Retirement Plans Resource Center

Quarterly Commentary - January 2017

Two events caught investor’s attention in the fourth quarter of 2016 - the unlikely election of Donald 100 Dollar Bills And Stethoscope Over American FlagTrump as President and the Fed’s second interest rate increase since 2006.

Markets reacted to both, as the Trump election fueled sentiment that the new administration would finally focus on fiscal issues like modernizing our nation’s infrastructure, cutting taxes, repatriating corporate foreign profits and reducing regulations. These “animal spirits” and a stable job market convinced the Fed that conditions were sufficient to resume its gentle normalization of interest rates.

U.S. market futures dropped precipitously on election night when it became apparent that the Electoral map was tilting in Mr. Trump’s favor, but it rebounded before the next trading day began and never looked back. The bond market, which was already seeing an increase in inflation expectations, especially in the service sector, saw yields tick up in early fourth quarter, while the Fed’s actual move in December had only a muted effect on yields.

Investment results were mixed for the quarter, with US equities continuing to perform well, led by small cap stocks, but developed internationals, emerging markets and REITs struggled for the quarter. Fixed income, as measured by the Barclays U.S. Aggregate Bond Index, sagged for the quarter as well. Despite these quarterly divergences, all the major asset classes, including fixed income were positive for the year giving investors something to cheer about going into 2017.

On January 20th, we swore in our 45th President, Donald J. Trump. As with every presidential transition, the tone and policies of the new administration will shift. It remains to be seen what the new administration will tackle first, but President Trump has assured voters that the fate of Obamacare will be on a short list of his priorities. There is much debate about whether this legislation is a foundation on which to continue to build or if it should be repealed and replaced.  Regardless of what becomes of this legislation, Obamacare is but one piece of the puzzle when considering the scope of issues surrounding the evolution of the cost and delivery of healthcare to Americans.  It is abundantly clear to us from our collective experience with clients in the financial planning process that the understanding and management of our individual healthcare has never been more critical to success in retirement. As such, we plan to explore the current state of healthcare, what might likely happen in this evolution and how we should plan for it.

The State of Healthcare in America

According to recent figures from the World Health Organization (WHO), the United States already spends more per capita on healthcare (approximately $10,500), and more on healthcare as percentage of its GDP (18%), than any other nation. Yet, we only rank 37th among 190 countries in terms of the most effective delivery of care. If that was not challenging enough, with over 10,000 Baby Boomers retiring every day, we have yet to feel the full burden of attempting to provide adequate healthcare to all Americans, especially as we age.

The Centers for Medicare and Medicaid Services, a federal agency within the Department of Health and Human Services that administers Medicare and Medicaid, is the driver of most of the structure and innovation with regard to the delivery and cost management of healthcare across both public and private plans. While only a third of Americans are presently on Medicare or Medicaid (which includes the Children’s Health Insurance Program-CHIP), between the two, they are the largest consumers of healthcare, so as Medicare and Medicaid goes, so goes the rest of the market.

Original Medicare is a government-sponsored plan that consists of three primary components: Part A (Hospital Insurance), Part B (Medical Insurance) and Part D (Prescription Drugs) and is primarily designed to help seniors age 65 and up cover some of their healthcare expenses. Medigap coverage is additional insurance that will cover expenses that Medicare will not.

As an Health Care Reform Coveragealternative to Original Medicare, subscribers can choose to enroll in a Medicare Part C plan (Medicare Advantage) - a type of Medicare health plan offered by private insurers or medical providers that contract with Medicare to provide all Part A and Part B benefits. If you are enrolled in a Medicare Advantage Plan, your healthcare services are covered through the plan and are not paid for under Original Medicare. Most Medicare Advantage Plans offer prescription drug coverage as well.

Medicaid is a joint federal and state program that helps with medical costs for people with limited income and resources. Medicaid sometimes offers benefits not normally covered by Medicare, like nursing home care and personal care services for those who qualify.

The Cost of Care

How do we currently pay for these public healthcare programs?  According to the Kaiser Family Foundation, Medicare is primarily funded from three sources: general tax revenues (42%), payroll taxes (37%) and subscriber premiums (13%).  Most people are surprised to learn how little of these costs are covered by subscriber premiums. The following graph shows the breakdown of these sources:

Sources-of-Medicare-Revenue-web

Medicaid is financed through a combination of federal and state funding. The federal government pays the lion’s share of the expense ($6 out of every $10) through Federal Medical Assistance Match Rates (FMAP) and the states pay their share primarily through state general fund appropriations.

While most Americans feel they are being squeezed by the direct costs of rising premiums, increased out-of-pocket costs and shrinking services, this pales in comparison to the indirect costs from our collective obligations to subsidize these programs through state and federal tax or through increasing our federal debt.

