Retirement health care planning and Medicare premiums: Advisor takeaways for 2024

By Ron Mastrogiovanni

Following the roller coaster ride of the last couple of years, we are seeing a return to near historical average increases in Social Security cost of living adjustments and Medicare Part B premiums for the coming year.

But this is only part of the picture for 2024. Our research shows significant across-the-board increases in Medicare Part D premiums in advance of the implementation of Inflation Reduction Act provisions to reduce drug costs in retirement.

Medicare premiums are a key expense advisors must consider when working with clients to build retirement or decumulation plans that address clients’ healthcare needs. Understanding the implications of 2024 changes is important for both clients planning for retirement and those in retirement.

Social Security and Medicare Part B premiums

The Social Security Administration announced in October that retirement benefits would increase by 3.2% in 2024, consistent with the overall decline in inflation. On average, this will mean an annual increase of $708 for retirees. For Medicare Part B premiums, which are deducted directly from Social Security benefit checks, the Centers for Medicare and Medicaid Services announced a 5.9% increase of $9.80 per month or $117.60 for the year.

Medicare Part B premiums are one component of total retirement health care expenses. Other areas of focus include Medicare Part D and supplemental insurance premiums as well as all other out of pocket costs including co-pays, dental, vision and hearing.

Next year’s increase in Part B premiums underscores the long-term trend of health care inflation rising at around 1.5 to 2 times the consumer price index. Combined with the age rating of supplemental insurance and increased usage of services over time, health care costs will be a far higher portion of retirement expenses toward the end of retirement than at the beginning.

Our actuarially based health care cost projection tools show an average healthy 65-year-old couple retiring this year and living to their actuarial projected life expectancy will spend an annual total of $14,500 on healthcare at age 65, and an inflation adjusted $49,300 at age 85. This doesn’t account for the potential expense of long-term care in the last years of life.

Medicare Part D premiums in 2024 will be significantly higher

Part D premium increases tend to receive less attention than Part B, because these are determined at a state level with coverage provided by individual insurance carriers. Our data from three large providers in the five states with the largest numbers of over-65 residents show average increases in Part D premiums of 42% for the same level of coverage across the plans they offer. Nationwide, the average increase between 2023 and 2024 for comparable standalone plans from the same providers is 33%, or almost 10 times the percentage increase in Social Security COLAs. Retirees, who tend to choose these Part D plans, are already being surprised by the magnitude of these changes.

Our recent Retirement Healthcare Costs Interim Data Report (2023-24) notes that these increases are most likely being driven by a reduction in the catastrophic cap on drug-related out-of-pocket costs from $7,050 to $2,000 in 2025, as well as changes to cost sharing above the new caps that mean carriers will pick up significantly higher expenses. As we and others, including the Kaiser Family Foundation, anticipated, this is driving higher premiums.

Inflation Reduction Act initiatives to negotiate drug prices and inflation controls on rising drug prices will benefit retirees by slowing the rate of increase of out-of-pocket costs. And, the lower catastrophic cap will reduce their impact on retirement budgets for the approximately 25% of retirees who currently exceed $2,000 in annual prescription drug expenses. The net effect for 2024 (and potentially the year after) is significantly higher Part D premiums, and, for some, relief on catastrophic costs and out-of-pocket expenses starting in 2025. It is important to note that diabetics are already benefiting from the lower cost of insulin under another Inflation Reduction Act provision.

The combined average Part B and Part D premium increases for individuals on high-end drug plans will, on their own, account for more than 60% of the 2024 COLA. Although we expect Part D premium increases will moderate over time, if we see a similar jump in costs in 2025 a healthy couple retiring today would face an additional $50,000 in lifetime inflation-adjusted Part D premium expenses.

When it comes to prescription drug plans, clients have choices. Financial professionals can work with clients to help select appropriate plans for their specific needs and budgets. Since each Part D plan is different and provides different levels of drug coverage, understanding the implications of choosing one plan over another, and making clear the potential for penalties if a drug plan is not chosen, provide a way for an advisor to add significant value.

Part B, Part D and the overall health care expense picture

Medicare premiums account for a significant portion of overall health care expenses, but these premiums are not the only costs retirees will have to cover. A significant number of retirees will choose a supplemental insurance plan to reduce the client’s exposure to out-of-pocket costs in the event of a major medical event. Retirees also must budget for the cost of hearing, vision or dental work, along with co-pays and other out-of-pocket costs.

Financial professionals also must build into the planning process the significant variables that will impact overall health care expenses, including income (surcharges), location, gender and health condition. Health is the most significant determinant of longevity, which in turn is the most significant determinant of lifetime health care expenses. More years of life will mean more years of premiums and other health-related expenses. We have long advocated for advisors to discuss realistic expectations for lifespan and build this into the planning process.

Medicare Part B premiums increasing faster than Social Security COLAs along with this year’s dramatic jump in Part D premiums, underscore the importance of planning for higher health care expenses and the long-term trend of costs being shifted to retirees.

Helping clients ensure health care needs are met is an opportunity for financial advisors and professionals to work with clients to navigate the complexities and choices around Medicare programs and health care planning. Engaging in these conversations is also a powerful way to leverage financial advisors’ core expertise of helping clients grow assets pre-retirement and, as they enter retirement, implement distribution strategies to achieve this very specific goal.

Ron Mastrogiovanni is CEO of HealthView Services. Contact him at [email protected].