Retiree Health Cost Estimate Falls, for a Change

Rising health care costs are a given. But for the first time in 10 years, the outlook is improving for new retirees wondering whether they'll be able to pay their medical bills throughout their retirements.

BOSTON -- Rising health care costs are a given. But for the first time in 10 years, the outlook is improving for new retirees wondering whether they'll be able to pay their medical bills throughout their retirements.

A 65-year-old couple retiring this year will need $230,000, on average, to cover medical expenses in retirement, according to a study to be released Thursday by Fidelity Investments.

That's down 8 percent from the $250,000 projection the Boston-based financial services company made a year ago. That's notable because the total had risen each year since Fidelity made its initial calculation of $160,000 in 2002. Annual increases have averaged 6 percent.

Fidelity attributes its optimism to President Obama's year-old health care overhaul, which will reduce many seniors' out-of-pocket expenses for prescription drugs.

The projections are part of Fidelity's business helping employers design workplace benefits programs. The study is based on projections for a couple of 65-year-olds retiring this year with Medicare coverage. The estimate factors in the federal program's premiums, co-payments and deductibles, as well as out-of-pocket prescription costs. The study assumes no employer provided insurance in retirement, and a life expectancy of 85 for women and 82 for men.

The calculation was complicated this year by the health care bill that Obama signed into law in March 2010. Although its focus is expanding health care access to people under age 65, the law also will benefit many retirees by gradually closing what's known as the 'doughnut hole' coverage gap in the Medicare drug benefit.

Fidelity says that's the key reason why its projection is down this year. But that effect will run its course. Longer-term, retirees' cost savings aren't expected to offset other factors driving expenses up, such as new medical technologies, greater use of health care services, and more diagnostic tests.

That's why Fidelity expects its calculation will eventually resume its historic pattern of annual increases.

"We expect that trend to continue when we look to 2012 and beyond," said Sunit Patel, a senior vice president for benefits consulting at Fidelity.

Fidelity's estimate is a projection of what an average couple would need. Actual costs will vary widely, depending on a couple's medical needs and how long they live. The projection also doesn't factor in most dental services, or long-term care, such as costs from living in a nursing home.

In any given year, about one in four Medicare beneficiaries have drug expenses high enough to hit the doughnut hole, in which they're responsible for the full cost of their medications. The older one gets, the greater the chances of landing in that hole at some point because of an illness requiring costly prescription drugs.

For 2011, the coverage gap starts after Medicare beneficiaries and their insurance plan have spent $2,840 on medications. After that, seniors are responsible for roughly the next $3,600. Once total spending reaches about $6,440, Medicare's catastrophic coverage kicks in and beneficiaries pay only a small amount.

Under the new law, the gap will be gradually eliminated by 2020. When the changes are complete, seniors will just pay the regular 25 percent cost sharing for all their medications.

The Employee Benefit Research Institute, an independent nonprofit, conducts similar research but, unlike Fidelity, doesn't focus on an average. That's because there are so many variables that impact a retiree's circumstances, says Paul Fronstin, EBRI's director of health research and education.

In its latest annual estimate released in November, EBRI projected that a couple with median drug expenses -- meaning half of the population would have higher, and half lower -- would need $158,000 for a 50 percent chance of having saved enough to cover health care expenses in retirement. They'd need $271,000 for a 90 percent chance.

EBRI's study didn't closely examine the savings impact from the health care law because of differences in how it makes its projections compared with Fidelity.

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