Fidelity Investments says the cost of health care in retirement is falling for the first time since the company began tracking health spending ten years ago — and the new health-care reform law is getting the credit.

Fidelity Investments 2011 retiree health care costs Fidelity estimates that a 65-year-old couple retiring this year will need $230,000 to pay for medical expenses throughout retirement, not including nursing-home care. That represents an 8% decline from last year, when the estimate was $250,000 and the spending forecast jumped 4.2%.

The drop in this year’s forecast stems from changes to the Medicare prescription drug program contained in the Affordable Care Act (ACA) that reduce out-of-pocket spending by seniors. The law gradually closes the notorious “doughnut hole,” which is the gap in coverage that starts when a drug plan beneficiary’s annual drug costs hit $2,830 and continues up to $4,550, when “catastrophic” coverage kicks in.

This year, the ACA mandates that pharmaceutical companies provide a 50% discount on brand-name drugs to seniors who enter the doughnut hole. Starting in 2012, the gap itself will be closed gradually until it is eliminated completely in 2020.

90% of Medicare enrollees have Part D coverage, and Fidelity estimates that about 30% of them will enter the doughnut hole in any given year.

Fidelity Investments 2011 retiree health expense survey The Fidelity study assumes no employer-provided retiree health coverage, and a life expectancy from age 65 of 17 years for men and 20 for women. It includes spending for traditional Medicare premiums (Part B and Part D), out-of-pocket drug costs and a variety of other co-payments and deductibles.

Fidelity cautions that this year’s decline likely is a one-time event; the company still expects health expenses to keep rising over time due to higher costs for services, introduction of new technology and higher utilization of services such as diagnostic testing.

Sunit Patel, a senior vice president in Fidelity’s benefits consulting practice, also notes that there’s considerable uncertainty about how the ACA will impact Medicare over time, including possible changes to provider payments, reform of fraud and abuse, and Medicare Advantage reimbursement levels. “We’ll need time to see how it plays out,” he says. “Right now, there’s nothing definitive we can point to that quantifies the long-term impact.”

What you can do:

Save. Be sure to include health expenditures in your projected retirement spending needs. Although most of us expect Medicare to cover everything, there does appear to be growing recognition that health is a major expense in retirement.

For example, Fidelity reports growing interest among employers in Health Savings Accounts (HSAs), which permit investment of pre-tax dollars, tax-free growth and withdrawals for workers who want to save to offset health expenses. HSAs do have significant limitations; their use is limited to workers enrolled in high-deductible insurance plans ($1,200 for an individual, $2,400 for families). Contributions are limited to $3,050 for individuals, and $6,150 for families.
Work longer. Staying on the job even a few years longer than planned is one of the best overall ways to counter health expenses, because it means more years of employer-sponsored health insurance and delayed Medicare enrollment.

Get an annual drug benefit check-up. Seniors should re-shop prescription drug plans annually to ensure that they are getting the best price and appropriate coverage. Insurance companies often change their offerings year-to-year in ways that can increase premiums by thousands of dollars, or make it difficult to get certain drugs. And, your health needs may change, too.