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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.

Health Insurance Early RetirementBut 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, commonly 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. A decade after becoming law, it’s still 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 quality health insurance at reasonable rates, at least in some areas.

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 $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.

Related: Navigating ACA Tax Credits to Purchase Affordable Health Insurance

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 health care and optimizing health insurance premiums, out of pocket medical expenses, and taxes in early retirement.

Comparing ACA Plans By State

Another factor to consider before choosing an ACA plan for your early retirement health care is where you want to live. Since its inception, we’ve received reports of wildly varied experiences and satisfaction from readers using ACA insurance. Much of the variance is based on the state in which they reside.

Kaiser Family Foundation reports different states are taking varied approaches to provide consumers more affordable health care options. Some of the approaches they highlighted include stabilizing marketplaces by implementing reinsurance programs, state individual mandate programs, state funded enhanced subsidies, and public plan options.

WalletHub enlisted a number of health care experts to rate the best and worst states for health care across a number of categories. Each of our health care needs are personal, so it is wise to see how the state where you plan to purchase health care ranks in the categories important to you.

At the very least, it is wise to understand how the ACA currently functions in the area where you want to retire. For those looking to relocate in retirement, finding a favorable state could provide an interesting opportunity for domestic geoarbitrage.

Our Early 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 nine 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, by our early-60’s, we will be 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.

Health Savings Accounts

These expenses are not out of the ordinary, even for those with health insurance and relatively good health. They can be much higher for those dealing with an acute event or chronic disease.

Utilizing a health savings account (HSA) is an excellent strategy to prepare for these expenses. Contributions to an HSA provide a tax deduction in the year the contribution is made.

This money can then be invested, without annual taxation of dividends, interest or capital gains. Money can then be taken out to pay for health care expenses without being subject to taxation. Chris reviewed the best options for those who want to invest the funds in your HSA.

Insurance Alternatives to ACA Coverage

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

Employer Provided Medical Insurance

The challenge of obtaining affordable and reliable health insurance in early retirement leads many people who are otherwise financially independent to continue to work in order to receive health care benefits.

This can come in many forms. Rather than retiring fully, some people elect to cut back from full-time to part-time in their current job or profession. Often one half of a married couple will continue to work enough to provide health care benefits to the household.

If you are willing to return 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.

Military Programs

Retired military have several affordable options to obtain health insurance in early retirement through TRICARE. These benefits extend into traditional retirement years when retirees can obtain coverage between a combination of Medicare and TRICARE for Life. Others who may be eligible for benefits under TRICARE include national guard/reserve members, survivors, former spouses and dependent parents and parents-in-law.

Retired military members may also be eligible for health care benefits through The Department of Veterans Affairs (VA). These benefits are more restrictive than TRICARE, but do provide an additional layer of protection for veterans who qualify for them.

Short-term Limited Duration Health Insurance

The ACA initially included a mandate to have ACA compliant health insurance. A popular feature of the ACA is not being able to discriminate against those with pre-existing conditions. The mandate was a way to balance the costs of those with pre-existing conditions, who use more health care services, by requiring younger and healthier people, who use less services, to participate.

Congress passed legislation, effective in 2019, eliminating the financial penalty for those without ACA compliant insurance. President Trump also issued an executive order to expand the availability of non ACA compliant short-term limited duration insurance (STLDI) policies.

Premiums for STLDI policies are typically far less expensive than ACA insurance. This is because they operate under different rules.

It’s important to understand the details of STLDI policies before considering them for your early retirement health care needs. A few key features that differentiate them from ACA insurance is they provide coverage for only a limited term following which a new policy is required. There is no guarantee to be able to renew coverage from year to year if health status changes.

STLDI also can charge higher premiums or simply deny coverage based on health status. They can also limit or exclude coverage for pre-existing conditions, mental health conditions, prescription drugs, maternity care and preventative care which are required to be covered by ACA compliant plans.

STLDI plans can also impose annual and lifetime benefit limits which ACA plans can’t, while also imposing much higher cost sharing provisions than ACA limits. This allows STLDI plans to pass on risk to the insured in ways ACA plans cannot.

For these reasons, STLDI plans are probably an option only for healthier retirees as a short-term bridge to Medicare or another more stable plan.

COBRA

Another potential short-term solution for early retirement health care is courtesy of the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986. Under COBRA 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.

Group Insurance

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!

Insurance Workarounds and Supplements

Health Care Sharing Ministries

Faith-based health care ministries (HCSM), which function like private insurance pools for groups willing to live by similar beliefs provide an alternative to traditional medical insurance. 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 HCSM with critical mass: Liberty HealthShare, Medi-Share, Christian Healthcare Ministries, Samaritan Ministries, and Altrua HealthShare.

Related: Are Health Care Sharing Ministries a Viable Alternative to Health Insurance for Early Retirement?

Direct Primary Care

Another alternative to traditional health insurance 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.

DPC is on the frontier of delivering medical services and it is unclear how reliable of an option it is for your early retirement health care needs. When I originally wrote about DPC in 2016, Qliance was cited as an innovator in health care delivery with nearly a decade providing DPC. In May 2017, they closed their doors and filed bankruptcy. Others like MedLion continue to expand across the country.

Bipartisan legislation has been proposed that would allow the use of HSA funds to pay monthly DPC fees. Currently, DPC fees are treated as an insurance premium by the IRS. Thus, they are not a qualified medical expense. This creates a barrier for those who would use HSA funds for DPC services.

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. This link takes you to a nationwide map of DPC providers.

Medical Tourism

Medical tourism means traveling abroad to receive medical care. Americans can often receive care at less cost, even after factoring in travel expenses, than can be obtained at home.

Some people use medical tourism to save money on procedures ranging from dental work to total joint replacements. Others elect to relocate on a long term basis to countries with more affordable health care systems.

We receive occasional comments and emails from readers who are taking this approach. Billy and Akaisha Kaderli have documented their decades long personal experience with medical tourism, as well as others who they’ve met on their travels, at Retire Early Lifestyle.

Medical tourism introduces unique risks and complications when planning for your early retirement health care needs. The CDC outlines risks and provides a helpful checklist for those considering medical tourism. Organizations including Medical Tourism Quality Alliance and Joint Commission International provide resources to help find providers in a number of specialty areas and geographic locations.

Self Insurance

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 problems. 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.…

The Future

Regardless of your politics, the future of Obamacare is uncertain. The Right wants to gut it, the Left wants to tweak it, expand it, or replace it with Medicare for All. 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. Large swaths of the country have only a single participating insurance provider.

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.

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Valuable Resources

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  • Our Books

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at chris@caniretireyet.com.]

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