Medicare Compliance & Reimbursement

With medical costs rising and employerprovided retiree coverage shrinking, allowing future retirees to fund coverage with pretax dollars could be an idea whose time has come, according to a new analysis from the Employee Benefit Research Institute.

“Policy incentives to allow retirees to use a vehicle to pay health insurance premiums and outof- pocket expenses on a pretax basis would not only make health insurance more affordable but might also spur financial planners to focus on health care expenses much more than they do today as a lifelong savings need,” write EBRI President Dallas Salisbury and senior research associate Paul Fronstin.

The share of employers offering retiree coverage is declining, and Medicare pays only around 50 percent of health expenses, says the analysis. According to federal-government data, in 2000 12 percent of all private employers offered health benefits to retirees under age 65 and 11 percent offered them to Medicare-eligible retirees, down from 22 percent for early retirees and 20 percent for Medicare-eligibles in 1997. The trend of decline appears to be continuing.

Based on the assumption that health-care premiums will increase by 7 percent annually over the next 35 years, the analysts conclude that 65- year-olds with retiree-sponsored coverage — the minority — need current savings with a present value between $37,000 and $216,000 to pay health-care costs in retirement, depending on date of death. A 65-year-old retiree without access to an employer-sponsored group plan needs between $47,000 and $354,000, depending in part on where he or she lives, since Medicare supplemental coverage costs vary from state to state.

Needed savings would be much higher for those who retire before the age of 65 or if premium costs rose faster, as they have in recent years.

Part of the problem is that retirees don’t face a “level playing field” with workers when it comes to funding their coverage, says EBRI.

Among options that could help: allowing retirees to exclude their health-premium contributions from taxable income and put pretax dollars into flexible spending accounts from which they could pay outof- pocket expenses.