Mitigating Inflation on Healthcare Costs with These 7 Strategies

By Chris Duderstadt

June 24, 2024

Mitigating Inflation on Healthcare Costs with These 7 Strategies

Key Points – Mitigating Inflation on Healthcare Costs with These 7 Strategies

  • How Does Healthcare Inflation Compare with Overall Inflation?
  • Assessing Annual Reports from the Peterson-KFF Health System Tracker and Employee Benefit Research Institute
  • How to Plan for Inflation on Healthcare Costs
  • Common Questions About Inflation as It Pertains to Healthcare Costs
  • 7-Minute Read

Considerations for Mitigating Inflation on Healthcare Costs

Healthcare costs are oftentimes top of mind for retirees and pre-retirees alike. The same can be said of inflation in recent years. Today, we’re going to explore both topics, as we review potential strategies for mitigating inflation of healthcare costs.

Healthcare Inflation vs. Inflation on Consumer Goods and Services

Before we share considerations for mitigating inflation on healthcare costs, we want to highlight some data that was in the Peterson-KFF Health System Tracker’s May 2024 study.1 Figure 1, below, shows that healthcare costs—including services, medical equipment, drugs, and insurance—inflated by 119.2% from January 2000 to March 2024. Over that same timeframe, costs of consumer goods and services increased by 85%.

Healthcare Costs Inflation

FIGURE 1 – Cumulative Percent Change in Consumer Price Index for All Urban Consumers (CPI-U) for Medical Care and for All Goods and Services, January 2000 – March 2024 – Peterson-KFF Health System Tracker

You can see in Figure 1 that the blue line (cost of goods and services) has risen at a faster rate than the green line (healthcare costs) since 2021. Remember, though, that the data in this study runs through March 2024. Since September 2023, the U.S. healthcare inflation rate has increased from -1.42% to 3.07%.2 Over that same period, the U.S. annual inflation rate cooled from 3.7% to 3.3%.3

We don’t have a crystal ball to tell you how the rate of specific costs will increase or decrease going forward. But now certainly feels like an appropriate time to share some strategies for mitigating inflation on healthcare costs.

1. Plan for Higher Healthcare Costs

According to the Employee Benefit Research Institute’s 2024 Report, a couple with a Medigap plan that has average premiums would need to save $351,000 just to have a 90% chance of having enough for healthcare costs in retirement.4 For the ERBI’s 2023 study, that savings total was $318,000.5 We hope that your healthcare costs in retirement aren’t that substantial, and we don’t share those statistics to scare you.

Everyone’s situation is different, so you might not need to save that much for healthcare costs in retirement. But if you and/or your spouse have significant health issues in retirement, you might need even more than $351,000.

Especially given the statistics we’ve shared, it shouldn’t come as a surprise that the No. 1 strategy on our list is planning to mitigate inflation on health costs. But how are you supposed to plan for that? We’re glad you asked.

Different Expenses Inflate at Different Rates

First, it’s important to have a financial plan that’s been stress tested through periods of high inflation and various other economic cycles. But it isn’t as simple as applying one inflation rate across your entire plan. That’s because all your expenses won’t inflate at the same rate. We outlined earlier how the inflation rate for healthcare costs has been higher on average than the inflation rate for goods and services. Then there’s your mortgage, which is set at a fixed rate and won’t inflate.

If you download our Retirement Plan Checklist, you’ll see that first of our 30 checklist items is: I have taken into consideration inflation, and have been conservative in my planning, using a 3% to 4% per year inflation rate. There are also various checklist items that touch on stress testing, including unexpected health care costs. Download a copy of the Retirement Plan Checklist below to gauge your retirement readiness and see how mitigating inflation on healthcare costs is a critical component of retirement planning.

Healthcare costs inflation

Retirement Plan Checklist

2. Have Health Insurance That Meets Your Healthcare Needs

Take a few minutes and review your current health insurance plan and your past medical expenses. Is your plan adequately covering your healthcare needs? Remember that just because a certain health insurance plan gives you more coverage than another doesn’t necessarily mean it’s a better option for you.

If you’ve been blessed with good health and are still several years away from being Medicare eligible, consider a high-deductible plan. On the flip side, if you have a compromised immune system or have a health condition that will impact you long-term, a low-deductible plan could better suit your needs.

3. Consider Long-Term Care Insurance

Many people elect to wait until 65 to retire since that’s when you become Medicare eligible. While Medicare is typically less expensive than private insurance, it’s important to realize that Medicare won’t cover all healthcare costs in retirement. For example, Medicare doesn’t cover the cost of long-term care.6 Long-term care is already an excessive cost, and inflation certainly hasn’t helped. Make sure that you know the answers to these five questions about long-term care:

  • What is it?
  • How much could it cost me?
  • How can you prepare for it?
  • What other factors impact long-term care?
  • What will government programs pay for?

