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A Guide to Retirement Health Care – How Will YOU Get It?

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Health care is the single biggest obstacle to retirement for many Americans. My ongoing Reader Survey indicates that health care is also the most common concern for readers of this blog — trumping even running out of money, Social Security, the stock market, inflation, and taxes!

Stories of individuals trapped in jobs because of their, or a dependent’s, health needs are common. There are many who have saved enough for retirement, by most other measures, but are then forced to work indefinitely, in order to keep health coverage.

Aside from government employees, and those at a few large corporations, many of us will have serious concerns about health care coverage in our retirement years. And, given federal, state, and local budget troubles, and continuing economic pressures on business, even those who think they have retiree health benefits locked up, may not be free from worry.

I don’t have all the answers, but I can offer this abbreviated guide to the current state of affairs:

Along the way, I include prices, so that you can guesstimate how much health insurance might cost you in retirement. At the end, I offer what I can in the way of tips for getting affordable coverage. And I explain the good fortune that provided a solution for my own early retirement.…

The Problem

The U.S. health care system, despite its technical prowess, has been in financial crisis for years. According to the Kaiser Family Foundation, health care spending has grown by 9.6% annually since 1970 — much faster than the rate of inflation, and even 2.4% faster than the nation’s Gross Domestic Product (GDP). Kaiser reports that total U.S. health care spending in 2008 was a whopping $7,538 per resident.

Having personally seen $20,000 in billing from a family member’s fairly routine one-day outpatient surgery, this is no surprise to me! You probably have your own stories.…

Business Insider reports that health insurance premiums have risen three times as fast as wages in the last decade. A study published in the American Journal of Medicine indicates that 60% of personal bankruptcies are related to medical bills, a 50% increase over a 6-year period. Many of those who filed were middle class. Shockingly, three-fourths had health insurance, but were still inadequately protected.

A recent survey from the Census Bureau showed that about 16% of Americans lack any health insurance coverage. When these folks get sick or injured, many wind up in an emergency room, where they receive suboptimal yet expensive care that is paid for indirectly by taxpayers or those who do have insurance. (Federal law requires most hospitals to provide a minimum level of treatment to those seeking emergency care, regardless of their health insurance coverage, or ability to pay.)

More and more, government programs have become the health plans of last resort. The percentage of people who are covered by private health insurance has been decreasing steadily since 2001. As for retirees, the Kaiser Family Foundation reports that, continuing a long-term downward trend, only 26% of large firms offer retiree health benefits, and only 6% of small firms do.

Original Medicare

Medicare, created in 1965, is the public health plan in the U.S. for people 65 or older, and is available to all regardless of health history. The uninitiated may view Medicare as monolithic “free public health,” but in fact, it’s a patchwork quilt of free and paid elements.

Medicare is divided into four parts. Part A covers hospital and other health facility care. Part B covers doctors’ services and outpatient care. (We’ll get to Parts C and D shortly.)

Those who paid Medicare taxes during their working career get Medicare Part A for “free” but still must pay a deductible (currently $1,156) plus copays and percentages for various charges.

Medicare Part B requires a premium, about $100 monthly in 2012 (which is usually automatically deducted from your Social Security payments), and a deductible (currently $140), plus a percent of various services.

Medicare Add-Ons

Medicare Part C, known as “Medicare Advantage,” is run by private insurance companies, and generally includes Parts A, B, and D (prescription drug coverage) plus other health care options such as vision or dental. Each plan’s cost structure is different, but generally, they resemble conventional health insurance with deductibles, copayments, and managed care from doctors/hospitals in a certain network. The Medicare Part C plans generally incorporate the Part B premium, plus other charges, to cover their additional options.

Medicare Part D, also run by private insurance companies, helps cover prescription drug costs. To get Part D, you must join a private insurance plan, either a Part C plan or a dedicated Prescription Drug Plan. These plans generally charge a monthly fee, a yearly deductible (currently capped at $320), and copayments/coinsurance for each of your prescriptions. Most Medicare drug plans feature a coverage gap (the infamous “donut hole”), meaning there’s a limit on coverage after you’ve spent a certain amount, and until you reach some higher amount.

Finally, you can also purchase supplementary “Medigap” plans that add to original Medicare by covering copayments, coinsurance, and deductibles to some extent. These plans come in standardized versions. The costs vary by policy, company, and area, but I found they were not generally offered online in my area. (Not a good sign for the budget shopper.) In general, if you have a Medicare Advantage Plan, you don’t get a Medigap plan.

The Bad News…

So that was my attempt to explain Medicare in a few paragraphs. I’ve intentionally simplified what is a very complex government program. Please go to Medicare.gov for all the gory details. And, if you are nearing age 65, pay special attention to the penalties for missing various prescribed enrollment periods!

