Given the skyrocketing cost of healthcare (as well as the increasing need for it as we age), it’s not too surprising that Baby Boomers’ biggest worry is how they’re going to afford their medical costs in retirement. Thankfully, however, Medicare (which is available to individuals who paid – or have spouses who have paid – Medicare taxes for at least 10 years and are at 65 years of age or older) is the de facto option for healthcare for retirees. And it’s actually quite affordable – at least relative to the underlying costs of care – due to the fact that Medicare taxes already cover between 77% and 99% of a Medicare recipient’s premiums (such that they only have to pay the net remaining premium out of pocket).
The caveat, however, is that, while the majority of individuals plan to retire at some point after they reach age 65, there is still a non-trivial number of individuals, whether by choice or by need, who retire before they are eligible for Medicare (or even Social Security, for that matter) and still need health insurance coverage (and can’t just simply be added to their still-working spouse’s employer-sponsored plan).
Fortunately, early retirees do have a few options as they consider the best way to obtain health coverage in early (pre-Medicare) retirement. For workers who retire from a company with greater than 20 employees, COBRA (Consolidated Omnibus Budget Reconciliation Act) coverage allows newly-separated employees (or employees who work so few hours that they’re not eligible for their employer’s health plan) to continue their existing insurance coverage at the same (full-premium) cost (plus an administrative fee that is usually capped at a maximum of 2% of the premium). However, COBRA coverage generally lasts only 18 months, and thus can only (except under certain conditions) be used to bridge short gaps before Medicare eligibility begins. Another option for retirees looking to continue their coverage using the same health insurance provider is to “convert” the plan under the group to an individual plan… at least, as long as the plan allows for such a conversion. Again, though, this isn’t always an ideal alternative, as there’s no requirement that the terms (or cost) of such an individual policy are the same as their “old” group plan.
Meanwhile, retirees who (either due to eligibility or cost) decide that either COBRA coverage or a conversion policy isn't the right choice for them, may choose to simply purchase health insurance using their state-approved exchange created under the Affordable Care Act. However, while retirees can’t be denied coverage for a pre-existing medical condition, coverage can only be purchased during specific open enrollment periods, or within 60 days that the employer’s plan is terminated (which means time is of the essence after retiring to make a decision).
Ultimately, though, the key point is simply to realize that, while retirees may be understandably worried about their healthcare costs eating away at their life savings, the availability of Medicare ameliorates those concerns to a significant degree. However, for those who aren’t yet eligible for Medicare, the issue of securing health insurance to bridge the gap until they reach age 65 becomes less clear… particularly for those whose budgets aren’t exactly robust. Regardless, the good news is that there are options, with coverage that is guaranteed (at least if timely obtained). But the range of choices means it is necessary to conduct a thorough cost/benefit analysis when finding the best option between purchasing COBRA coverage, converting an existing group health plan to individual coverage, and/or purchasing insurance via a state-approved health insurance exchange.
According to a recent survey, the number one worry for most Baby Boomers is how they’re going to hand their medical costs in retirement, just edging out “running out of money.” And given that the cost of healthcare has consistently risen at a pace that significantly exceeds inflation and that healthcare needs typically increase as individuals age, it’s no surprise that looming healthcare expenses are a major concern for many retirees. In fact, according to a recently released survey by the National Council on Aging, some 56% of Americans aged 60 and older are worried about their healthcare costs exceeding their retirement savings.
Though not all-encompassing, the most effective way of mitigating large healthcare expenses is generally via health insurance. To that end, over 90% of Americans have some form of healthcare coverage. The majority of that coverage, however, is received through employer-sponsored healthcare coverage. In fact, the ~56% population covered by employer-based health insurance is nearly triple the number of individuals covered by Medicare!
But if employer-based healthcare is so critical to so many individuals’ personal and financial well-being, what happens when their coverage is no longer available after retiring from that employer? Certainly, if coverage is available via a spouse, pursuing that path often becomes a logical choice. But for some retirees, whether by choice or by misfortune, employer-provided healthcare is terminated, no spousal coverage is available, and other options must be explored.
The “Logical” Choice For Retiree Health Insurance: Medicare Coverage At Age 65
For those who make it until at least age 65 prior to retiring, the health insurance “issue” is usually not much of an issue at all. That’s because once an individual reaches 65, they are generally eligible to receive coverage under Medicare.
To qualify for Medicare coverage on the basis of age, an individual must be 65 years old, and either they or their spouse must have worked (and paid Medicare taxes) for at least 10 years. (Medicare is also available for certain younger disables persons and those with permanent kidney failure, regardless of age. But that’s it!)
And since by the time most people who are still working at age 65 reach that milestone age they have already worked for at least 10 years, they become eligible for Medicare at that time (at age 65). For such persons, a 7-month “Initial Enrollment Period” begins at the start of the month three months prior to the month in which they turn 65 and ends at the end of the month three months after the month they turn 65.
