Early retirement spoiler

The high cost of individual health insurance makes early retirement a challenge.

From the pages of In Business magazine.

Barbara Bova has a decision looming. By the end of October her husband Gary will be eligible for Medicare but she will either have to opt for medical insurance on the private market or run the risk of going without coverage during the winter months when she plans to live in Florida.

Already 16 months into retirement, she has bought some time with COBRA coverage as a bridge to the point where Gary is eligible for Medicare, the federal government’s health insurance program for seniors, and it’s a good thing, too. In that time, he’s had multiple health episodes that could have bankrupted an uninsured couple, but now it’s time to consider her needs and the options won’t come cheap.

Now 61, Bova has a lot in common with others who would like to retire a bit early but find it problematic due to the high cost of insurance on the individual market. Some have enough assets to swing it, while others can afford the cost if they are willing to report a lower annual income until they are 65, which makes them eligible for subsidies under the Affordable Care Act, and others end up delaying retirement even after age 65.

“It’s definitely a huge problem,” says Lisa Neumann, an employee benefits consultant with the Madison office of Ansay & Associates. “Insurance prices are increasing astronomically, especially in the individual market. People are having a tough time and that’s why they work longer — because they can’t afford the cost of an individual plan once they retire.”

For the 2017 plan year, the cost of individual plans could rise dramatically. The Affordable Care Act (ACA) requires that insurers planning to significantly increase plan premiums by 10% or more submit their proposed rates to either the state or federal government for review. In the Madison market, individual plan submissions that exceed this threshold range from a 16.2% increase for Dean Health Plan’s individual HMO plan to a 37.88% increase for one of Unity Health Plan’s individual products. Of these individual plans, two are in the 10% to 20% range, three are in the 20% to 30% range, and three are in the 30% to 40% range.

“What’s going on here is that [under the Affordable Care Act] health insurance is guaranteed issue and there is no underwriting,” explains Jason Marty, an account representative with Insurance and Investment Professionals. “Insurance companies are required to give everyone a policy and they can’t underwrite them for height, weight, lifestyle, and any of the things that you would normally use to measure risk.”

The good news is that under the ACA people can purchase individual coverage with no denial of coverage due to pre-existing conditions. Prior to that, if people wanted to retire and they had a history of cancer or heart disease, for example, their condition could prevent them from getting an individual plan. The state of Wisconsin had a high insurance risk sharing pool, known by the acronym HIRSP, to help people gain access to insurance, but now insurers “have to take you on as an individual,” Neumann notes.

While availability has improved, affordability still is a challenge because the ACA’s mandated benefits ramp up the cost and because insurers aren’t sure how many sick people will be part of the risk pool, which makes it more difficult to price the policies. According to Neumann, a 62-year-old Madison resident with a $500 deductible plan would pay $885 per month (double for a spouse). For someone with a $2,000 deductible plan, the premium comes down to about $700 a month. “That’s just for one person, so it’s expensive,” Neumann says. “For couples, you’re talking about the size of a mortgage payment.”

With that, we offer four cost mitigation strategies for people who are approaching retirement.

1. Open an HSA

One thing a prospective retiree can do is take advantage of a health savings account, provided their employer’s health plan includes this feature. Individuals who are eligible to make contributions to a health savings account have a tax-advantaged way to save for Internal Revenue Service-qualified medical expenses at retirement. HSAs typically are paired with a high-deductible health plan and the money in the account is mostly used for out-of-pocket costs.

Since HRAs were created in the tax code, the IRS determines which expenses can be reimbursed and which cannot. The list of qualified expenses ranges from acupuncture to x-rays; examples of nonqualified expenses include cosmetic surgery, health club dues, and nutritional supplements.

Under certain circumstances, insurance premiums qualify as a medical expense for HSAs. They include temporary continuation of employer coverage under COBRA (the Consolidated Omnibus Budget Reconciliation Act), qualified long-term care coverage, and medical coverage while receiving unemployment insurance.

“They put money into the account now and they can take money out of that account later to pay for health insurance premiums,” Neumann says.

HSAs have strict contribution limits: up to $6,750 annually for a family plan and up to $3,350 annually for a single plan, plus an extra $1,000 in each case if you’re over age 55. There is incentive to limit your health spend in the early years because the employee controls the money; whatever is left in the account at year’s end is rolled over to the following year and can build to a sizeable account over time.

If you haven’t established a health savings account by age 50, Bob Garrison, human resources manager for UW Provision, believes it’s time to start. “If you’re able to put that much every year into an HSA at the bank, and you don’t have a lot of medical expenses to pay, then it’s a great way to save for insurance costs after you retire,” notes Garrison, whose company offers HSAs to employees. “You already have the money in the bank, and it’s been put in there pretax.”

