Health care expenses in retirement and the use of health savings accounts.

The new Medicare drug law that was enacted in late 2003 makes two changes that supporters of the law say should make it easier for today's workers to prepare to pay the medical bills they will confront in retirement: prescription drug benefits (the new Medicare Part D) and health savings accounts (HSAs). This paper examines the impact of Medicare Part D on savings needed for insurance premiums to supplement Medicare, Medicare Part B and D premiums, and out-of-pocket expenses in retirement, and examines the viability of using HSAs to save for these expenses. It presents a wide range of estimates based on various ages at the time of death, because longevity risk is a major threat to retirement income security. This range of estimates also varies with various assumptions regarding health insurance premium inflation rates and out-of-pocket expenses. Projecting the amount needed for medical expenses in retirement is tentative and complex because it requires conclusions about the range by which medical inflation will exceed consumer prices generally, as well as assumptions about whether medical practices will change in a way that makes Medicare coverage for a given ailment more or less likely.