Health care: Practical advice for a 'graying' U.S.

Modern medicine has made great advances, giving a child born in the U.S. in 2000 an average life expectancy nearly 30 years longer than one born in 1900. But health care has no cure for old age.

Today, more than 36 million Americans are 65 years of age or older, making up approximately 12 percent of the total population. And by the year 2030, that number could grow to 71 million, a staggering 20 percent of the population. Yet as this tidalwave of baby boomers prepares to enter retirement, both employers and the government are cutting back on low-cost health-care benefits.

More and more, responsibility for America's health-care price tag is shifting to individuals and families. Medicare faces constant cost pressures, and some people are concerned that the program may eventually become insolvent. Premiums for employer-sponsored insurance have increased 87 percent cumulatively from 2000-2006, compared to a 20 percent increase in wages and an 18 percent increase in overall inflation. In addition, employers are moving to limit the benefits and coverage they will offer to current and future retirees.

With maturing Americans living longer, more vital lives, how will they afford the growing cost of health care - especially for situations involving long-term care? While various forms of insurance typically cover routine doctor visits and emergency medical situations sufficiently, coverage for ongoing long-term health-care needs is often limited and restricted. Paying for long-term care needs can quickly deplete even substantial savings.

Many Americans are rightfully concerned, and there are indications that rising health-care costs are hurting their household finances. Even wealthy individuals view this issue as a major threat to their family's long-term financial well-being. According to a Citigroup Smith Barney Affluent Investor Poll (May 2006), about seven in 10 of those surveyed had concerns about being able to pay the cost of long-term care in their retirement years.

Whatever form governmental health care financing may take in the future, we will all shoulder some part of the costs. Wise planning now can make a great difference in how financially prepared you will be to handle the medical needs of retirement. This series of articles provides a brief introduction to some of the major programs and issues you should consider when planning your health-care finances - both now and for retirement.

Employer-Sponsored Health Insurance: The first line of defense

If you belong to an employer-sponsored health-care program, regardless of your age or health, keep it! The premiums, deductibles, prescription drug and co-pay charges available through a group health plan can be a bargain in comparison to individual health insurance. If you are changing employers, sign up for the new employer's plan as soon as you join the company (generally within the first 30 days).

Many large plans will have no limitations on pre-existing conditions, but that may only apply if you sign up immediately upon becoming an employee. If you wait and do not have proof of existing coverage from another source, additional charges or limitations may apply.

The government's COBRA legislation (Consolidated Omnibus Budget Reconciliation Act of 1985) instituted a variety of safeguards for workers and their immediate family members to maintain health-care coverage if a "qualifying event" occurs. These include death of covered employee; termination or reduction of hours (whether resignation, discharge, layoff, strike, or other cause); divorce, which normally terminates an ex-spouse's eligibility; or a dependent child reaching an age or status for which coverage is excluded. In 1996, the government added further health-care coverage and protections under the Health Insurance Portability and Accountability Act. While these are helpful, they generally place a greater burden of cost upon the individual.

Health Savings Accounts: A new tax-favored strategy for health-care savings

If you are currently employed, you might consider a Health Savings Account (HSA). The federal government introduced these accounts in 2004 to help people save for both current and future medical expenses. To qualify, you need to have medical coverage under an HSA-approved high-deductible health plan (HDHP). Check with your employer's benefits department to see if they offer an HDHP alternative, which typically charges lower premiums than the regular group coverage and may, for some, balance out the higher deductible. If not, you can also contact your state insurance department to find insurance companies qualified to sell these plans in your state of residence.

There are significant advantages to HSAs. They are triple tax-favored: annual dollars you are allowed to contribute are deductible on your federal tax return even if you don't itemize; assets in the account can be invested and the earnings grow tax-free; and withdrawals from the account for qualified medical expenses are also tax-free.

HSAs are fully portable, meaning you can keep your account even if you change jobs or medical coverage, become unemployed, move to another state, or change your marital status. This is the first of a three-part series.

For more information, call me at 689-8704 or e-mail William.A.Creekbaum@smithbarney.com.

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of SmithBarney, a financial services firm serving Northern Nevada at 6005 Plumas St., Ste. 200 Reno, NV 89509.