The Department of Health and Human Services’ most recent estimates project healthcare spending to grow by 5.8% annually through 2025.  By then, the government is projected to provide 47% of all healthcare spending.  We mentioned that at current levels, every man, woman and child is using approximately $10,500 of health services annually. Based on these projections, this number will grow to approximately $15,500. So, by 2025, a family of four will use over $60,000 of healthcare services, much of which would be indirect expenses that are collected through taxes and Piggy bank and Stethoscope Isolated on white backgrounddeficit spending.  This is clearly an unsustainable path that without major changes, will wreak havoc on our ability to provide healthcare in the future. Consequently, it is critically important to improve

our healthcare system to deliver better quality care and contain costs.  Individually, we must continue to take more responsibility for our health and well-being, and we need to be far more intentional about saving for our future care.

Challenges and Solutions

In a recent piece, Building A System That Works: The Future Of Healthcare, Sylvia Mathews Burwell, the outgoing Secretary of Health and Human Services, outlines a number of initiatives healthcare agencies are working on to provide sustainable healthcare services, both now and in the future. This is an excellent piece that we urge you to read in its entirety.

To read the full article, go to: http://healthaffairs.org/blog/2016/12/12/building-a-system-that-works-the-future-of-health-care/

While we were not able to address all the issues in this article, we have highlighted a few that should help make our healthcare system better.

Duplication and Price Transparency

There are a myriad of causes that push U.S. per capita healthcare spending to a level double the spending of other developed nations without better outcomes. Many health policy experts point to waste as one of the drivers of our high costs. The National Academy of Medicine estimates that 30% of our healthcare spending goes to unnecessary, ineffective, and overpriced services.

The sheer overhead and duplication in healthcare administration created by the labyrinth of public and private channels, including the federal and state healthcare programs, private insurers, and individual payers adds tremendous cost to the system.  A better system to reduce overhead, complexity and cost shifting could be achieved through payment reform and greater simplicity to healthcare decision making.

Further, service providers need to provide much greater price transparency, so that consumers of healthcare services have a clear understanding of the relative value of a given service between possible providers.  Accordingly, consumers have to take responsibility for making these comparisons to find the most value to drive competition which will help to keep costs in check.


Medical Team Holding Blue Jigsaw Pieces In HuddleValue-Based Medicine

Our traditional model for receiving care has primarily been fee-for-service where caregivers receive a fee for each service they provide such as an office visit, test, procedure, etc. It is easy to see where a system which pays for a volume of services, with no financial downside for redundancies or unnecessary care, would drive up overall costs.  Under this model, caregivers are rewarded for these services, but go uncompensated for other important duties--like reviewing lab tests, corresponding with patients, and communicating with other doctors to coordinate care--resulting in higher costs and less desirable outcomes. In order to improve this system of care, those in the forefront are changing payment models to reward providers for the value of care and patient outcomes rather than the quantity of services. The Center for Medicare and Medicaid Innovation (CMMI) is systematically developing, testing, and scaling innovative reforms to payment and service delivery models to strengthen quality and reduce costs in Medicare and Medicaid while collaborating with private payers and states to test these new payment models to reach the broader population.

Subscriber Cost Sharing

By making the cost of healthcare more visible to subscribers through increased cost sharing, they will be encouraged to be more selective in healthcare decisions. These options include increased co-payments and higher deductibles to make patients more aware of costs.  By using tiered co-pay and deductible amounts, patients would be encouraged to select higher value care options.  There is strong support among economists and policy leaders for prohibiting “first dollar” or “low deductible” coverage, so patients have more out-of-pocket cost exposure to consider when making healthcare decisions.

Reducing federal healthcare subsidies is also a likely reform. These reforms would continue to make the programs available, but higher subscriber costs would limit federal costs. For Medicare, options under consideration include raising the eligibility age and increasing premiums or taxes on benefits, which would reduce the level of financial assistance provided as subscriber’s income rises.Payment for Doctor's Services

Tools and Technology

The CMMI has a three-pronged initiative for using technology to make the delivery and coordination of medical information more efficient. The first involves making sure health IT systems are using common standards, so that healthcare data is portable. The second involves changing the culture around access to information, so doctors and hospitals recognize that their patients have a right to their own electronic health information. The third is to ensure that rules and regulations are in place to allow this confidential data to move simply and securely throughout the healthcare system.

In Summary

Securing a rewarding and sustainable future is at the heart of our mission for our clients.  After a lifetime of effort and sacrifice, you have earned the right to confidently pursue what matters most in retirement. Our financial planning process is the key to measuring progress toward this goal and it is our duty to help you identify and address issues that could derail this plan. Healthcare costs will most likely be the single largest retirement expense for most clients, so we need to keep abreast of this issue to help you properly plan for it going forward.  As with any type of planning, the sooner you begin to prepare for this exposure, the more options and strategies we have available to us and the less challenging this issue will be.  The risk associated with ignoring the impact of both expected and unexpected healthcare costs can be substantial, which in turn, could have an impact on your desired lifestyle and your legacy.

Having a comprehensive financial plan, which addresses important issues like healthcare, in conjunction with a well-diversified portfolio and disciplined saving and budgeting remains the best path to a peaceful and rewarding future.

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