Medicare Is Super-Affordable For Most Retirees
Reaching Medicare-eligibility-age is often a key milestone for (potential) retirees because it provides extremely affordable healthcare coverage, thanks in large part to premium sharing with the Federal government (funded via the Medicare taxes deducted from workers’ wages and/or self-employment income, which cover anywhere from 77% to 99% of the actual costs). Traditional Medicare comes in three parts; Part A, Part B, and Part D, each of which have separate premiums.
Medicare Part A, known as “Hospital Insurance”, covers expenses such as inpatient hospital visits, hospice, and care provided in skilled nursing facilities (for a limited amount of time). Notably, the cost of this insurance is generally borne 100% by Uncle Sam, and is “free” for individuals eligible to enroll in Medicare!
Medicare Part B, or “Medical Insurance”, covers outpatient services, preventative services, and most doctors’ services. Though not free, premium sharing helps to keep premiums down for retirees. For instance, most Medicare Part B participants are required to pay a premium that is equal to “only” 25% of the total cost of Medicare Part B. For 2019, this amount is $135.50 per month, per person. (Higher-income individuals do pay more, though, under the so-called Income-Related Monthly Adjustment Amount [IRMAA] rules, as discussed further below.)
Finally, Medicare Part D, or “Prescription Drug Coverage”, varies in cost depending upon the specific plan selected, but is expected to average “just” $32.50 per month for most Medicare Part D participants in 2019. Notably, this cost has actually gone down over the last two years, and again, almost 87% of the premium cost is actually borne by Federal and state government (making it relatively affordable, though again IRMAA surcharges may apply for high-income individuals).
Thus, for what by most definitions would be considered fairly robust health coverage (Medicare Part A, Part B, and Part D), the typical retiree with an average Part D plan has a total monthly Medicare cost of “just” $168 = $135.50 Part B Premium + $32.50 average Part D premium. (Note: This is just the cost of the Medicare insurance premiums. Other costs, such as deductibles and coinsurance, may apply when care is received, if not covered by another insurance policy. However, in practice these costs are typically relatively stable, averaging only slightly more than another $100/month for those in otherwise good health and another $400/month for those in poor health.)
Medicare Is A Great Deal For High-Income Retirees Too!
Regardless of a retiree’s annual income, the cost of Medicare Part A is generally fully absorbed by the Federal government. The cost, however, for both Medicare Part B and Part D increases (as the premium sharing provide by the Federal government is reduced) as a retiree’s income exceeds certain threshold amounts. The additional premium amount that a Medicare participant must pay as a result of their income is known as an Income-Related Monthly Adjustment Amount (IRMAA).
In 2019, the Part B (and Part D) IRMAA begins to “kick in” once a Single Filer’s modified adjusted gross income (MAGI) exceeds $85,000 (and twice that amount - $170,000 – for Joint Filers). At the first IRMAA tier, a Medicare Part B participant’s premium will be increased by “only” $54.10 per month (per person). By contrast, as the chart below shows, retirees with the highest incomes have an IRMAA of $325 per month (per person), which is equal to 85% of the actual Medicare Part B premium cost in 2019. Thus, when combined with the base premium, those retirees with the highest income have a total Medicare Part B monthly cost of $460.50.
Like Medicare Part B, high-income Medicare Part D participants are subject to an IRMAA. As illustrated by the chart below, the lowest IRMAA tier for 2019 adds $12.40 per month (per person) to the base cost of a high-income individual’s Medicare Part D plan. On the other hand, those at the highest end of the income spectrum must add $77.40 per month (per person) to the cost of their selected Medicare Part D drug plan.
With a $168/month “all in” monthly Medicare premium (as explained above) for the “average” retiree, it’s hard to argue that they don’t have “the best deal in town” when it comes to health insurance coverage. And while the IRMAA can significantly increase the cost of Medicare coverage for a high-income participant, when viewed in the proper context, even those with the highest incomes (who pay the maximum Medicare IRMAAs) fair pretty well under Medicare when compared to other alternatives. After all Uncle Sam is still picking up all of the cost for Part A, and at least some of the cost for Part B and Part D!
Consider, for instance, that for the same Part A, Part B, and average Part D coverage noted above, individuals with the highest income will have a monthly Medicare bill of $570.40 = 135.50 Part B Base premium + $325.00 maximum Part B IRMAA + $32.50 average Part D premium + $77.40 maximum Part D IRMAA. Sure, that $570.40 monthly amount is more than the $135.50 monthly amount that would be paid by most Medicare beneficiaries for the same coverage, but it’s still much less than the $1,123 average monthly premium for a 64-year-old with a Sliver Plan purchased via a health insurance exchange from a private insurer (more on this in a bit)!
Medicare Coverage Is Robust And Widely Accepted
While premiums matter, they are far from the only factor to consider when evaluating health coverage. For example, it’s critical to evaluate what expenses are covered by a policy, and what additional expenses (i.e., coinsurance, deductibles, etc.) will be borne by a participant when seeking care. When compared to other types of policies, Medicare tends to shine in these areas as well, especially when paired with an effective Medigap (Medicare Supplement) policy.
