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Key Takeaways:
The rising cost of healthcare plays a pivotal role in retirement planning—now more than ever. For example, from July 2021 to July 2022 alone, prices for more than 1,200 prescription drugs increased an average of 31.6%. That is significantly higher than the 8.5% inflation rate during the same time period.1
It’s no surprise, then, that out-of-control healthcare costs are a top retirement concern of most U.S. adults. In fact, 63% are very worried about what healthcare costs might do to their plans for retirement.2
The Inflation Reduction Act (the “Act”), a federal budget bill signed into law in 2022 that contained public investments in a broad array of social, infrastructural, and environmental programs, included provisions to reduce the frequency and size of drug price increases for people enrolled in Medicare. The Act allows Medicare to negotiate prices for certain prescription drugs covered under Medicare Part B and Part D, caps out-of-pocket Part D costs, and extends the Affordable Care Act insurance subsidies into 2025.
While this legislation will undoubtedly help with some prescription medication costs, retirees will still face potentially significant out-of-pocket costs for medical care. That’s why helping your clients plan ahead for healthcare costs remains a crucial part of the retirement planning process.
Many people do not understand that Medicare isn’t free. In reality, there are a variety of potential costs involved—including premiums, coinsurance, copays, and deductibles.
Aside from helping to fund Medicare through federal taxes, Medicare beneficiaries also share significantly in the direct costs of medical care and prescription drugs. This comes in the form of premiums, copays, coinsurance, and deductibles.
Medicare cost-control measures of the Act kick in gradually over several years.3,4
A long-standing clause in the Medicare Prescription Drug Improvement and Modernization Act, the 2003 law that established Medicare Part D, prohibited the federal government from interfering in the pricing of drugs covered under the program. This clause restricted the ability of the federal government to wield its purchasing power to lower drug costs—especially for high-cost drugs with no competitors.5
The Inflation Reduction Act changed that—requiring the federal government to negotiate prices for 60-plus drugs without competitors. The first 10 drugs for which Medicare will negotiate prices were announced in August 2023 and include the following:
Negotiated prices for these drugs will go into effect in 2026.6
The new cost controls that first came into effect in 2023 are anticipated to reduce out-of-pocket drug costs for Medicare enrollees beginning in 2024. But retirees are still required to pay Medicare premiums, copays, and coinsurance, not to mention many other potential out-of-pocket costs for physician visits, surgeries and other procedures, hospitalizations, hearing care, dental care, and more.
These costs will add up over time. The Employee Benefit Research Institute (“EBRI”) estimates that to have a 90% chance of paying for Medicare premiums and prescription drug costs in retirement, a 65-year-old woman would need $197,000—and a 65-y ear-old man $166,000. 7 EBRI projects a couple with high prescription drug costs would need $383,000 to meet that 90% target.8
As a financial professional, you can offer valuable guidance to clients by helping them create tax-efficient strategies to plan for these costs. Options can include:
The Nationwide Retirement Institute offers a wealth of insights and resources to help you create tax-efficient strategies for your clients. You can also find tips and strategies on a broad array of financial topics at NationwideFinancial.com/topics.
Nationwide and its representatives do not give legal or tax advice. An attorney or tax advisor should be consulted for answers to specific questions.
“Price Increases for Prescription Drugs, 2016-2022,” U.S. Department of Health & Human Services, Sept. 30, 2022.
“What the Inflation Reduction Act Means to Older Adults,” National Council on Aging, Aug. 16, 2023.
“FACT SHEET: Biden-Harris Administration Announces First Ten Drugs Selected for Medicare Price Negotiation,” The White House, Aug. 29, 2023.
“Explaining the Prescription Drug Provisions in the Inflation Reduction Act,” KFF, Jan. 24, 2023.
“FACT SHEET: Biden-Harris Administration Announces First Ten Drugs Selected for Medicare Price Negotiation,” The White House, Aug. 29, 2023.
“Retiree Medical Costs Are Expected to Moderate, but Still High,” The New York Times, June 30, 2023.
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