Unfortunately, by the time you have Medicare figured out, it could well be bankrupt. Due to an aging population and soaring health care costs, Medicare is the most financially unstable of the major government social programs.

The Medicare Trustees issued their most recent annual report in April. Though projections are highly uncertain, here are a couple of statistical nuggets: (1) Medicare’s costs are expected to nearly double as a percent of GDP within the next 30 years; (2) the trust fund underlying Part A is expected to be out of money in little more than a decade! And, frankly, we have yet to see a political or financial compromise that could even make a dent in the problem.

The Early Retirement Health Care Gap: Life After COBRA

So we’ve explored Medicare, the public health plan for those 65 and older. It’s a patchwork quilt of coverages, and has serious financial problems. Now let’s talk about what happens if you retire early. And if Medicare hasn’t exactly filled you with confidence, then brace yourself for the situation you’ll face if you leave your job, by choice or otherwise, before age 65.

The good news is that you can wait a few months before panicking. Thanks to the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986, you will be eligible to continue the group health benefits from your current employer (assuming you have any), for a limited time.

But COBRA coverage is generally far more expensive than the same coverage when you were an employee, because you usually must pay your employer’s share of the premium as well. When I left my secure corporate job, the cost to continue its typical low-deductible corporate group health family plan through the COBRA mechanism was $1,700/month. That’s a punishing sum, easily totaling one-third or even one-half of a typical retirement living budget!

But COBRA was never intended for extended health benefits, as in an early retirement scenario. It was designed to provide temporary coverage while transitioning between jobs. Though there are a variety of extenuating rules, in general, you can continue COBRA coverage for 18 months — a year and a half — after your voluntary or involuntary retirement. Then what?

HIPAA To the Rescue?

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) supposedly guarantees your right to buy (and renew) individual insurance policies, and plans from state high-risk pools, after COBRA. You must have had continuous coverage for at least 18 months, have lost your group coverage, exhausted your COBRA, and not be covered under any other health insurance. In other words, you must be desperate. And desperation is not a good bargaining position.…

When I called my insurance company to inquire about this option, I received a royal runaround: it was clear they weren’t very interested in that business. I was eventually told that my particular company group plan offered no conversion after COBRA, but that HIPAA would require the company to accept an individual, non-group application.

Unfortunately, HIPAA imposes no controls over premium costs, and, with no bargaining power, you really are at the mercy of the insurance company. The little that I’ve been able to learn about true HIPAA plans is that they are frighteningly expensive (think thousands of dollars per month). But the details of coverage differ from state to state, so check with your state insurance office.

As a last resort, most states operate health plans, called “high-risk pools,” for those too medically burdened to qualify elsewhere. Some states designate their high-risk pool as the HIPAA option for those whose COBRA coverage is running out. The costs may or may not be subsidized for lower income levels. But the pools also may have entry requirements such as “going bare” (without insurance) for a period of time first, or getting denied by multiple insurance carriers. And, they may close periodically due to budgetary constraints, or have waiting lists. Again, check with your state insurance office for details.

Individual Insurance Plans

If you exhaust your COBRA coverage and can’t find or afford a HIPAA plan for the long-term, then you are in the market for an individual health insurance plan. Unfortunately, getting approved for individual health coverage while in your 50’s or 60’s is far from certain. The insurance companies are about as interested in you at that age as your kids are.

It’s hard to generalize, but, according to Retire on Less Than You Think, the managing director of one underwriting group said that “thirty to forty percent of the people…are getting turned down.” And I was told by a reliable health insurance agent that the pre-existing conditions in our generally healthy family pretty much precluded us from being approved for an individual plan.

Similar stories abound. An excellent source for first-hand experiences with individual plans is available in the “Health and Early Retirement” forum at Early-Retirement.org. There are many stories of people being rejected for coverage, sometimes because they have serious health conditions, but other times because of trivial-sounding health interventions that may have occurred years prior.

Your experience in applying for an individual plan will depend on your personal situation, the state in which you live, and the criteria of the underwriting departments at the insurance companies reviewing your application.

Assuming you have a shot at getting approved, eHealthInsurance lets you easily generate quotes for a range of plans, and offers helpful agents if you should need more direction. Family plans with a high ($5,000) deductible recently required premiums of anywhere from $350 to $900/month, depending on the insuring company and other options.

The Patient Protection and Affordable Care Act: Denouement or Detour?

The Patient Protection and Affordable Care Act (PPACA), passed in 2009, and often referred to as Obamacare, offers some hope for access to affordable health insurance for retirees. But it won’t be fully implemented until at least 2014, if ever.

