Note: This article is the ninth in a series of ten articles addressing the future of slow GDP growth, high Federal debt, and strained household finances.
HEALTH CARE COSTS
Its likely most readers have personally experienced health insurance inflation which has exceeded general inflation, and perhaps household income growth. So let’s take a look at some specific details regarding specific health insurance cost growth.
Health Care Cost Inflation
From the web page linked below, I first ran the general inflation figure from 2000-2016 for health care costs in comparison to the CPI-U (which sources its data from the BLS). Tom’s Inflation Calculator
CPI-U (the standard, quoted as inflation)
Next I ran the medical cost inflation rate for the same period. Per the web page link above: “Medical-Cost Inflation: This data set covers U.S. medical-cost inflation since 1935. It’s actually part of the overall CPI-U.” “Please note that this data set tracks the inflation of actual medical costs, not the inflation of health-insurance premiums, which generally rise faster than medical costs.”
According to a February 15, 2017 CMS report, annual inflation for health care is projected to average 3% through 2025. 2017-02-15 – Centers for Medicare & Medicaid Services
“Medical price inflation: Medical prices are expected to increase more rapidly after historically low growth in 2015 of 0.8 percent to nearly 3 percent by 2025. This faster projected growth in prices is influenced by an acceleration in both economy-wide prices and medical specific prices and is projected to be partially offset by slowing growth in the use and intensity of medical goods and services.” Three percent doesn’t sound so bad until you consider that the CBO projects annual inflation-adjusted GDP to slow from 2.2% in 2017 to 1.9% to 2027 (page 8, see link below). To the degree this could limit annual wage increases, medical costs may continue to outpace wages as well as GDP. https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52801-june2017outlook.pdf
However, the CMS predicts we can expect higher premium costs:
“Spending growth is projected to increase to 6.5 percent in 2017, due in part to faster premium growth in Marketplace plans related to previous underpricing of premiums and the end of the temporary risk corridors.”
Health care cost-shifting to individuals
Generally, individuals pay three categories of costs: premiums, out-of-pocket costs for co-pays, and then for coinsurance once the deductible is met. Once the coinsurance limit has been met, insurance usually covers 100% beyond that.
The Kaiser Family foundation conducts an annual survey of premium cost trends. 2016 Employer Health Benefits Survey
Here are some excerpts from 2016’s slide deck:
We can extrapolate the growth of the costs in the slide above. From 1999-2016, while the total cost for families’ premiums has increased 315%, the employers’ share has increased less, 303%, causing employees’ share to rise 342%. Looking at it another way, inflation for premiums paid for family coverage rose 315% (since 1999) while general inflation increased 39% (since 2000). Note also that in Article 2 of 10 we addressed the slow growth of household incomes since roughly 2000. It’s possible that because employers had to absorb an average of $8,000+ of premium cost increases for family health benefit coverage for employees, that they restricted wage growth to cap the overall growth of labor costs.
The good news in the slide above is that the rate of premium increases has declined since the 2001-2006 period. However, since 2001, premium increases have greatly exceeded the rate of overall inflation (39%, 2000-2016) and of workers’ earnings increases.
2) Increase in Annual Deductibles
While premium increases are bad enough, let’s take a look at a Kaiser slide on annual deductible increases, in this case dating to 2006.
So for workers who have an annual deductible, it has increased 253% from $584 to $1,483 (and of course more for family coverage).
Fidelity, in an article dated June 22, 2017, states the annual deductible per person is much higher for some individuals: https://www.fidelity.com/news/article/default/201706220852MRKTWTCHNEWS_SVC000198
“More than 40% of commercially insured patients had a health plan with a family deductible above $2,600 in 2016, either from their employer or through a plan sold on an insurance exchange, according to the Centers for Disease Control and Prevention. That is up from about 29% in 2011.”
To some degree, these increases for families are offset by contributions by employers to HRA and HSA plans. But in order to qualify for establishing such plans for the benefit of individuals, higher deductible insurance plans were required. Hence the industry shifted more to a coverage program for higher-deductible (or catastrophic) insurance coverage with a greater share of first-dollar costs paid for by employees, as a basis for reducing the rate of escalating insurance claims cost increases (at least, for the employers).
Premium and deductible cost-shifting, combined
Let’s combine the premium and deductible cost escalation for an illustration of the total impact to a family’s finances. John Mauldin addresses the health care cost issue in an article dated October 17, 2017. In his health care article, Mauldin cites the following pertaining to the ACA health exchanges:
“Consider this example from a Health Affairs study:
[A] family of four living in Roanoke, Virginia with an income of $60,000 in 2016 would have a premium payment of $4,980 for the year for the second-lowest-cost silver plan. That plan has a $5,000 deductible. That means the family could spend almost one-sixth of their pre-tax income on health costs before they received any insurance payment.”
