With health-care costs rising much faster than inflation, planning ahead for health-care expenses has been increasingly material to financial advising. But integrating care expenses into retirement planning is only part of the puzzle.
Ensuring that clients not only have enough in their retirement plan to cover health-care expenses, but also have the most cost-effective strategy for their health coverage, is part of comprehensive financial planning.
In this column, I’ll explain how advisors can help clients save up to $12,000 annually by transitioning to Medicare. This is a situation that we see often for professionals who are partners or business owners in their organization, and nearing retirement age. For this example, we’ll use a client who works as an attorney and firm partner.
I’ll cover why transitioning off the group plan is often the right strategy, what Medicare choices are available, and how asking the right questions can uncover the best, most cost-effective coverage option for your client.
The Situation
As the client approaches Medicare eligibility at age 65, he is also at his peak earning potential as partner in the firm. But partners are generally responsible for paying 100 percent of the costs of their employer-based health insurance. This can be upwards of $1,000 per month, or more if the coverage includes dependents.
Often, partners at law firms or other professional enterprises will stay on the group plan because of inertia. It seems like the path of least resistance, and they have many other priorities to consider. When you are billing in six-minute increments, how much time do you really want to spend evaluating health insurance? There is also a misconception that Medicare covers less, or provides worse coverage than group insurance.
I say this is a misconception because, with very few exceptions, partners at law firms who become Medicare eligible should always transition to Medicare at the first available opportunity.
Making the transition to Medicare can translate to savings of up to $15,000 annually without compromising access to good health care. In fact, in some cases, the network of doctors and hospitals your client has access to will actually expand through Medicare.
But Which Medicare Strategy Is Best?
Part of what keeps many high-income clients from transitioning off the group plan is the fact that Medicare can be complicated. Contrary to popular opinion, you don’t just “go on Medicare.” There are actually 18 different Medicare strategies available to eligible Americans. These include Medicare A, Medicare B, Medicare Part D, Medicare Advantage, Medicare supplement plans, employer retirement plans and combinations thereof.
The best strategy for your client will depend of their unique circumstances. But in many cases, the best Medicare strategy for a high-income professional like our attorney is one that lowers their deductible, offers a wider network and costs thousands less than staying on the firm’s group plan.
Not to mention, when Medicare-eligible employees transition off the group plan, it can also reduce the rate of premium increases for the rest of the employee group due to reduced liability.
But the devil is in the details, right? Here is how an attorney can save thousands per year by switching to Medicare.
Let’s say your client earns $400,000 per year in MAGI, currently has coverage through his group plan and is Medicare-eligible. For the sake of simplicity, he has no dependents. The client spends about $3,000 per year on health-care services including tests and prescriptions.
The group plan has a $2,000 in-network deductible and monthly premiums of $1,500. If he stays on the group plan, your client will spend about $20,000 on health care annually—assuming he says in-network and hits his deductible.
The Options
His first option is “traditional” Medicare. This is the combination of Medicare Parts A ($0) and B ($428.60 per month), plus Medicare Supplement F ($130 per month) and Medicare Part D for prescriptions ($100 per month).
This translates to about $8,000 per year, or annual savings of $12,000, and the client can see any doctor who accepts Medicare—which is basically all of them. This means less worry about in-network versus out-of-network costs. If he wants to go to MD Anderson for cancer treatment, he can.
The next option is Medicare Advantage. These plans are operated by private carriers as regulated by the federal government. These typically cost less than Medicare supplements and often include prescription coverage and other benefits like dental and vision, but the trade-off is that these plans often have cost-sharing copays and network considerations.
Monthly premiums for Medicare Advantage plans can be as low as $0 per month, not including the Part B premium. This strategy would cost around $7,000 per year including premiums and co-pays for care, representing savings of $13,000 per year.
How To Find The Right Option
While this example uses a law firm partner, the same analysis applies to any client who is a high earner and owns all or a portion of their business.
These clients are typically shocked when they discover they could get coverage equal to or better than their existing group plan for thousands of dollars less per year. What keeps these clients from making this transition on their own? They simply don’t know that they have more affordable options than their group plan, and are often concerned that cheaper coverage means worse health care, even though this isn’t true.
By helping clients work through those misconceptions, you can provide advice in an area of high concern for clients, and position yourself as a comprehensive wealth manager.
Here are the steps to take to help clients work through these comparisons.
1. Create a drug list on Medicare.gov on your client’s behalf. This will help you evaluate Medicare Part D versus Medicare Advantage plans that include prescription coverage.
2. There are 11 types of supplements labeled A through N. The most comprehensive supplement is called the “F” plan.
3. Ask your client what their preferences are in utilizing healthcare. Do they tend to rely on their primary care physician for referrals? If they were diagnosed with cancer, would they prefer to visit a local oncologist or would they be willing to travel for treatment? 
These questions will inform which Medicare strategy and which carriers, will be the best fit.
By becoming familiar with the different Medicare strategies, advisors can provide guidance in an area where advice is often scarce, and help clients save thousands of dollars per year in the process.
Ryan McCostlin leads efforts to help individuals and families with health care through partnerships with financial advisors and healthcare providers at benefits advisory firm Bernard Health.