Key provisions of the law that could affect retirees include:

  • a unified health insurance option available through state-based marketplaces
  • a requirement that all individuals have health insurance or face a tax penalty
  • a ban on insurers denying coverage or raising premiums due to pre-existing conditions
  • a ban on insurers dropping policyholders who become sick
  • eventual elimination of the Medicare Part D coverage gap

The court case challenging the PPACA is in front of the Supreme Court as this is written in May 2012. Justices heard oral arguments at the end of March. The most important issue in front of the court is whether the mandate requiring every person to buy health insurance or pay a penalty exceeds Congress’s authority.

That mandate is of particular interest to early retirees, because it would expand the insurance pool you must jump into when you leave work, likely increasing access to health insurance, and reducing its costs. That’s simple economics. But whether or not we’re going to have an enforced national health insurance policy is a political and legal decision, now up to the justices. Their decision is expected no later than the end of June.

How much might a basic health care plan cost an early retiree if the PPACA is upheld? The law envisions a “bronze” plan with catastrophic coverage and a minimum set of essential benefits. The Congressional Budget Office estimated that premiums for Bronze plans would probably average about $395/month for single policies and about $1,020/month for family policies. However, those with income up to four times the poverty level ($60,520 for a couple in 2012), may be eligible for a subsidy. In the upper eligible income ranges it appears the subsidy would cap premiums at 9.5% of income, or about $480 monthly for that hypothetical couple.

Like it or not, the new legislation clearly has not laid to rest questions about the future of health care in the U.S. Practically speaking, with legal challenges and shifts in political power still on the landscape, nobody is yet able to predict what health care in the U.S. will cost, or constitute, in the future.

Tips but No Silver Bullets

In the meantime, those of us accustomed to living frugally will remain on the lookout for ways to cut costs. Health care is no exception, but the health care establishment is a powerful, complex, and well-funded machine that seems to operate by its own rules. The potential for money-saving shortcuts is limited when you’re David against Goliath, you can’t see the money flow, and you’re sick at the same time!

But there are a few possible avenues for getting coverage and/or reducing health care premiums:

  • Joining a trade, fraternal, or professional organization was once an easy route to affordable group health insurance. But the easier it is to get into an organization, the less likely it will offer any compelling health insurance advantage. Insurance companies are not so blind as to change their rules for pre-existing conditions or substantially reduce premiums just because you’ve filled out an application and paid a few bucks to join a club. Years ago, I paid relatively steep premiums for a health plan purchased through my professional engineering society, only to discover a year later that a plan purchased directly from Blue Cross/Blue Shield in my state was cheaper and had better coverage!
  • Health Savings Accounts linked to high-deductible health insurance policies have been used for years by the healthy or self-employed to control health care premiums. But you must have the resources to cover out-of-pocket expenses up to your deductible. And, if you’re in poor health, you still might not be approved. If you are, and you wind up paying the full deductible every year, the plan could prove to be very expensive.
  • A few states have experimented with guaranteed issue, community rating, or mandatory coverage requirements. This makes it easier for anybody, regardless of health history, to get into the insurance pool. If you are flexible about your location, and have funds to see you through the transition, moving to a state with retiree-friendlier insurance laws is an option. (Historically these have been New England states, so you’d better enjoy cold winters!) Be advised that many states probably require waiting periods after relocating, and coverage could still be expensive.
  • The PPACA has created special Pre-Existing Condition Insurance Plans (PCIP) for those with pre-existing conditions, until full provisions of the new law come into force. However, you must have been without insurance for six months before applying. In my state, the premium for an individual is $425/month.
  • If you are willing to work part-time (and most early-retirees need that in their bag of tricks), there are some prominent companies that offer health benefits for part-time workers. Articles at InsuranceProviders, PT Money, and MoneyCrashers offer details, including some information on the coverages available.

Self-insuring and negotiating rates with health providers have been the last line of defense for some. But this poses a grave risk of bankruptcy if you encounter any major medical problem. It also puts you at an immediate financial disadvantage: According to Health Affairs, the uninsured are charged 2.5 times more than an insurance company would pay for the same service. So you might have to bargain ferociously, just to get back to what your insured neighbor is paying.…

How I Got Retirement Health Insurance

It appears to me that the most reliable strategy for retirement health care is one that starts relatively early in your career, and, unfortunately, it won’t suit everyone. Public service, working for a government entity, is the only path that seems to offer some certainty of retiree health benefits going forward. I don’t see us eliminating health care for our veterans or retired public safety workers any time soon, though benefits could certainly be reduced. However, in the private sector, even the most compassionate and profitable corporations are under relentless pressure to cut back on health care benefits, and they certainly won’t be looking for reasons to extend those benefits to employees after they’ve left the work force.

As for my personal experience? My previous employer, a progressive and well-managed mid-size company with generous employee benefits, had nothing to offer retiring employees with many years of service. After enjoying a premium health plan for a decade, we were looking at an abyss until age 65. So, how, in the face of all the problems outlined above, was I able to retire at age 50?