For example, while adding a Medigap Plan F (the most widely adopted Medigap plan – by far!) might add another $300 - $400 per month of total health insurance costs, it can virtually eliminate any additional costs for health services covered under Medicare (as such plans cover virtually all of the copay, coinsurance, and other out-of-pocket obligations of Medicare). And even with this additional cost, the total annual premium outlay for the highest-income Medicare participants would still be less than the cost of an average Silver Plan policy for a 64-year-old!
Medicare is also widely accepted by doctors. In fact, more than 90% of non-pediatric primary care physicians accept Medicare. And the numbers of physicians accepting Medicare is almost identical to the number of physicians who accept any form of private insurance!
Alternatively, some retirees may wish to opt out of traditional Medicare (Part A, Part B), and instead, enroll in Medicare Part C, more commonly known as Medicare Advantage plans. Such plans are offered through private insurers, and often provide all the benefits of traditional Medicare and Medigap policies – and then some (i.e., dental benefits, vision benefits, etc.) – for lower total premium costs, at the trade-off of a more limited network of healthcare providers.
Use COBRA Insurance To Bridge The (Short) Retirement Gap To Age 65
The Consolidated Omnibus Budget Reconciliation Act of 1995, better known “COBRA”, created another health insurance option for early retirees.
When an individual retires from most employers with more than 20 employees (exceptions apply for Federal government employees and certain religious organizations), the employer is required to offer the employee (as well as their spouse and dependent children) the option to continue their existing health insurance coverage, and at the same (full-premium) cost. Upon separation, the employer will provide the employee with a COBRA Election Notice, and a 60-day window in which the retiree and any family members eligible for coverage must make a decision with respect to COBRA will begin. (Technically, the 60-day election window begins at the later of the date the employee separates from service, or their COBRA election notice is provided. However, in practice, employers will not provide such a Notice to an [former] employee until separation of service occurs.)
The continuation-coverage requirement is not, however, indefinite.
In general, when an individual retires – or goes so part-time that they no longer qualify for employer-provided health insurance, or simply quits or is terminated from their job in general – COBRA coverage must be offered by the employer for a minimum of 18 months (employers, at their discretion, can offer continuation coverage for longer than required by COBRA). Thus, if a retiree and their spouse (if applicable) is/are at least 63 ½ when the worker retires, COBRA will last long enough to bridge the gap between termination of employment and Medicare.
But while 18-months-of-required-coverage is the general COBRA rule for employees separating from service, retirees should be aware of two key exceptions to that rule which can extend the required-coverage period under COBRA further.
Extended 29-month COBRA Health Insurance For A Qualified (Disabled) Beneficiary
One exception to the 18-month rule applies when a “qualified beneficiary” is disabled (as certified by the Social Security Administration by the 60th day of COBRA coverage). For this purpose, a qualified beneficiary may be either the employee separating from service, the employee’s spouse, or the employee’s child.
When applicable, the disability-related extension to the COBRA coverage window is 11 months. Of note, a disability by any one qualified beneficiary triggers the 11-month extension for all qualified beneficiaries, providing such persons with a COBRA-coverage widow of up to 29 months = 18-month “regular” COBRA window + 11-month disability-related COBRA extension.
Example #1: Leslie is 61 years old and is married to Ben, who is retired and just celebrated his 63rd birthday. For the last few years, both Leslie and Ben have received health insurance though Leslie’s employer.
Leslie, however, has recently become disabled – a disability certified by the Social Security Administration – and is no longer able to work. Upon her termination of employment, Leslie and Ben would be able to continue their existing coverage under the “regular” 18-month COBRA window, plus the 11-month disability-related extension.
Notably, this would allow Ben to remain on the plan from his current age 63 until he reached his 65th birthday and was entitled to Medicare (at which point, the company can terminate Ben’s COBRA window). Additionally, Leslie would be able to keep her existing insurance for 29 months, at which point, she would also be eligible for Medicare, due to her disability.
(Note: In general, workers disabled prior to the age of 65 are eligible to receive health insurance via Medicare. Such coverage is typically only available, however, after an individual has received Social Security disability benefits for at least 24 months. And Social Security disability benefits don’t begin until five months after an individual is determined to be disabled. Not coincidentally, the 5-month-Social-Security-disability-benefit waiting period, plus the 24 months an individual must receive Social Security disability benefits prior to qualifying for disability-related Medicare equals 29 months… the same amount of time as the “regular” COBRA window upon separation of service plus the 11-month extended window that applies in the event of disability!)
COBRA Coverage For Family Members Of Retirees Recently Eligible For Medicare
A second exception to the typical 18-month COBRA window that applies upon separation of service – and one which is very relevant for retirees – is applicable when the retiring worker became entitled to Medicare less than 18 months before the separation of service. As such, this exception often applies when an individual retires between 65 and 66 ½.
In such situations, the COBRA window is extended until 36 months after the date the employee became entitled to Medicare coverage. Of course, since at this point, the retiree can go on Medicare, the retiree, him/herself, won’t need to use COBRA continuation coverage. The retiree, however, may have a younger spouse (or a dependent child) who still needs coverage, and the extended COBRA window can help that (those) person(s) bridge any coverage gap.