“This is nuts. The premiums alone are 8.3% of the family’s income. All the money buys them is the opportunity to spend another $5,000 on coinsurance before the insurance company pays anything.”
In short, the increase in health care costs is just one reason Americans’ debt levels have increased and their retirement savings are woefully insufficient (as covered in detail in prior articles in this series).
Retiree Health Care Costs
Much of the discussion thus far has focused on those who are still in the workforce. Retirees for the most part live on fixed incomes with limited annual COLA increases. To the degree they are not working or cannot work, their capacity to absorb and fund escalating health care costs is more difficult. Fidelity published an article dated August 16, 2016 addressing projected total health care costs: Health Care Costs for Couples in Retirement Rise to an Estimated $260,000 – Fidelity
“Paying for health care can be one of the largest expenses for people in retirement. A 65-year-old couple retiring in 2016 will need an estimated $260,000 [$130,000, per person] to cover health care costs in retirement, according to Fidelity’s Retiree Health Care Cost Estimate. This is a six percent increase over last year’s estimate of $245,000 and the highest estimate since calculations began in 2002.
The estimate applies to retirees with traditional Medicare insurance coverage and provides a general idea of the monthly expenses associated with Medicare premiums, Medicare co-payments and deductibles, and prescription drug out-of-pocket expenses.”
As if that weren’t bad enough, here’s Fidelity’s take on long-term care in the same article:
“Fidelity also examined the costs associated with long-term care, which could impact seven in 10 Americans who reach age 65 in the next five years.”
“Fidelity estimates that a 65-year-old couple would need $130,000 [$65,000 per person], in addition to savings for retiree medical expenses, to insure against long-term care expenses. This assumes the couple is in a good health and purchases a policy with $8,000 monthly maximum benefit, with three years of benefits, and an inflation adjuster of 3 percent per year.”
In short, Fidelity projects that the average retiree can ‘look forward’ to $130,000 of health care costs in retirement, and 70% are likely to need long-term care in some form of home-care, assisted living, or skilled nursing/memory care costs estimated at $65,000. That’s nearly $200,000 per person, $400,000 for a retired couple.
THE FUTURE LONG-TERM SQUEEZE FROM RISING COSTS
Part of the problem has to do with the fatal flaw in the concept of insurance for health care vs. other insurance. Per Mauldin:
“It works well for things like fires and earthquakes. Health insurance starts off flawed because everyone will get sick, given enough time.”
If you extrapolate this to the aging population as 76m Boomers retire, with presumably most if not all of them requiring health care in their older years, you can see the extent of the cost problem. “The whole point of insurance is to spread the risk of unpredictable, expensive events. Everyone pays a little to avoid being the one who must pay a lot.” So it spreads the cost of those with higher expense to those with lower expense. But it can’t benefit from savings from one with no claims, such as in the case of homeowners’ fire insurance, which according to this web site was running under 6% nationwide in 2013: Catastrophe Facts and Statistics
Mauldin continues to write in his aforementioned article:
“Is it any wonder, then, that retail sales are in the doldrums? The consumer is simply running out of available cash. The chart below from Jeff Snyder at Alhambra Partners (hat tip John Vogel) shows that the year-over-year growth in retail sales is lower now than it was before we entered the last two recessions.”
Consider that this is looking backwards. What will be the impact as we look out the next 10 years? As mentioned above, the CBO predicts GDP will slow from 2.2% to 1.9% by 2021, continuing this rate thereafter to 2027. Presuming wage increases parallel this, unless trends in premium and deductibles slow, consumer discretionary dollars will continue to be pinched.
The chart above represents retail sales declines, but it could have just as easily represented the decline in retirement savings rate and the increase in consumer debt (as the only other primary source for financing consumer spending).
WHERE ARE WE HEADED WITH HEALTH CARE?
Here’s Mauldin’s take:
“Greenspan warned that fundamentally it is not so much an issue of immigration, or even economics, but unsustainable welfare spending, or as Greenspan puts it, ‘entitlements.’ I don’t know how it’s going to resolve, but there’s going to be a crisis.”
“…elderly people consume more healthcare, and as a country we are getting older. As of 2012, 34% of healthcare spending was attributable to those considered elderly (65 years and older)…”
“The number of people over 65 is rising exponentially. There were 35 million of us in the year 2000, and there are about 47 million of us today. We will more than double that number by 2060, and in just 13 years – in 2030 – we are going to have 25 million, or 60%, more elderly people than we have today.”
“In 2015 we spent roughly $3 trillion, or almost $10,000 per person ($9,523), on healthcare. If costs rise as predicted, the number will top $10,000 this year. Per person. Including kids, etc. That is about 17.5% of total US GDP right now.