If you’re in good health and still several years away from retirement, you might be thinking, “Why would I need long-term care insurance?” There are several reasons to consider it. One, you can lock in a lower monthly premium. Two, the long-term savings can help offset the cost if you or your spouse does require long-term care. And three, it can bring peace of mind for your spouse and children if you suddenly require long-term care.

4. Understand Tax Advantages of Health Savings Accounts

Do you have a high deductible health insurance plan? If so, you might be eligible for a Health Savings Account (HSA). HSAs can cover healthcare costs such as prescriptions, co-pays, and certain vision and dental expenses. And as Marty James, CPA, PFS explained to Dean Barber on The Guided Retirement Show, there are many tax advantages of HSAs.

HSA contributions and distributions are tax-free if they’re properly utilized. Marty further explained the tax advantages of HSAs and gave some examples of how the contributions and distributions are tax-free, so make sure to tune into the episode.

5. If Eligible, Take a Tax Deduction on Substantial Healthcare Costs

We all know that life is fragile. If you or your spouse’s health suddenly takes a turn for the worse, the potential financial implications probably aren’t the first things the comes to mind. That’s why it’s so critical to plan for healthcare costs and understand how to mitigate inflation on those expenses.

If you have substantial healthcare costs in a given year, it’s possible that you could be eligible to take a tax deduction. To qualify for a tax deduction, your qualified unreimbursed healthcare costs must be 7.5% more than your adjusted gross income.7 In that situation, you would also need to itemize your taxes. Follow these steps from the IRS to determine if your healthcare costs are tax deductible.8

6. Be Aware of IRMAA

Let’s stay on the topic of taxes for this next strategy to mitigate inflation on healthcare costs. IRMAA stands for Medicare Income-Related Monthly Adjustment Amount. It’s a surcharge on Medicare Part B and D premiums. If your Modified Adjusted Gross Income exceeds $103,000 ($206,000 if you’re married filing jointly),9 IRMAA will begin to kick in.

There’s also a two-year lookback with IRMAA, so it’s calculated based on your MAGI from your tax return two years ago. Make sure you’re aware of how much MAGI you have so you don’t unexpectedly get hit with the surcharge. Keep in mind that Roth conversions can be used as a strategy to lower your taxable income.

7. Prioritize Preventative Care

It’s no secret that the older we get, the more medical attention we may need. We can’t stress enough that your health is your wealth, so make sure you’re checking all the necessary boxes when it comes to preventative care.

  • Do you have a consistent exercise routine?
  • Are you being honest with yourself when assessing how healthy your diet has been lately?
  • Are you going to the doctor’s office for your annual physical and addressing any other specific healthcare needs that are unique to you?

Common Questions About Inflation as It Pertains to Healthcare Costs

Healthcare costs and taxes are typically two of the leading wealth-eroding factors for people in retirement. So, we’re going to wrap up this article with a short Q&A that consists of questions we’ve received from clients and perspective clients that pertain to healthcare costs and taxes.

Question: I’m paying so much for my medical premiums. Are they going to be deductible? How does it impact my taxes?

Answer: Those are great questions to ask, as it’s only logical to wonder if you’ll get help from a tax perspective, especially as premiums go up due to inflation. It depends on the individual’s situation and the rest of their income that they have. There’s still the 7.5% floor that you need to exceed. Once again, it comes down to the retirement distribution.

Question: Should I be getting health insurance off the exchange and spend down on my taxable account or look at Roth conversions because of the long-term impact on the plan?

Answer: There is a whole lot to unpack with that question. Long-term income is the goal for everyone in retirement. Roth conversions can be an excellent way to recognize capital gains and build long-term income to mitigate any inflation with your healthcare costs. But remember, everyone has their own unique answers for their unique health and financial situation.

Do You Have Questions About Mitigating Inflation on Healthcare Costs?

If you’re struggling with how to mitigate inflation with your healthcare costs or have questions about these seven strategies, start a conversation with us below.

Schedule a Meeting

Our team of professionals is here to help you develop a plan that’s tailored to your needs, wants, and wishes. We hope that these strategies can make a difference in your plan so you can have more confidence that you’re making informed decisions with your money, freedom from financial stress, and time to spend doing the things you love.

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Investment advisory services offered through Modern Wealth Management, LLC.

The views expressed represent the opinion of Modern Wealth Management, LLC. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.