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Retirement Health Care: What Are Your Options?

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For years, health insurance in the U.S. was a major roadblock to early retirement. If you dared to leave work before age 65, when Medicare starts, you were on your own for retirement health care. In my case, our assets were closing in on financial independence as I reached my mid-40’s. But pre-existing conditions precluded purchasing an individual health policy. So I didn’t dare take the plunge into early retirement.

But then two lights appeared on the horizon: My wife went back to full-time teaching for a few years, qualifying us for retiree health benefits from our county school system. (They’re expensive, but we are able to buy into a guaranteed group plan.) Those retiree benefits removed the last obstacle to my early retirement, one that I could not have overcome on my own. I couldn’t have retired at 50 without them.

The other light was the passage of the Patient Protection and Affordable Care Act (ACA) in 2009, better known as “Obamacare.” This was our backup plan. It functions today, and is still our backup plan. But for many early retirees it’s their first, and only, plan. Unfortunately, it’s a system that is still under revision, and under attack, on many fronts, both political and financial. I’m relieved that we don’t have to rely on it for our early retirement, but sympathetic to the many who do. The picture is changing year-to-year. Here is an update on Obamacare and its alternatives….

Tax Complexity

The ACA has transformed the landscape for early retirees with pre-existing conditions in the U.S. We can now get health insurance at reasonable rates, at least in some areas. (The cost varies by location and can still be very expensive.)

Health insurance is more affordable through the ACA exchanges thanks to a complex web of tax subsidies. Premium Tax Credits are awarded based on income, in an attempt to ensure that families of the same size and means pay the same for insurance, regardless of their age, location, or medical needs.

But, for those who want to understand and optimize their health care finances, the new law creates new problems: Superimposing the ACA and Federal income tax profiles makes for a bewildering puzzle at tax time. Even the financially savvy will be hard-pressed to minimize all their costs, especially if life events don’t cooperate.

The problem is the number of constraints that come into play: You can’t make too much income, or you’ll lose subsidies. You also can’t make too little income, or you’ll be forced onto Medicaid or lose coverage. Further, the definition of “income” (Modified Adjusted Gross Income or MAGI) is different for Obamacare than for your income taxes.

The way the Premium Tax Credit is reduced as income increases, works like a tax. At incomes above 400% of the Federal Poverty Level (FPL), subsidies are completely eliminated. This is known as the “Premium Subsidy Cliff.” It’s a cliff because, in high-cost areas, $1 of additional income could expose you to thousands of dollars in increased premium expenses!

Roth conversions and tax-free capital gains harvesting are other key tax strategies whose thresholds are complicated by the new ACA rules.

Given the current system, which subsidizes health care via the tax code, if you are retired and relying on Obamacare, and want to minimize your expenses, you will have no choice but to become an expert on taxes.

Optimizing Obamacare

Most early retirees and even many traditional retirees have some flexibility in how they realize income. You can control the timing for when you claim Social Security, withdraw from retirement accounts, harvest capital gains, work part-time work, and pay certain major expenses. Each of these events impacts your income, and thus your eligibility for ACA subsidies.

Based on my reading, here is a general strategy for optimizing insurance costs through the ACA exchanges in early retirement:

  1. Start by tracking your income carefully during the year: It’s the most vital metric for using the ACA.
  2. Be sure to generate enough income to exceed 138% of the Federal Poverty Level in states that expanded Medicaid, or 100% of the FPL in states that did not.
  3. Maximize benefits by keeping your MAGI between 100%-250% of FPL and choosing a Silver plan, to be eligible for the Cost Sharing Subsidy Reduction. That gives you lower out-of-pocket costs on copayments, coinsurance, and/or deductibles.
  4. Do whatever you can to stay below 400% of the FPL, to avoid losing subsidies altogether and possibly going over the premium “cliff.”

If you need more detail, Jeremy at Go Curry Cracker! shares his considerable experience in optimizing Obamacare for early retirement and optimizing health insurance premiums, out of pocket medical expenses, and taxes.

