Why COVID-19 Is Driving Up The Cost Of Healthcare In Retirement And What You Can Do Now To Prepare

While the long-term effects of COVID-19 on U.S. healthcare costs has only begun to emerge, experts estimate that healthcare costs linked to the pandemic could climb well into the hundreds of billions in the coming years. That not only places greater pressure on a system that was already strained due to burgeoning costs well before the pandemic, but could have a significant impact on how much you can expect to pay for future healthcare expenses.

How COVID-19 is driving up healthcare costs

A recent study from the Kaiser Family Foundation found that many insurers expect health costs to increase this year due to pent-up demand following deferred care, direct costs related to COVID-19 testing and treatment, and vaccination costs. A separate report from McKinsey & Company indicates that while the direct impact of COVID-19 has already been substantial, additional layers of delayed or indirect impact have the potential to dwarf the immediate effects, resulting in $125 to $200 billion in incremental annual U.S. health system costs. For example, according to the report, the average cost of treating a patient with chronic obstructive pulmonary disease has the potential to increase by between 7% and 11%, going from approximately $38,000 per patient per year to approximately $41,000 per patient per year. This increase in cost is largely driven by an expected increase in the severity of a patient’s symptoms due to the deferral of care.

Behavioral health is another area of concern. In August, the CDC found that anxiety symptoms had tripled, and depression symptoms had quadrupled among 5,470 adults surveyed compared with a 2019 sample. Similarly, Scientific America reported that two separate national surveys conducted by researchers at the Boston University (B.U.) School of Public Health and Johns Hopkins University found that the prevalence of depressive symptoms (B.U.) and “serious psychological distress” (Hopkins) were triple the level measured in 2018. According to the B.U. study, these rates were higher than those seen after other large-scale traumas like September 11^th and Hurricane Katrina.

What can you expect to pay for healthcare in retirement?  

Healthcare is among the most underestimated yet significantly impactful expenses most people will face in retirement. While Medicare pays a portion of costs for those age 65 and over, it doesn’t pay for everything. In most cases, that includes dental and vision coverage, which must be purchased separately, and long-term care expenses, among others. In fact, it’s estimated that the average couple will need $295,000 in today’s dollars for medical expenses in retirement, excluding long-term care. That makes retirees one of the most vulnerable populations when it comes to rising healthcare costs.

Longevity also plays a role. While advances in medical care and treatments have led to longer average lifespans, longer lifespans also mean more people may need long-term care at some point in their lifetime. According to the 17^th Annual Genworth Cost of Care Survey, every day until 2030, 10,000 Baby Boomers will turn 65 and 7 out of 10 will require long-term care, which could add substantially to their estimated out-of-pocket healthcare costs in retirement. From 2004 to 2020, the cost for facility and in-home care services has risen on average from 1.88% to 3.80% per year. That’s an increase of $797 annually for home care and up to $2,542 annually for a private room in a nursing home. Genworth reports that at this rate, some care costs are outpacing the U.S. inflation rate of 1.8%. Over the course of a single year (as of December 2020), the annual national median cost of care increased as follows:

• Assisted living facility rates increased by 6.15% to $51,600 per year.
• Homemaker services, increased 4.44% to an annual median cost of $53,768
• Home health aide services, which include “hands-on” personal assistance with activities such as bathing, dressing and eating, increased 4.35% to $54,912.
• Skilled nursing facility costs rose to $93,075 for a semi-private room, an increase of 3.24%, while the cost of a private room in a nursing home increased 3.57% to $105,850.

In a supplemental study on the Drivers of the Cost of Care, Genworth looked at the impact of the COVID-19 pandemic on rising long-term care costs. They found that increasing demand and strained supply are driving up costs, with 92% of those surveyed citing a growing demand for homecare services, and 54% citing a shortage of skilled labor as the main drivers of increased rates. As COVID-19 intensified the supply and demand gap in 2020, 53% of homecare providers reported serving more clients than in the previous year. As healthcare facilities and home health providers struggle to attract and retain qualified employees, 62% of survey participants say they expect to increase costs in the next six months and 43% expect those costs to increase by more than 5%.

How will you pay for healthcare in retirement?

Whether you’re concerned about how you will pay for rising healthcare costs in retirement or are seeking to help manage the cost of care for a parent or loved one, it pays to plan early. Take the time to meet with an independent financial advisor who can help you develop a comprehensive strategy that takes key retirement risk factors, such as longevity, rising healthcare costs, and long-term care, into consideration.

In many cases, long-term care insurance products can help protect against the rising cost of care. Long-term care insurance is designed to provide coverage if you become chronically ill and may be an option for certain individuals and couples seeking to transfer a portion of the financial risk associated with these costs. However, long-term care insurance is not a solution for everyone. Policies and coverages differ greatly from one provider to the next, so it’s important to read all policy provisions carefully, prior to purchase, to learn about any exclusions, limitations, and waiting periods. It’s also important to compare benefits and providers before deciding whether long-term care insurance is right for you. In addition, since your age, current health, pre-existing medical conditions, and family medical history all play a role in determining annual coverage premiums, the best time to investigate long-term care insurance is when you’re still in relatively good health and less likely to be turned down for coverage.

Your advisor can help you evaluate various strategies to help ensure you are able to pay for both anticipated and unanticipated healthcare expenses in retirement. Whether you’re confident in your ability to generate income for another 20, 30 or more years in retirement, or have concerns about how long your income may last, working with an independent advisor can provide you with a better understanding of how you can make the most of this exciting period in your life. To learn more, download our complimentary guide, Living in Retirement.