Projected Health Care Costs for Medicare Beneficiaries Rose Again in 2023

The predicted savings target needed for Medicare beneficiaries to cover premiums, deductibles and prescription drugs in retirement increased once again last year, according to new data from the Employee Benefit Research Institute.  

In an extreme case, a couple with high prescription drug expenditures will need to have saved as much as $413,000 to have a 90% chance of having enough money to cover their health costs in retirement, EBRI found.  

EBRI also calculated that a 65-year-old man enrolled in a Medigap plan with the highest prescription drug expenditures in retirement will need to have saved $215,000 in order to have a 90% chance of having enough money to cover premiums and median prescription drug costs, and a 65-year-old woman will need to have saved $252,000. 

Jake Spiegel, a research associate at EBRI, says many workers do not feel concerned about paying for medical expenditures in retirement, because it seems like an issue that is very far away

“One of the reasons we built this model is to make those costs a little bit more salient, because when you hear a number like $413,000, … [it] makes those costs a little bit more serious, and it makes it a little bit easier to plan for in the current time period,” Spiegel says. 

Spiegel notes that EBRI did not take into account long-term care costs in its model, which can be significant, as assisted living facilities, for example, can be very expensive.  

Savings Targets on the Rise 

When Medicare was first established nearly 60 years ago, it was not designed to cover health care expenses in full, EBRI explained in its report. 

While the Patient Protection and Affordable Care Act of 2010 included provisions to reduce the out-of-pocket expenses Medicare enrollees would face for prescription drugs, it did not completely eliminate them. In 2024, enrollees in Medicare will continue to pay 25% of the cost of both generic and brand-name prescription drugs, according to EBRI. 

However, Medicare Part D out-of-pocket spending will be capped at $2,000 starting in 2025 due to a provision in the Inflation Reduction Act of 2022.  

According to EBRI’s model, a man who turned 65 in 2023 would need an average of $184,000 saved to have a 90% chance of covering median Medicare Part B premiums and deductibles, Medicare Part D premiums and out-of-pocket drug expenses. A woman who turned 65 in 2023 would need $217,000 saved, and a couple would need $351,000 to have a 90% chance of covering their expenses.  

Savings targets tend to be lower for Medicare Advantage enrollees than for Medigap enrollees, but according to EBRI, there are tradeoffs to consider. For example, Medicare Advantage enrollees generally trade lower premiums for higher out-of-pocket spending, and some Medicare Advantage plans have narrower networks—meaning enrollees may have fewer doctors to choose from, or may require approval before certain medications or services are covered.  

Despite some of its drawbacks, Spiegel says enrollment in the Medicare Advantage program is growing every year. 

How Employers, Participants Can Prepare 

The high cost of health care in retirement for Medicare beneficiaries is particularly problematic because fewer employers are offering retiree health benefits. The federal Agency for Healthcare Research and Quality reported that in 2021, about 3% of private-sector employers offered health benefits to Medicare-eligible retirees, down from 10% in 1997.  

Larger firms were much more likely than smaller ones to offer benefits to retirees, EBRI found. Among private-sector employers with at least 1,000 workers, 14% offered health coverage to Medicare-eligible retirees, and 23% offered it to early retirees in 2022. But even among larger firms, the percentage that offer health benefits to either early retirees or Medicare-eligible retirees has been declining.  

Spiegel says it is highly unlikely that retiree health benefits will return, as they are “enormously expensive for employers to offer and maintain.” 

To prepare for high health care costs in retirement, Spiegel recommends that workers take full advantage of their employer match in their 401(k), as well as participate in a health savings account if their company provides that benefit alongside a high-deductible health plan.  

“[An HSA] can go a long way to help defray the significant costs of health care in retirement, especially because any health care costs that you’re paying for in your HSA are going in on a pre-tax basis,” Spiegel says. 

Spiegel adds that employees who have the benefit of receiving an employer match in their HSA tend to accrue higher balances and are more likely to invest their HSAs, which “sets them up for weathering expensive costs” in retirement.