Health savings accounts have been popular throughout the country, but they are not as widely used in Dane County because of the unique characteristics of this health care market. With Dane County operating in a physician-directed HMO environment, local insurance companies are either owned by the doctors or there is a direct connection with the doctors, so they have lower claims cost compared to a stand-alone insurance company that is contracting with a provider network, Marty explains.

HSAs might not be a large piece of business for local insurers, but Garrison says about 25% of the UW Provision employees who enroll in the company health plan have a health savings account. “It has been appreciated by employees and understood as a viable option, particularly for healthy employees who don’t go to the doctor a lot,” he notes. “The cost to them for the health savings account plan is a lot less than the regular HMO plan. If they don’t go to the doctor a lot, they save money every week by not having as much deducted out of their check for insurance.”

(Continued)

2. Continue on COBRA

Another option that people should consider is remaining on their former employer’s insurance for up to 18 months after their departure. Under the aforementioned COBRA, which generally applies to group health plans maintained by private-sector employers with at least 20 employees, businesses are required to provide a temporary continuation of group health coverage to people who leave the company, either through termination or reduction in hours, death, retirement, or reasons other than gross misconduct. It also requires the coverage to be offered to employees and their spouses, former spouses, and dependent children.

If you’ve saved money in a health savings account, that money can be used to cover COBRA premiums. While these premiums are typically less than if individual coverage was purchased on its own, there is sticker shock because while employers are required to offer the coverage, they are not required to pay for any share of it. Say the group pays $900 a month for employee-spouse coverage, the affected employee can continue on the group insurance at that $900 rate for up to 18 months. “A lot of people are typically shocked as they learn what COBRA costs because once you’re on it, you’re paying 100% of the premium,” Marty notes. “Sometimes they forget their employer is paying 70% to 80% of the premium. They see 20% or 30% come out of their paycheck and think it’s outrageous, but they forget the employer is paying a large portion of that.”

While the COBRA route can bring sticker shock, Barbara Bova was grateful for COBRA because her former employer offered a very generous plan at a time her family needed it. While the monthly premium is $1,700, Gary’s health scares made that a bargain. Since Barbara retired, Gary had a major stroke, triple bypass surgery, and prostate surgery. Their out-of-pocket costs amounted to $250 for the surgeries, and the deductibles and copays of optional coverage made it a no-brainer to continue with her former employer’s insurance.

“Money wise, it was less expensive to go with the COBRA with better coverage,” she notes.

3. Get high deductible

When you consider an individual health plan, look at purchasing a higher-deductible plan. Under such a plan, the higher the deductible, the lower the monthly premium cost, which favors people who remain healthy and are more judicious with their health spending. And if they have paired the high-deductible plan with a health savings account, they can draw from the account for out-of-pocket expenses.

Victor Lemachko of Apex Insurance Group offers a higher-deductible, lower premium scenario with a platinum plan available on the ACA marketplace. One person with a platinum plan would start with a monthly premium of $844, with a $500 deductible, Lemachko notes. If you choose a bronze plan with a $6,450 deductible you would pay $452 a month, so you’ve saved more than $400 a month in premium. So if you are a healthy 62 year old and you opt for a bronze plan, you’ve saved $5,400 within the first year. Even if you use $1,000 of the savings to pay for doctor visits and medications, you would still save $4,000.

“It’s a good strategy and people should definitely look into it because initially they are shocked because they are coming off a plan with no deductible or a $500 deductible,” Lemachko notes. “When you bring up the idea of a high deductible plan, when you talk about a $6,000 deductible, people go, ‘Whoa! No, no, no. That’s too high of a deductible,’ and I say look at the savings. Within a year, you save almost enough to cover the deductible. If you don’t go to a doctor or just go there for minor stuff, you’ll be better off.

“If you do, then you’ll still save as much and you can run that money through an HSA and have an advantage there, as well.”

4. Apply low-income leverage

It might sound immoral to some, but one perfectly legal strategy is to declare a lower amount of annual income if you retire at 62 (based on Social Security benefits), which would make you eligible for a health insurance subsidy under the ACA. Remember, the subsidy test is an income test, not an asset-based test, so anything saved in a retirement account doesn’t apply.

According to Lemachko, a 62-year-old person with savings that won’t be counted as income could declare $2,000 a month in Social Security income, or $24,000 a year, qualify for a $441 monthly subsidy, and basically get an ACA platinum plan at no cost. “It’s going to be a high-deductible plan, but it will be no cost to you,” he says. “So even well-off people, I’ve seen more than several who are taking a subsidy because that’s how the law is written.”

