Out-of-Pocket Healthcare Costs Can Empty Client Pockets
Out-of-pocket health care costs have increased an estimated 230% for the average working American in the past decade, reports Kaiser Family Foundation. At the same time, 66% of consumers rank planning for these costs as the most challenging and stressful aspect of managing their healthcare, according to the Alegeus Healthcare Consumerism Index, a healthcare and benefits payment firm. With employers continuing to shift healthcare costs to employees and big increases in prescription drug prices, even the wealthiest clients are feeling the sting.
Matt Goff, chief investment officer of the Goff Financial Group in Houston, Texas, says one of the best ways to handle this issue is to make sure clients have sufficient money on the sidelines to cover emergencies.
“Those funds should not be subject to stock market risk,” he adds. Goff, who manages $200 million, explains his clients aren’t likely to worry about paying for a doctor visit here or there, but even someone with $5 million in assets is vulnerable to an emergency or long-term healthcare costs.
It’s also important to break out health-related expenses when planning for your retirement needs, says Goff. “We know that health care costs are likely to rise faster than inflation. So we calculate retirement needs with an inflation rate of 3% per year, then break out health expenses and use a 5% annual increase.”
Goff also advises Medicare-eligible clients to buy supplemental insurance whenever possible. “That way your client isn’t solely dependent on the government.”
One of the tools Ann Reilley Gugle, CEO of Alpha Financial Advisors in Charlotte, N.C., recommends clients use to save and pay for medical bills is a Health Savings Account (HSA).
The accounts offer triple tax benefits — contributions are tax-deductible, earnings grow tax-free and no taxes are paid on withdrawals — which help clients stretch their medical dollars further.
It’s also a great way to save for retirement healthcare costs.
“We counsel clients to pay current healthcare costs with after-tax dollars and invest their HSA money. That growth can help counteract the effect of healthcare inflation down the road,” says Gugle, whose firm manages $130 million.
Long-term care is the most important discussion about healthcare Gugle has with her clients.
“It’s like death and taxes,” she says. “Over the long term, you can’t avoid healthcare costs.”
Most of Gugle’s clients prefer to self-insure over purchasing long-term care insurance because of the complexities and limitations of that product. “We help them with self-insure strategies such as balancing the overall portfolio to accommodate long-term care costs, using a target-date retirement fund dated in the year you’ll think you need long-term care and avoiding ever considering the primary home as an asset for paying for long-term care.”
“We know our clients can pay their medical bills but the question is, how best to do that?” asks Diane Pearson, a wealth advisor with Legend Financial Advisors in Pittsburgh, Pa., with $290 million in AUM.
She recommends clients look beyond paying a large medical bill in one chunk from a savings or investment account, even if they can afford to write the check. She points out that healthcare providers are more open than in the past to letting patients use a loan or credit card to make payments.
“One client paid for elective surgery using a 0% credit card provided by her surgeon through a local bank,” explains Pearson. “She was able to stretch the payments for 15 months at no interest and without having to withdraw a large chunk from her investment accounts. That’s a better use of her money.”
Pearson is also a big fan of using HSAs to build account balances that can be used to pay premiums and other health care costs in retirement.
“Where to invest that HSA money? That’s where the advisor comes in. You have to take all the same things into account as you do with the rest of a client’s portfolio such as their financial situation, time frame and risk tolerance,” says Pearson.
The important thing is to make sure clients — even high net worth individuals — are doing something to save for their out-of-pocket health care costs.