Example #2: Andy is turning 65 in November 2019 and plans to retire the following month, in December. However, his wife, April, who is covered by Andy’s group health insurance policy, is only just past her 62nd birthday, and won’t turn 65 until July 2022.
Since Andy will be over the age of 65 when he retires, he will use Medicare as his health insurance. April, on the other hand, still needs health insurance coverage to bridge the gap for nearly 3 years until her Medicare eligibility.
Normally, April’s COBRA continuation coverage would end in June 2021, leaving a roughly one-year gap between her current existing coverage and her Medicare eligibility. However, since Andy became entitled to the Medicare within the 18 months prior to his retirement, April is eligible for the special 36-month Medicare-related COBRA window. That 36-month period would not end until December of 2022, which is after April turns 65. Thus, the extended Medicare-related window will allow April to bridge the full gap between Andy’s separation of service and her enrollment in Medicare.
Primary Benefits Of COBRA Continuation Coverage
COBRA continuation coverage offers several benefits to prospective retirees.
For one thing, “getting” COBRA continuation coverage is simple. There’s no underwriting, it’s guaranteed issue, and coverage can be terminated at any time.
In situations where separation of service is a predetermined event, pre-planning may allow an individual enough time to appropriately evaluate a variety of coverage options and reduce the value of this benefit.
In situations where separation of service is unexpected, however, the “comfort” of having a health insurance policy with known benefits can be helpful and allows focus to remain on matters that are often more important at the time. If, for instance, an individual is terminated from employment, they may find it more valuable to spend their time searching for a new job than to spend time searching for appropriate health coverage for themselves and their family. Similarly, if employment is forced to end due to illness or injury, the same time may be best spent focusing on getting better.
Another key benefit of COBRA continuation coverage is that, since it is the same coverage an individual had while employed, there should be no disruption to ongoing medical care. No time has to be spent calling doctors to make sure that they will take the “new” insurance, and no time has to be spent looking for doctors on a new plan, because there is no new plan. In a similar vein, copayments, coinsurance, and other plan features all remain the same.
Although less important today, thanks to the Affordable Care Act, COBRA continuation coverage also maintains an individual’s HIPAA eligibility. Under HIPAA, an employer could not exclude a new employee’s pre-existing condition from coverage for more than a year.
And more importantly, especially in the context of an early retiree, if an individual was HIPAA eligible (had continuous [no break for 63 days or longer] coverage for at least 18 months, with the most recent coverage via a group health plan), coverage provided by a new employers plan would begin immediately, and with no restrictions on pre-existing conditions. Furthermore, such HIPAA eligibility guaranteed an individual the right, after exhausting COBRA continuation coverage, to purchase an individual health insurance plan directly without an employer (and at a time when such plans could otherwise deny such coverage), effectively making group health insurance “portable” to individual coverage (albeit only by first obtaining and exhausting COBRA coverage).
The Affordable Care Act no longer allows employers’ health insurance plans to deny coverage for any pre-existing conditions for any period of time. And as discussed in greater detail below, as a result of the same law, individual policies purchased via an exchange are now guaranteed issue and don’t require medical underwriting. Thus, the “portability” benefits of HIPAA are no longer as meaningful as they once were (before the Affordable Care Act).
The Affordable Care Act, however, has been a source of intense political controversy, and there have been several attempts to repeal it in part, as well as in its entirety. In the event such repeals were eventually effective, HIPAA credibility would likely become significantly more important. Thus, those concerned about the political risks surrounding the Affordable Care Act should consider this issue when evaluating health coverage options.
Cost Of COBRA Continuation Coverage
Given its simplicity and other benefits, one might wonder, “Wouldn’t it almost always make sense to use COBRA continuation coverage when possible?” Indeed, while that might make sense for many individuals if they had an unlimited budget, the cost of maintaining COBRA continuation coverage is often the “fly in the ointment.”
As noted earlier, when an individual elects COBRA continuation coverage, they become responsible for the full cost of the policy. In addition, in most instances, employers are allowed to charge an additional 2% administration fee, bringing the total cost of the policy to 102% of the actual premium. (However, this amount may be increased to 50% - making the total COBRA cost 150% of the policy premium - during the additional 11 months in which COBRA coverage is provided on account of a former worker’s disability.)
It is important to note that the actual premium of COBRA coverage includes any amounts that were being paid by an employer prior to an employee’s separation of service. Given that the average employer covers more than 80% of the cost of an individual policy and more than 70% of the cost of a family policy, this increase in cost can catch unsuspecting retirees by surprise, and it is often the reason COBRA continuation coverage is turned down. Additionally, COBRA continuation coverage is not available for the premium credits that are sometimes available for lower-income taxpayers purchasing coverage via a public exchange (more on this below).
Example #3: Recently, Jerry was let go from his employer. Prior to his termination, Jerry was paying $300 per month for his family health insurance, while his employer was picking up the remaining $1,700 balance of the $2,000 monthly premium.
If Jerry decides to continue his existing family coverage via COBRA, his monthly costs will increase from $300 per month to $2,040 = $2,000 x 102%, a nearly 600% increase in Jerry’s actual out-of-pocket cost for coverage.