Marty acknowledges the moral issue associated with such people receiving a subsidy, but until the federal government addresses this aspect of the law, people can legally take advantage of it. “We’ve always thought that was a silly way to determine a subsidy,” Marty states. “A person could, in theory, have $1 million in the bank and be drawing $25,000 out of their retirement account for those three years (from 62-65) and still receive a huge subsidy.”

• • • • • •

As Barbara Bova shops for medical insurance for herself she’s hoping to find a national policy in the $1,100 per month range, but the lack of carriers who will insure her in both Wisconsin and Florida makes it difficult. Blue Cross Blue Shield offers nationwide coverage, but Bova is reluctant to go with Blue Cross because her advisers have told her there is no guarantee the company will continue to do so. “We have a condominium in Florida, and we want to spend the winter in Florida but be covered by health care,” she explains. “If I stick with Unity, I cannot see a doctor down there. I’m only able to go to an emergency room or an immediate care clinic. Blue Cross is the only one that provides nationwide coverage, so I don’t know what I’m going to do. I might just stick with Unity and go to Florida and hope that I stay healthy. I guess if something happens, I’ll have to worry about it then.”

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Is Medicare for more the answer?

Presidential candidate Hillary Clinton wants to give people over 50 or 55 a chance to but into Medicare, but will that address the cost issue?

Should Medicare, the government’s health insurance program for seniors 65 and older, be available to people at age 50 or 55? Presidential candidate Hillary Clinton has put forth the idea, and if a related proposal becomes law it would be another option for people who would retire early but for the high cost of medical insurance. Many of the details still need to be fleshed out, but Clinton has talked about allowing people to buy into the Medicare program.

Lisa Neumann, an employee benefits consultant with the Madison office of Ansay & Associates, notes there are several unanswered questions. “With no knowledge of premiums or subsidies yet, a Medicare buy-in might just be too costly for those uninsured adults above 50 who have low incomes but are ineligible for Medicaid because of state rules,” she states.

It’s also unclear, Neumann adds, whether people under 65 could qualify for the Medicare supplement and advantage plans that help fill coverage gaps. Right now Medicare pays 80% and a Medicare supplement plan purchased by an individual picks up 20%. “Sicker elderly adults regularly run up against the limits of Medicare,” Neumann says, “and it’s hard to envision cases in which Medicare would make more financial sense for near-elderly adults, with serious chronic illnesses, than medium-cost marketplace plans.”

Jason Marty, a partner and account representative with Insurance and Investment Professionals, admits to being tugged in both directions. On one hand, he thinks it could spur the economy by allowing people to retire and have their jobs open up to lower-cost workers, but he does not believe it would address a cost issue made worse by Medicare fraud.

“Insurance companies are very good at monitoring fraud,” he notes. “They have a profit motive. If you expand Medicare, how are you going to make sure that stays under control?”

Why one advocate says it's time for single-payer coverage

Has the time finally come for universal medical insurance via a single-payer — i.e., the federal government — system? Patti Kraemer thinks so, at least as an option to the existing system.

Patti Kraemer wants to see single-payer become an alternative for consumers.

Under a single-payer system, the government would finance universal medical insurance coverage through tax increases on high-income earners, a concept that exists in many industrialized nations. Single-payer advocates believe it’s the only option left that can address quality, cost, and access.

Given potential tradeoffs such as rationing and longer wait times for surgical procedures, not everyone is sold. Kraemer does not dismiss the tradeoffs; she simply wants an alternative that does not tie medical insurance to employment.

Kraemer has been diagnosed with multiple sclerosis, which may or may not become a disabling disease, but she notes that people who are diagnosed with a disability later in life face more than a health crisis. After saving for retirement, they can easily burn through their savings to cover health needs — even with employer-sponsored insurance.

Now employed with Dane County, Kraemer primarily has worked for nonprofits and has had her battles with various insurance companies, both in terms of their coverage of services and prescriptions. As a result, she’s not convinced that group medical insurance is a cure-all.

“I know that I have a disease that could be expensive to treat, and without coverage it’s something that could bring overwhelming debt,” she says.

Kraemer reasons that universal coverage will mean longer wait times because everyone would have coverage and seek services, so that’s not necessarily a bad thing. She believes single-payer is worth a try because the status quo, even with more people covered under the Affordable Care Act, is lacking. “There has to be something to move us out of the situation we’re in right now,” she opines.

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