The Hidden Cost Of Retirement: Healthcare

Many of us look forward to retirement. It is the time when we can finally enjoy our lives and the fruits of our labour. It is also when we envision finally using the money that we have saved and invested over a lifetime. However, the road in retirement may not always be smooth sailing. There are accidents, unforeseen emergencies, unexpected events, costs and expenses which may derail us, no matter how carefully we may have planned for them. As we grow older, healthcare is the one cost which keeps creeping up relentlessly. It is the hidden cost of retirement. In collaboration with WealthDojo, we take a deeper look at the costs of healthcare as we age.

Healthcare costs in retirement

Healthcare costs form a significant part of retirement spending. In a previous article, we documented how healthcare costs increases from a bit less than 7% of all household spending for a typical household before retirement, to more than 12% after retirement. This is on top of health insurance spending. This 12% of overall spending in retirement is made up of the deductibles, co-payments and other outpatient expenses that actually comes out of the retirees’ pockets (or Medisave account).

The proportion of spending on healthcare and healthcare insurance in retirement

The higher percentage spent on healthcare does not mean that a retired household spends less on everything else. In fact, once household size and inflation are accounted for, retired households actually spend the same amount after retirement as they do before. Hence planning for higher healthcare costs is crucial as part of retirement planning.

Why do Healthcare Costs go up in Retirement?

It is no secret that while inflation has moderated for most goods and services in the past few years with slowing economic growth, healthcare inflation has continued unabated. But the rate at it is going up is not well known. Let’s look at some data.

From the data.gov website, we can see that healthcare inflation has outpaced general inflation, in the last few years.

Healthcare Cost vs General Inflation in Singapore

But this chart gives a relatively benign view of healthcare cost inflation, showing that it is still manageable. This is, however, not true at the patient level, especially for retirees. As life expectancy increases, Singaporeans also spend an increasing number of years in ill health to more than 10 years out of a lifespan of 84 years. This means that the corresponding bills for healthcare will increase, as hospital stays becomes longer, and procedures become more complex.

To get a better sense of the increase in healthcare costs at the patient level, we look at the Ministry of Health’s Fee Benchmarks Committee Report from 2018.

Excerpt from MOH Fee Benchmarks Committee Report 2018

So, while Class A public hospital bills grew by 4.9% per year between 2007 and 2017, private hospital bills grew by 9% a year in that same period!

Beyond that, healthcare costs have kept increasing. Mercer in 2019 indicates that in 2018, Singapore healthcare cost inflation was 10%. Even worse, the same is projected for 2019 and 2020.

In addition to hospital bills and healthcare costs going up, retirees have to face the fact that the frequency of their hospital stays will also increase. As we show previously, the likelihood of hospitalization in any year will go up from between 20% – 27% for retirees in their late 60’s and early 70’s, to a staggering 70% – 80% when they reach their mid 80’s, or a three-fold increase at a minimum.

The increasing likelihood of hospitalisation as we age

A three-fold increase over 20 years corresponds to a growth rate of hospitalization of 7% per year.

So, to get the true, or hidden, rate of healthcare cost increase in the retirement years, we consider both:

1. The higher frequency of hospitalization and healthcare needs
2. The growing rate of healthcare inflation

Putting both these figures together:

• Retiree patients in public hospital Class A wards face a 12% increase in healthcare costs per year (4.9% and 7%). In other words, expected costs double every 6 years
• Retiree patients in private hospitals face a 18% rise in healthcare costs on a year-on-year basis. That is, expected costs double every 4 years

It is true that with healthcare insurance, like Medishield Life or an Integrated Shield plan, much of these rising costs can be transferred to the insurer. However, the retiree patient still faces the prospect of rising co-payments and other out of pocket costs. Furthermore, rising healthcare costs will ultimately be reflected in higher insurance premiums as well, which is what we discuss next.

Rising healthcare insurance premiums

As healthcare costs increase, premiums for medical insurance will go up we well, as payouts increase. From 2015 to 2020, Singapore’s medical insurance premium began its steep incline. The Ministry of Health has had to step in on many initiatives such as co-payment, the use of preferred doctors, and also pre-authorisation to help cope the medical inflation rates in Singapore.