Of course, in many cases the reality is that purchasing health insurance on an insurance exchange – since employer coverage is no longer available – will result in a similarly-substantial cost increase, as the primary driver is not that COBRA is “more expensive” but simply that it is provided without the common employer-provided premium subsidy. As a result, eligible retirees shouldn’t automatically reject COBRA coverage because of its higher-than-previous cost; instead, it’s necessary to compare the cost of COBRA to other available alternatives at the time of retirement.
“Gaming” The COBRA Rules For Short Coverage Gaps
Given the potential for financial disaster if an individual goes without healthcare coverage for even a day, it is generally advisable to avoid any gaps in coverage. However, in limited circumstances, an individual can effectively guarantee coverage if health services are needed, while avoiding paying for “unnecessary” coverage if such services are not required.
Recall that the COBRA continuation coverage rules require that an individual be given no less than 60 days to make their COBRA decision from the later of the date on which coverage is lost, or the date on which they receive their COBRA Election Notice. And once elected, the coverage is applicable retroactively back to the date the original coverage was terminated (at the end of employment).
Thus, if new coverage will be secured by the end of the 60-day COBRA election window (i.e. an individual becomes eligible for Medicare, coverage is available via a spouse’s employer, etc.), an individual who does not expect to need care before the new coverage is secured can hold off on making the COBRA election with the hope of avoiding a few months of healthcare premiums. If coverage becomes necessary within the window, it can be elected at that time.
Example #4: Ron is planning to retire from his employer on December 31, 2019, at which point his employer-provided health coverage will terminate. Ron, however, will turn 65 on March 25, 2020, thus making him eligible for Medicare as of the first of that month.
If Ron wants to, he can “game” the COBRA rules to potentially avoid buying health insurance for January and February of 2020. Given that Ron has no less than 60 days from the date he loses coverage to make a COBRA decision, if Ron has no immediate healthcare needs, he can simply “sit tight” and do nothing during the two months between his separation of service at the end of 2019 and when his Medicare coverage begins at the beginning of March, 2020.
Suppose, however, that on February 15, Ron has shortness of breath and goes to the hospital for evaluation. At that time, he can contact his former employer to elect COBRA continuation coverage and minimize his out-of-pocket expenses for the hospital visit (though while the coverage itself would be retroactive back to Ron’s termination, that also means Ron would owe COBRA premiums for both January and February 2020 if he ended out needing to make the COBRA election).
(Note: While COBRA rules only apply to employers with 20 or more persons, many states have similar requirements, via what are known as “Mini-COBRA” laws. Thus, those separating from service from smaller employers should check to see what options are available to them under state law, especially since Mini-COBRA rules vary dramatically from state to state.)
Convert Group Health Insurance To An Individual Plan
An additional option for some retirees is to “convert” their group health insurance policy into their own individual health insurance plan.
The ability to convert a group policy to an individual policy is an option that can be provided by a plan, but it is not required. However, if such an option is available to a participant upon separation of service (as an alternative to COBRA continuation coverage), the same option must also be made available at the end of the COBRA continuation-coverage window (if COBRA coverage was elected and maintained until that time).
Unlike COBRA continuation coverage, though, the terms of a conversion policy do not have to be the same as the “old” policy. As such, premiums for such policies may be higher, and/or the policy may provide a lower level of coverage. As such, conversion options must be evaluated on a case-by-case basis.
Finally, it’s important to note that while COBRA continuation maintains an individual’s HIPAA-eligibility status, conversion coverage is individual market coverage. Thus, it does not maintain an individual’s HIPAA eligibility. Although far less important in the post-Affordable Care Act world as health insurance policies have become guaranteed issue via health insurance exchanges, HIPAA eligibility continues to provide individuals purchasing individual coverage greater protection than is otherwise available via state law.
Purchase An Individual Policy (On A Public Healthcare Exchange)
Another option for early retirees looking for healthcare coverage is to purchase a health insurance policy via a state health insurance exchange.
This option is often the best option for retirees who either:
- Find that their COBRA continuation and/or conversion policy options are too expensive to maintain (or that they would prefer less robust, but less expensive coverage).
- Have exhausted their COBRA continuation coverage window and are still not eligible to enroll in Medicare.
- Are moving to another state after retiring, and few (or possibly even no) doctors in the new location will accept the existing COBRA continuation coverage insurance.
- Can receive premium assistance tax credit subsidies for their health insurance as a result of “low” income.
Public health insurance exchanges were created by the Affordable Care Act (commonly known as ACA or “Obamacare”) and serve as a marketplace for persons seeking health insurance coverage. Each state has either its own exchange, uses the one created by the Federal government, or uses some kind of hybrid approach. Functionally, though, the end result is the same: individuals receive a range of health insurance options in their state but must purchase health insurance from the state in which they maintain their permanent address. (If that state of residence changes, so much their coverage.)
Of critical importance for many retirees is that, since 2014, the Affordable Care Act has required that all major medical insurance policies be issued on a guaranteed basis. Thus, an individual can no longer be denied for a pre-existing condition. And to that end, the often-arduous medical underwriting process that applied in the pre-ACA era is also no longer applicable. In other words, an early retiree is assured – similar to COBRA coverage – of being able to transition from employer-provided health insurance to a private insurance plan via an insurance exchange, regardless of any health conditions.
