The importance of healthcare cover in retirement

Many pre-retirees tend to underestimate their post-retirement healthcare costs and use their current health status as a guideline for what their future health will look like. The reality, though, is that many diseases and chronic conditions are a function of aging, and your fortunate good health in the years leading up to retirement is not guaranteed to continue as you grow older. For most of us, medical aid costs are a hefty line item in our monthly budgets, but slashing medical costs by buying down to cheaper plan options – especially as you grow closer to retirement – can be risky. Worse, resigning from your medical aid can leave you at the mercy of our state healthcare facilities or with the added burden of having to pay late joiner penalties if you decide to take up medical aid membership again.

While it’s common knowledge that medical inflation outstrips consumer inflation year-on-year by between 3% and 4%, it is absolutely essential that these inflationary assumptions are built into your long-term retirement plan to ensure that you don’t run into financial problems. Also, keep in mind that these inflationary assumptions relate only to your current medical aid, gap cover and general out-of-pocket expenses and do not factor in additional costs which you may be faced with later in life such as frail care, private nursing or medical devices.

The problem with healthcare costs that continually outstrip inflation is that, over time, these costs make up an ever-increasing portion of your overall income. So, if you’re in retirement and living on a fixed income, you can expect your healthcare costs to take up a bigger chunk of your income as each year passes. If you are dependent on a guaranteed life annuity for your retirement income and the annuity is fixed in line with inflation, it is likely that you will end up with cashflow problems at some point during your retirement. On the other hand, if you’re drawing an income from a living annuity, rising healthcare costs may necessitate that you draw down at a higher rate that you can actually afford which, in turn, can lead to liquidity problems later on. Cashflow problems later in retirement as a result of increasing healthcare costs can be somewhat alleviated by incorporating a discretionary investment component in your overall retirement funding portfolio. Having discretionary money which is appropriately invested for retirement purposes will allow you access to capital which you may otherwise not have access to if you are wholly dependent on an annuity structure for income.

There are currently 75 registered medical schemes in South Africa – 18 of which have open membership enrolment – and the premiums and benefits differ vastly across the various plans and options. Selecting a scheme and option that is appropriate for your needs can be a minefield as medical aids and their respective rewards programmes have become increasingly complex. That said, membership of a network medical aid option would cost an adult dependant in the region of R1 200 to R1 600 per month. If you’re looking at a mid-range medical aid option offering a good hospital plan, you can expect to pay between R2 100 and R2 500 per month. Fully-comprehensive, top-end medical aid options can range from R3 000 to R5 500 per member per month, which is a considerable expense. It’s always advisable to have a gap cover policy in place over and above your medical aid cover, especially as you age. This is because your chances of being hospitalised increase as you age, and a comprehensive gap cover policy can provide much-needed financial assistance when it comes to covering doctor and specialist bills for treatment received in hospital. There are a range of gap cover policies on offer with different benefits and price points, making it very difficult to make accurate comparisons. Generally speaking, a gap cover policy which provides cover of up to 500% of medical aid tariff will cost between R400 and R680 per family, with each insurer offering different add-on benefits such as enhanced oncology and specialist radiology benefits. As a result, it is important to do your research and find a policy that suits your specific needs. Remember, most gap covers have a maximum entry age of 65, so it is advisable to take out cover sooner rather than later, keeping in mind that you may have waiting periods imposed on you when making application. If you’re looking for a more affordable gap cover option, entry level benefits that cover up to 300% of medical aid tariff are priced between R180 and R370 per month.

While all registered medical schemes are obliged to provide cover for the Prescribed Minimum Benefits (PMBs), do not assume that all treatment for a listed condition will be paid by your medical aid. PMBs include all emergency medical conditions, 270 listed medical conditions, and 25 chronic conditions, but the extent to which they are covered differs from medical aid to medical aid, so it is important to understand exactly what treatment and care your medical aid will provide. For instance, treatable dementia is listed as a PMB which is somewhat misleading a medical aid is only required to pay for is the patient’s admission for initial diagnosis and the management of acute psychotic symptoms for one week – which doesn’t even begin to cover the actual costs of dementia care. Bear in mind that the average dementia patient lives around 7 years from date of diagnosis and the cost of treatment and care during this time can run into millions of Rands. Being listed as a PMB therefore provides no guarantee that all treatment for the diagnosis will be paid, and it is important to check the details of your medical aid in respect of benefit limits, treatment programmes, drug formularies, and co-payments to fully understand how you are covered.

Medical aids operate on the basis of cross-subsidisation which means that the premiums of the younger and/or healthier members are used to cover the costs incurred by the sicker and/or older members of the scheme. On this basis, members who do not belong to a medical scheme during their younger years and who then choose to join later on in life can be penalised for effectively anti-selecting against the scheme. Where this happens, medical schemes are permitted to charge a late joiner penalty which is effectively a premium loading that applies on an ongoing basis. This loading is based on the risk portion of the contribution and is calculated according to the years spent without medical cover after the age of 35 according to a sliding scale. If you’re trying to cut costs and spend even a couple of years without medical aid membership, you can see yourself paying an additional 5% on top of your premiums. If you spend between 5 and 14 years off a medical scheme, your contributions can be loaded by 25%, and between 15 and 24 years your premiums can be loaded by 50%. If you’ve spent more than 25  years off a medical scheme, your loading can be a massive 75% of your risk premium. The bottom line is that it pays in the longer-term to ensure that you do not interrupt your medical aid membership, even if it means dropping to the cheapest plan option.

Common diseases which are a function of aging include cancer, dementia, Alzheimer’s disease, heart and vascular diseases, Parkinson’s disease, hearing loss, cataracts and refractive errors, osteoarthritis, diabetes, and depression – and, sadly, many aged people tend to suffer from several conditions at the same time. Medical appliances and devices can add enormously to the cost of medical care, with medical aid coverage depending largely on how comprehensive your plan option is. If you’re on a hospital plan only, it’s likely that the costs of medical devices, aids and appliances will be for your own expense, keeping in mind that hearing aids, spectacles, wheelchairs, walking aids, and orthotics can really serve to drive up healthcare costs.

But perhaps the biggest expense to factor into one’s long-term healthcare plan is that of assisted living, frail care, or private nursing which are generally not covered by medical aid. The costs of this type of care can be prohibitive for many elderly people, the result being that they end up being cared for by their families. This, in turn, can place additional emotional and financial strain on the extended family – affecting the entire family who often buckles under the burden. As a result, a retirement plan should always include a ‘worst case scenario’ when it comes to budgeting for future healthcare costs to ensure that there are sufficient funds set aside for full-time care should the need arise. If left unfunded for, you effectively transfer the financial burden onto your adult children and other family members which, in turn, will only serve to compromise their own retirement funding. Every retirement plan should therefore cater for regular and unforeseen medical expenses, and possible full-time care, while taking into account the effects of medical inflation over time.

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