Our Retirement Health Care Expenses

What if you aren’t forced by circumstances to use the ACA exchanges? As explained above, we do have retirement health benefits. We are some of the “lucky” ones. We have guaranteed coverage, and some price stability. But our health care expenses are anything but cheap:

When I retired five years ago, I budgeted what I thought would be generously for our health care. I knew these costs could be the single biggest risk factor in our retirement.

So I planned on $700/month for health insurance premiums. And I also budgeted $500/month for out-of-pocket health care expenses. How is it going? We are fast approaching that premium figure. The next inflation adjustment to our health insurance premium will likely put us over. As for out-of-pocket expenses, more months than not, we are spending our full budgeted amount. Together those two categories make $1200/month or over $14K/year in health care expenses.

So, already, in our mid-50’s, we are close to exceeding our health care budget. It’s a worrisome trend for our future. We can expect some relief when Medicare kicks in at age 65. Basic Medicare coverage would appear to save us several hundred dollars a month in premium costs. But that savings could quickly evaporate if we elect a more comprehensive Medicare Advantage or Medigap plan.

Alternatives to Obamacare

If government programs don’t fit you financially, or philosophically, there are some alternatives to Obamacare that bypass the traditional health insurance model:

The first is Direct Primary Care (DPC), which replaces the typical fee-for-service insurance model with a simple flat monthly fee that covers routine primary care services. This makes your expenses, at least for routine healthcare, more predictable. Examples of DPC include Qliance in Washington state, and MedLion, now expanding across the country. In some cases, DPC can be coupled with Health Savings Accounts (HSAs) or high-deductible health insurance, to cover major medical care, though the rules are still being established.

Related to DPC are higher-end “concierge medicine” practices where a group of patients pay an annual retainer and receive exclusive access to their doctor. According to knowledgeable insiders, such practices may thrive in a few well-to-do locations, but will be challenged to keep up with the infrastructure demands of modern medicine, particularly information technology systems.

Finally there are the faith-based health care ministries, which function like private insurance pools for groups willing to live by similar beliefs. Members pool their resources when they’re healthy, to provide for times when they’re not. In these plans, everybody pays equally and is eligible for equal benefits. No government regulations or insurance company rules are involved. But payments aren’t guaranteed either — they depend on cash flow. In general, the plans seem to work: You’ll find many reports online of high satisfaction and significantly lower premiums and deductibles than Obamacare.

Currently there appear to be five such ministries with critical mass: Liberty HealthShare, Medi-Share, Christian Healthcare Ministries, Samaritan Ministries, and Altrua HealthShare.

The Future

Regardless of your politics, the future of Obamacare is uncertain. The Right wants to gut it, the Left wants to tweak or expand it. Given such a new and volatile program, any election year could bring dramatic change.

And, even without political changes, there are worrisome indicators for financial stability: Actuaries question whether Obamacare will be financially sustainable if current usage trends continue.

Major insurers have abandoned unprofitable Obamacare business in some markets and more are threatening to leave.

There are reports of sick people gaming the system, while healthy people avoid it. Some experts advise using the ACA exchanges only if you’re getting a subsidy: That might be a good personal strategy, but it’s not financially sustainable for a country. (Insurance doesn’t work if only the people in need buy it.) If these trends continue, Obamacare could be bankrupt in a few years.

If Obamacare fails, will the U.S. health care system take some other route to expanded coverage? The interests vested in the current system are numerous, wealthy, and powerful. Expecting significant change any time soon looks like wishful thinking to me.

However, one aspect of the ACA that we can probably count on continuing is the ban on denying coverage or raising premiums due to pre-existing conditions. Those provisions will be too politically popular to get axed.

While not the roadblock it once was, health insurance remains both uncertain and expensive for U.S. retirees. And no resolution is in sight. Naturally, you’ll try to optimize your health care spending. But, given the pressures and changes afoot, no single strategy is likely to carry you all the way through retirement. Staying informed and flexible, and healthy, is your best hope.