But while a retiree can’t be denied coverage for a pre-existing medical condition, they cannot simply purchase coverage via an exchange whenever they want. Rather, coverage can only be purchased during an enrollment period. In general, retirees who lose employer-provided health coverage and wish to insure themselves via an exchange-purchased policy should secure coverage during their Special Enrollment Period. The Special Enrollment Period begins when the employer coverage is terminated and ends 60 days later.
If coverage is not purchased during this time, it is generally necessary to wait until the next Open Enrollment Period (which runs from the beginning of November to mid-December each year, with coverage taking effect at the beginning of the subsequent year). However, this could leave a retiree dangerously exposed to healthcare costs incurred prior to the start of that coverage.
Example #5: Chris is an exceptionally healthy individual who retired on February 10, 2019, at the age of 63. Given his exceptional health and the Tax Cuts and Jobs Act’s repeal of the individual mandate effective beginning 2019, Chris decided to “roll the dice” and wait until 65 to enroll in Medicare to have health insurance coverage.
Unfortunately for Chris, in August of 2019, he begins to suffer from severe itching an unexplained weight loss. Eventually, Chris “gives in” and gets checked out. As it turns out, he has Hodgkin’s Lymphoma and must begin treatment immediately.
In this situation, Chris would only be able to enroll in health insurance coverage during the next Open Enrollment Period, which doesn’t open until November 1, and coverage wouldn’t begin until January 1, 2020! Thus, Chris would be responsible for the full cost of his treatment from August until next January (which could easily bankrupt him, even if he had substantial savings!)
Cost Of Exchange-Purchased Health Insurance Policies
The cost of an insurance policy purchased via an exchange can vary dramatically based on a number of factors, but somewhat ironically, an individual’s health is not one of them! Rather, under Federal law, the only five factors that insurance companies can use (unless the state uses even fewer factors) when establishing premiums are:
- Tobacco use
- Individual coverage vs. coverage for an individual and a spouse and/or dependents
- Plan category (i.e. Bronze, Silver, Gold, Platinum, and Catastrophic)
Perhaps not surprisingly, health insurance purchased via an exchange for early retirees can be rather expensive. After all, healthcare needs tend to increase as an individual ages.
As noted earlier, the average cost of a Silver Plan purchased via an exchange for a 64-year-old in 2019 is $1,123. But that’s just the average, and the actual price of insurance can vary substantially from location to location. For example, a Silver Plan will cost a 64-year-old living in Lincoln, Nebraska about $1,758 per month. That’s more than 50% higher than the national average! Meanwhile, a Silver Plan for the same 64-year-old living in Indianapolis, Indiana would cost “just” $885 per month.
In a small number of states, though, health insurance for early retirees is dramatically cheaper than the national average, thanks to what’s known as Community Ratings. Most states allow insurers to charge more to provide health insurance to an older person than to a younger person. But in a small handful of states, insurers are required to use Community Rating, in which all persons in a geographic area are charged the same for the same insurance, regardless of their age.
As one might imagine, Community Rating systems result in younger individuals having health insurance costs that are higher compared to individuals of the same age in other, non-Community Ratings-based locales. But while it may come at the expense of younger persons, this is generally a boon for older individuals who need to purchase health insurance via an exchange, whose policies are not increased in cost for their age (as they would be in other areas).
For example, in New York, New York – an area with one of the highest costs of living in the country – the average monthly premium paid by a 64-year-old individual purchasing a Silver Plan in 2019 is just $585! And that $585 premium is exactly the same premium that would be paid by a 24-year-old individual in the same place!
Subsidizing Health Insurance Exchange Coverage With Premium Assistance Tax Credits
After separating from service, some retirees will experience a dramatic reduction in income. In such situations, individuals may find themselves eligible to receive a Premium Assistance Tax Credit – i.e., an insurance premium subsidy – to help them pay for the cost of their health insurance.
In order to qualify for a Premium Assistance Tax Credit (PATC), an individual must purchase health insurance (other than catastrophic insurance) via an exchange (thus, COBRA coverage or a converted group policy does not qualify), and generally meet the following requirements:
- Household income between 100% and 400% of the Federal Poverty Level for the family size ($12,140 to $48,560 for a single individual in the continental U.S. during 2019, or $$16,460 to $65,840 for a married couple)
- Cannot be claimed as a dependent by someone else
- Cannot be eligible for coverage through a government program (i.e., Medicare, Tricare, CHIP, Medicaid) or be able to purchase affordable coverage (less than 9.86% of household income for employee’s cost of employee’s coverage for 2019) via an employer-sponsored plan of minimum quality (actuarial equivalent of a Bronze plan, or higher).
- Cannot file married-separate
- Be a U.S. citizen or lawful resident
When eligible, the PATC an individual receives is calculated using a complicated formula that is based on comparing the individual’s household income to the cost for the second-lowest-priced Silver Plan available in the state. However, while the price of the second-lowest-priced Silver Plan is the benchmark to determine the tax credit itself, a retiree can choose to purchase any plan they desire (and use whatever credit is available towards the selected plan).
