that single people cover at least $1,050 of their own health-care costs a year before insurance kicks in, and families must cover the first $2,100 of medical spending.

The consumer-directed plans are an attempt to use market forces to control health-care costs more effectively.

The financial services industry and financial advisers have become increasingly interested in the accounts as more people start to use them.

Nearly $1 billion is in more than 820,000 HSA accounts, which have an average balance of $1,181, according to Inside Consumer-Directed Care newsletter, published by Atlantic Information Services Inc. of Washington. With that amount in the accounts, more competition is expected for the business, and some large health insurers may launch their own financial firms or acquire existing ones, according to Steve Davis, managing editor of the newsletter.

UnitedHealth Group Inc. of Minnetonka, Minn., the country's second-largest health insurer, owns Exante Bank Inc. of Salt Lake City, which administers the company's HSAs. WellPoint Inc. of Indianapolis, which is the operator of the Blue Cross and Blue Shield health insurance plans, and the country's largest health insurer, plans to start its own bank to administer HSAs next year, also in Salt Lake City.

"It's kind of one-stop shopping," Mr. Davis said.

"That's clearly one channel of distribution for these products," Mr. Kimler said in an interview. "It speaks to this overwhelming movement toward HSAs, because of the attractiveness of the tax advantages that they give."

Many of the companies for which Fidelity provides retirement services want HSA services, as well. "It's akin to retirement investments" that Fidelity already is administering for them, Mr. Kimler said.

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