Is GDP growth going to total 60% between now and 2030? Not at the rate we’re going. At 2% per year – and no recessions – it will be about half that much. The number of elderly people and the amount they spend on healthcare is growing faster than the economy is. Government statisticians project healthcare spending to be 20% of GDP by 2022. So by 2030 we could be spending 23%–25% on healthcare.”
“Put that into your statistical pipe and smoke it, and then try to figure out how we’ll pay for healthcare. That is either a massive (as in obscenely high) tax increase or grandma does not get healthcare. And since nobody wants to tell grandmother she can’t have healthcare, providing it means a huge and still-rising tax burden.”
if you thought health care costs were a significant cost burden for working families, try adding in child-raising costs, which continue to climb. Per pages i-ii: https://www.cnpp.usda.gov/sites/default/files/crc2015.pdf
“For the overall United States, annual child-rearing expense estimates ranged between $12,350 and $13,900 for a child in a two-child, married-couple family in the middle-income group.”
“The estimated expense to raise a child from birth through age 17 is $233,610 (in 2015 dollars) for a middle-income (before-tax income between $59,200 and $107,400), married-couple family with two children.”
Note that this estimate is just through age 17, and therefore presumably doesn’t include college costs. Let’s look at the change in average household income from the Federal Reserve:
Given that the average household income is below $60,000, I suspect the estimated child-raising cost is overstated because most families can’t afford to spend that much annually.
Here’s a July 24, 2017 article citing Wall Street Journal data on college costs: Report: The cost of a college degree is finally slowing down – The College Fix
“U.S. college tuition is growing at the slowest pace in decades, following a nearly 400% rise over the past three decades that fueled middle class anxieties and a surge in student debt.
“Tuition at college and graduate school—after scholarships and grants are factored in—rose 1.9% in the year through June, broadly in line with overall inflation, Labor Department figures show. By contrast from 1990 through last year, tuition grew an average 6% a year, more than double the rate of inflation. In that time, the average annual cost for a four-year private college, including living expenses, rose 161% to about $27,500, according to the College Board.”
At $27,500/year, a four-year degree will total $110,000, ignoring future inflation. That’s per child. (In fairness, that’s an average. There are any number of schools where tuition is less, and perhaps additional costs savings can be achieved by living at home.) Add that to the $233,000 cost above to raise a child, and we’re getting into pretty costly territory, more so if you have two or more kids.
During the last 2+ decades, costs for health care, child-raising, and a college education have risen exponentially relative to inflation and wages. No wonder there has been a decline in retirement savings, as well as in the standard of living for families, because wages have not kept up.
Ultimately, these costs are difficult to sustain for many families. It’s possible that as some folks max-out on debt as a funding source for these expenditures, spending may top-out. At some point, as change and technology progress, it’s not hard to foresee changes resulting in lower-cost alternatives. That has been the case for a number of years with the shift to online college degrees. Perhaps, and hopefully over time, changes can be made to become more cost-efficient and effective with medical care.
1) From 1999-2016, while the total cost for families’ premiums has increased 315%, the employers’ share has increased less, 303%, causing employees’ share to rise 342%. In total, this is a whopping 315% increase in family premiums relative to the annual inflation increase since 2000 of 39%.
2) For workers with an annual deductible, it has increased 253% from $584 to $1,483 (and of course more for family coverage).
3) “A family of four living in Roanoke, Virginia with an income of $60,000 in 2016 would have a premium payment of $4,980 for the year for the second-lowest-cost silver plan. That plan has a $5,000 deductible. That means the family could spend almost one-sixth of their pre-tax income on health costs before they received any insurance payment. The premiums alone are 8.3% of the family’s income. All the money buys them is the opportunity to spend another $5,000 on coinsurance before the insurance company pays anything.”
4) “The number of people over 65 is rising exponentially. There were 35 million of us in the year 2000, and there are about 47 million of us today. We will more than double that number by 2060, and in just 13 years – in 2030 – we are going to have 25 million, or 60%, more elderly people than we have today.”
5) Fidelity projects that the average retiree can look forward to $130,000 of health care costs in retirement, and 70% are likely to need long-term care in some form of home-care, assisted living, or skilled nursing/memory care costs estimated at $65,000. That’s nearly $400,000 for a retired couple (at least, factoring inflation).
6) “The estimated expense to raise a child from birth through age 17 is $233,610 (in 2015 dollars) for a middle-income (before-tax income between $59,200 and $107,400), married-couple family with two children.”
7) At $27,500/year, a four-year degree will total $110,000, ignoring future inflation. That’s per child. Add that to the $233,000 cost to raise a child per above, and we’re getting into pretty costly territory; worse if you have two or more kids.
Disclosure: I am/we are long EQIX COR CONE MSFT O STWD JCAP HASI UNIT HD LOW.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Increasing Healthcare And Other Costs (Article 9 Of 10)