Purchasing a Bronze Plan, for instance, might allow a low-income retiree to completely offset the cost of their health insurance with the premium they received. Meanwhile, if a retiree purchased a Platinum Plan, they would almost certainly have to foot a substantial part of the bill via savings or some other means.
The cost of healthcare is one of the most hotly debated topics in the politisphere, as well as one of the most concerning for retirees.
Fortunately, for individuals retiring at 65 or later, the challenge of securing cost-efficient and effective health insurance is generally minimized thanks to the availability of Medicare.
For younger retirees, however, securing quality healthcare coverage can be problematic, especially for those with a limited budget. Options include COBRA continuation coverage, converting a group health plan to individual coverage, and purchasing insurance via their state-approved exchange. Each of these options provides its own unique benefits and drawbacks, thus further complicating matters for many individuals during a period of time in which there is already massive change and complication.
In general, the best option for retirees, when available, is to “hop onto” Medicare. When that isn’t an option, the question is generally, “Would I rather keep my current coverage, via COBRA, for as long as possible, or should I just get an individual coverage via an exchange?” Like many issues, this simply becomes a cost vs. benefit analysis.
Will key doctors take the new exchange-purchased insurance? How expensive is the COBRA continuation coverage in comparison to the exchange-purchased policy? Would Premium Assistance Tax Credits be available for an exchange-purchased policy? These are the types of questions retirees must ask themselves, and answer, in order to make a sound decision.
For some couples losing employer-provided health benefits, two separate courses of action may be best, creating yet another complication as what was once “standard household coverage” is split. This can leave each spouse with their own policy (e.g., Medicare for one and an exchange-purchased policy for the other), complete with their own respective deductibles, coinsurance, and list of physicians accepting such coverages. For others, the “best” course may be a mixture of several options, such as COBRA continuation coverage, followed by the purchase of an exchange policy when COBRA expires, and ultimately Medicare at age 65.
George Smith says
You have forgotten Medicare Advantage which is the best program under Medicare. You are eligible to receive some benefits of Part A & B under this. These programs are so so cheap. I’ve used this for my medical consultation and trust me it provides me so many benefits.
Maria Woods says
Wow, this is the best blog I’ve found on the web. Thanks for listing the choices that have to be made. You have provided the excellent illustrations which are necessary to make planning before applying for Medicare.
This was great information. As an early retiree, it confirmed that I am doing the best I can to protect our future. The balance of keeping premiums as low as possible, against risk of major medical costs is more art, than science.
One thought on your list of five factors considered, I believe sex is another factor that impacts premiums on exchanges.
Also, I’ve never been able to find a good explanation as to why there is a ceiling for deductions and out of pocket to contribute to an HSA. I have been unable to contribute for several years now, having chosen plans above that ceiling. It seems the higher they are, all the more reason to have options to mitigate the risk. I recognize there are significant tax benefits to boot, and that may be a reason behind the limit. Do you have insight? Thanks again.
Barnard Buscemi says
Great article, thanks for providing. Extended cobra for the non working younger (57) spouse is relevant. Working spouse turns 65 in Nov 2020, but will stop working in early 2020 and go on Cobra via a severance agreement. Can the non working spouse get the extended Cobra in Nov 2020 when the working/severed spouse goes on Medicare?
Ed Mo says
Thanks for the info Jeff. I have a few questions regarding a Roth IRA when it relates to MAGi to qualify for Healthcare.gov medical coverage.
Do capital gains from a Roth IRA count as MAGI if I withdraw them?
Do qualified distributions from a Roth IRA reduce MAGI?
If I rolled over funds from a 401K Plan to a Traditional IRA, would that reduce MAGI?
I’m really close to that 400% of poverty level number and want to be sure that I don’t go over.
Thank you for you assistance.
Jean Fullerton says
Thanks for all the good info. I have a few suggestions/questions:
* Beware Medigap F. Yes it is the most common but it is going away soon for new retirees and altho folks currently on F will be grandfathered they will be among an increasingly older group.
* Medicaid is an option for very low income retirees. And in fact in my state if you qualify for Medicaid you are not allowed to buy ACA insurance (may need to boost income a bit with IRA withdrawals). Also it is my understanding that in my state you may not buy ACA insurance if you signed up for COBRA, until COBRA runs out (so you could lose a substantial subsidy).
* You can buy individual insurance outside of the guaranteed issue ACA plans, which could be cheaper if you can pass underwriting.
* You may have retiree health insurance through your employer (particularly local/state government employees). But BEWARE once you turn 65 and you qualify for Medicare (10 years) you must sign up for Medicare or face a later delayed penalty because employer coverage only counts if you are actively employed.
* Also there are numerous distracting editing errors (Sliver plan, ‘is simply quits’, ‘wouldn’t is almost’, ‘the includes’,….)
Jeff Levine CPA CFP® says
Jean – thanks for reading and for sharing your thoughts and insights. Also, we’ll get those typos fixed. Appreciate you pointing those out!