I got lucky. I married the right woman 25+ years ago. Among many other wonderful attributes, she’s a public school teacher and qualifies for group retiree health benefits that also cover dependents. So, after I retired, and we had been on COBRA for a few months, we switched our family coverage to her health plan. Of course, the premiums for that plan keep rising annually, and the retiree benefits could even be threatened by our ongoing local budget crisis. But, for now, they are our best bet.

How Will You Get It?

So there, I hope, is a realistic overview of the entire retiree health picture, from the current problems, to Medicare, to the early retirement gap, to individual plans, to the new PPACA law, and a few tips for getting coverage or reducing health insurance premiums.

Only one thing seems certain about U.S. health care: it will cost more than we like, or be less available than we like, and probably both.

But this is not the end of the story: many of you have detailed knowledge or relevant personal experiences. I’m especially interested in hearing your individual stories on this topic:

  • Are you ready to retire, but tied to your job because of health care?
  • Have you applied for an individual plan recently? What was the outcome?
  • Have you successfully joined a HIPAA plan or high-risk pool? What does it cost you?
  • Do you live in a state with guaranteed issue, community rating, or mandatory coverage?
  • Have you chosen a Medicare Advantage or Medigap plan?
  • Any other valuable lessons learned for dealing with our health care system?

Please reply below and we’ll all benefit.…

Comments

  1. Great summation of these issues. I fall squarely into the category of those who are hanging onto a job primarily because of the health insurance benefits for me and my wife (who's self-employed). We're in our late 50s, early 60s, and fortunately have had no major medical issues. Even so, I've wondered whether a small skin cancer removed a couple of years ago (basal cell carcinoma) could complicate the coverage issue for me, or increase the premium. It seems to me that one of the catch-22s of the current system is that you can't get firm answers until you apply for coverage, and then if you're rejected, that becomes part of the record and may influence other potential insurers.
    A couple of questions that you or perhaps other readers might address:
    1) Do you think it's easier to obtain coverage under a high deductible plan? In other words, are insurers more lenient in looking at applicants who're willing to shoulder a higher portion of the costs?
    2) For those willing and even wanting to continue working part time, are there companies that offer at least some insurance support for part-time workers? (I'm thinking specifically of major names like Starbucks, Lowe's, Home Depot etc.).

  2. Darrow Kirkpatrick says:

    Thanks for the comment Chris, and for pointing out one of many catch-22's in the current system. A good health insurance agent, like the ones at eHealthInsurance.com, may be able to give you some feedback on those underwriting questions, before you commit to an application. Also, at Early-Retirement.org, you can read about other people's experiences trying to get approved. Starbucks is the poster child for health coverage of part-time workers, but there are others: see the updated "Tips" section of my post above for some helpful lists of companies….

  3. Howdy,
    This is a very nice and informative article and it scares the crap out of me. We got started late saving for retirement so health care costs are a critical consideration w/ regard to retirement.

    We are both self employed and currently have a high deductible 2 person group plan. Still very expensive and the premium increases 15% annually. The group plan was a last ditch effort as we both got turned down for individual plans do to pre-existing conditions.

    We are in our mid fifties. Calculating out 10+ years of our premiums with the geometric progression of premium increases is enough ta make ya puke.

    We will likely be one of those couples that seriously considers leaving the US for less expensive locales with some healthcare cost advantages like Costa Rica or Belize. Dont know what else we could do…unless we try to get a govt job or teaching position.

    Thanks for the GREAT article…I have to admit I am a little afraid to pass it along to my wife…it is likely to scare the crap out of her as well! đŸ™‚

    Happy trails, cowboy Mike

    P.S. Got to you via Mike Piper/Oblivious Investor and his Friday, Investing Blog Roundup email.

  4. Darrow Kirkpatrick says:

    Thanks for the heartfelt comment Mike. You're right, those of us who manage to get coverage then have to worry about premium increases. And that's a very scary picture too. Thanks also for pointing out the international option. Sobering.

  5. The situation in the US is so bad I am planning to move to Canada next year. Nothing is perfect, but it's a lot better than what we are dealing with here in the US (I have dual citizenship).

  6. Darrow | CanIRetireYet.com says:

    Thank you Tara. That's a telling choice that you are making. Many would like that option.

    Some readers may be interested to know that Canada offers a Business Immigration Program for investors, entrepreneurs, and the self-employed.

  7. For the people who are out of group insurance and who have had problems with getting individual insurance, every state has a HIPAA plan. You need to know that it's available and request it specifically.

  8. Darrow Kirkpatrick says:

    Thanks for the tip Kim. That's a good reminder that you have to do your own legwork in this area: providers aren't lining up to sell you insurance in high-risk categories.