The Medishield Life Committee’s recommendations in 2014 proposed the upgrade from Medishield to Medishield Life. It meant that the scope of coverage will increase, and at the same time, the premiums will increase. In parallel, there have been government subsidies to help Singaporeans cope with the rising cost of medical insurance.

For those wishing to upgrade their coverage, an Integrated Shield Plan consists of Medishield (now Medishield Life), and additional healthcare insurance coverage from an insurance company. As a result, this increases the overall premiums that consumers have to pay.

Illustration of Medishield Life and Integrated Shield Plan

The introduction of the Integrated Shield Plans unexpectedly led to insurance companies making underwriting losses. The net claims faced by the insurers outpaced premiums earned, particularly for plans covering private hospitals. Net claims consist of the absolute cost of healthcare and the frequency of healthcare. As we show above, the absolute cost of healthcare has gone up, particularly in the past 5 years. Furthermore, with better understanding of medical treatments, it is more common for people to seek medical treatment, as compared to the past. All these factors have made, and will continue to make current healthcare insurance premiums unsustainable in the long run.

For example, between 2016 and 2019, the premiums of riders and the private insurance component of Integrated Shield Plans have increased 24% and 10% respectively each year on average. These trends are largely reflective of the increases in private hospital insurance claims. The rise in questionable claims has also pushed up the claims experience of the insurance companies.

As an example, a 37-year-old patient stayed seven days in hospital for abdominal hernia repair. Of the $46,000 bill, the surgeon’s share was $31,900, or five times the norm! It transpired that while in hospital, she also had breast augmentation, and a tummy tuck. But since these procedures were not covered by insurance, none of this was stated in the bill.

A second example is a patient warded for 42 days for cervical sprain and strain (or pain in the neck). This patient only received treatment only on seven days. She had physiotherapy and painkillers for the other 35 days, something that could have been done as outpatient treatment. The bill was $84,000!

As a result, the combination of Medishield Life premiums increases, healthcare cost inflation, frequency of healthcare needs, and the rise of questionable claims is making the previous premiums charged in the past 5 years unsustainable.  This leads to an inevitable increase in medical insurance inflation. It also leads to tightening of the allowable claims, and claims procedures, as we see in the news recently.

The Hidden Cost of Healthcare in Retirement

Medical and healthcare insurance is one hidden cost that we often do not take into account before, and during retirement. We typically assume we will be well (why will we not be?), and plan for our living expenses, with the occasional holiday or two. But the cost of medical insurance keeps going up in lockstep with your age of retirement.

Example of Healthcare Insurance premiums

Using this medical policy as an example (all figures for the various insurance companies are around the same):

• At age 65, we will need to annual cash premium of $2,226 ($967+$1,259) for a private hospital coverage (with 5% co-payment). This comes out to be around $185/month.
• In 5 years time (age 70), we will need to pay an annual cash premium of $3,234 ($1,695+$1,539). This is around $269/month.
• If this doesn’t scare you yet, at age of 75, we will need to pay an annual cash premium of $4,685 ($2,650+$2,035). Which comes out to be around $390/month.

In Singapore, life expectancy is around 84. It is hard to imagine how one can afford these premiums in the future, without having planned for them ahead of time. And this assumes that there is no future medical inflation beyond the current level of premiums! If anyone is thinking that you can self-insure healthcare costs, without any insurance, apologies if we burst your bubble!

Conclusions

There is an old adage that you can afford to die, but you cannot afford to fall sick. This is not yet to be proven true in the Singapore context. And in fact, Medishield Life is a pretty good scheme that will not depelete your Medisave too fast. But looking at other countries which have similar traits in their healthcare financing system (mixture of private and private providers and insurance), there seems to be a slippery slope where we can slide down onto spiralling healthcare costs.

Rather than to depend on charity in the event that happens, remember that charity begins at home. In this case, planning for the hidden cost of retirement, or healthcare costs, begins way in advance of retirement!

*For those who have an Integrated Plan for private healthcare, here’s a look at the economics of Integrated Plans which might be of interest and, wait, there is more, here is a follow up on the first post with even more details!

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