A lot of very excellent detail here. Thanks for listing the choices that have to be made. Some of the points illustrate, once again, why planning is important. And for the circumstances of retirement surely this kind of consideration must be part of the planning. Just a couple of points to make. Medicare isn’t the be all and end all. The deductibles and co-pays are quite significant unless one purchases a supplemental policy or Medicare Advantage plan. And there is a cost there as well; often more than Part B for some of the better plans. Medicare Part B covers only 80% of the Medicare approved rate for the procedure or service; you pay the rest if you don’t have a supplemental plan. Also, many company plans are quite costly and finding the cost under COBRA can provide serious sticker shock. Extending may be very useful to keep the same doctors, etc. but at some point the band-aid has to come off or the price tag can be really hard to swallow. It isn’t remarkable for a company family plan to cost $20,000 or more annually. For someone in early retirement that can be a serious load.
Jeff Levine CPA CFP® says
Jrpower… All great points. Thanks for reading and for sharing your insights!
Gary Smith says
It also doesn’t discuss “Shared Care” options…..like CHM coverage. I know it is not “insurance” but it does fill a need that is extremely beneficial.
Mr. Iced Tea says
Advisors who recommend a shared care strategy should be held responsible for the result of what could be a cool but unstable strategy. Advisors who are so insurance adverse to be recommending self-insurance should be held jointly accountable with the client for the wins and failures.
Jeff Levine CPA CFP® says
Gary – That’s correct. This post focused more on actual insurance options, which you note healthcare sharing programs are not. That said, we did cover that topic in an earlier post last year, which can be found here https://www.kitces.com/blog/healthcare-sharing-program-review-chm-medicare-lhs-samaritan-health-share-plans/ Thanks for reading and taking the time to comment!
Mike Sheeran says
You can game COBRA for up to 105 days if you need to. Usually makes sense if you are close to Medicare, or are coasting into an ACA open enrollment. Cobra isn’t technically active until you pay your premium. So you elect coverage on day 59 of 60 for your election period, and don’t pay the bill. From the day you elect, you have another 45 days to pay.
Last thing to note, Cobra is not considered credible coverage for Medicare Part B. I have seen a lot of people delay Part B because they thought Cobra would be enough. Not the case.
Jeff Levine CPA CFP® says
Mike… good points! Thanks for reading and sharing your thoughts. Also worth noting that coverage will often last until the end of a month, so if you retire on the first, your 60-window to elect COBRA won’t actually start for another 30 days. There’s always an angle!
Jo Tulsa says
Bummer that this article doesn’t even mention Medicare Supplemental plans and their value and costs. Or even Medicare Advantage plans that offer medical and Rx in one and are cheap, cheap… And… even though he talks about premiums and says the ‘government’ will cover the cost, we have prepaid the premiums with NO BENEFITS since our first job at age 16… So much great and accurate information in here though so I hate to be so critical. Lastly, this article talks strictly Federal COBRA and there are several states that have extended continuation coverage, so you should check your state carefully. Ie. California offers 36 months to almost all individuals (either ‘mini-COBRA or COBRA plus Cal-Cobra).
Jeff Levine CPA CFP® says
Jo Tulsa… thanks for taking the time to read and comment. A few quick thoughts…
1) You actually haven’t been “pre-paying” premiums since your first job at 16… just the same way you haven’t been paying into your Social Security “account” since that time either. The taxes you pay for these programs are intended to pay for the benefits people are receiving today. It’s why the first Medicare and Social Security beneficiaries were able to receive benefits without ever paying in. Workers, at the time, paid for their benefits. And one day, when you presumably get these benefits, the workers of the day will pay for most of your benefits. Note that regardless of what health insurance option you choose to select at age 65, you will have paid those payroll taxes. If you would like to continue to purchase private insurance at 65, you may do so, but you will not receive a government subsidy for it. On the other hand, if you decide to purchase Medicare coverage like the overwhelming majority of people do at that time (but is not actually “required”), then the cost of that coverage will be subsidized.
2) The focus of this article is on healthcare options for early retirees, for whom Medicare supplements are generally not available. That’s why you don’t see much on them here. That said, they actually are mentioned at the end of the “MEDICARE COVERAGE IS ROBUST AND WIDELY ACCEPTED” section.
3) I covered Medicare Supplements and Medicare Advantage policies in greater depth in this post last year https://www.kitces.com/blog/2018-medicare-open-enrollment-period-oep-annual-election-planning-for-2019/
4) While the focus of the article is on Federal COBRA rules, there is a note within the article that discusses mini-COBRA and encourages readers to check state rules.
Chris T says
What about this situation:
-Retire at 61 with spouse age 59
-Use COBRA to have (family) health insurance for next full year
-Get family policy following year from the exchange (because it probably doesn’t make sense to have a half year of COBRA and a half year of something else)
-Go on Medicare when turning 65 (in January), but what about spouse who won’t be Medicare eligible for another couple years (actually, a little less than two years).
What are the main points to consider?
Josh Shoop says
I totally agree with your point, “while retirees may be understandably worried about their healthcare costs eating away at their life savings, the availability of Medicare ameliorates those concerns to a significant degree.”