Editor's note: This article is adapted from Kiplinger's Retirement Planning 2010. Order your copy today.
If you're no longer working and you're younger than 65 -- the age at which you become eligible for Medicare -- finding affordable health insurance can become a new full-time job. Whether you retired early or you were a victim of downsizing during one of the worst recessions in memory, being cut free from the traditional employer-provided health-insurance system can be one of the rudest shocks and biggest challenges of life after work. For many, health insurance is available, but the price is steep.
For others who have a medical condition that rendered them uninsurable in the past, the new health-care-reform law provides a measure of hope -- but most of the reforms won't kick in until 2014. At that point, insurers will no longer be able to reject people because of their health, low- and middle-income people will receive subsidies to help pay for their insurance, and everyone must have coverage or pay a penalty.
In the future, early retirees looking for health coverage should benefit from new insurance exchanges, which will make it easier to compare policies and coverage. But the exchanges won't open for business for four years. In the meantime, you'll have to piece together your own safety net. Although chasing after affordable health insurance when you're too young for Medicare may seem like a futile pursuit, we've developed some guidelines to help in your quest.
Your first decision
Even retirees whose former employers continue to offer coverage until Medicare kicks in at 65 may encounter sticker shock. As health-care costs have continued to rise, many employers have reduced or eliminated pre-Medicare coverage or have asked retirees to pay a larger share. Only 29% of large companies provided retiree health coverage in 2009, according to the Kaiser Family Foundation, down from 66% in 1988.
The health-care-reform law provides $5 billion in financial incentives for employers to continue to offer early-retiree health benefits. The program starts this year, but it's a temporary fix that will end in 2014. For now, the stopgap measure could help some employers reduce premiums, co-payments and deductibles, which have been rising over the past several years.
If your employer doesn't offer retiree health coverage, then you can remain on your employer's plan for up to 18 months after you leave your job through protections provided under COBRA (which stands for Consolidated Omnibus Budget Reconciliation Act of 1985). But your premiums will jump substantially. Generally, employers shoulder the lion's share of the cost of health-insurance coverage. But if you continue your coverage through COBRA, you will have to pay the full price yourself.
In 2009, for example, employers paid an average of $4,045 per year for health-insurance coverage for single employees, according to the Kaiser Family Foundation, and employees paid just $779. But under COBRA, you'd have to pay full freight -- $4,824 per year for individual coverage. The full price of family coverage is nearly three times as much: Employees paid an average of $3,515 per year for family coverage in 2009, but you'd have to swallow the full cost of $13,375 per year if you extended your benefits under COBRA.
In 2009, Congress approved a massive economic-stimulus package that included a government subsidy to cover 65% of the cost of COBRA for laid-off workers for up to 15 months. Those who lost their jobs between September 1, 2008, and May 31, 2010, are eligible for the COBRA subsidy. See the Department of Labor's COBRA Continuation Coverage page at www.dol.gov/ebsa/cobra.html for updates.
If you're healthy and you don't qualify for the COBRA subsidy, you may find a better deal on your own. You can get price quotes from several companies at eHealthInsurance.com, or find a local agent through the National Association of Health Insurers (www.nahu.org). And if you buy health insurance on your own, you'll benefit from a few key consumer protections that are the result of the new health-care-reform law. Starting on September 23, insurers must cover certain preventive services, and they'll no longer be able to place lifetime limits on the dollar value of benefits or rescind coverage, except in cases of fraud.
One way to cut the cost of health insurance is to raise your deductible. Although you'll have to pay medical expenses until you satisfy the deductible, the new health-care-reform law requires that all health-insurance policies -- including high-deductible plans -- provide some basic preventive services, such as physical exams and some screenings, free.
Plus, if you increase your deductible to at least $1,200 for individual coverage or $2,400 for family coverage in 2010, you can contribute tax-deductible money to a health savings account. You can use HSA money tax-free for current medical expenses, or you can stockpile it for future years. If you use it for nonmedical purposes, you'll pay taxes on the money; if you're younger than 65, you'll pay a 10% early-withdrawal penalty, too. (The penalty increases to 20% in 2011.)
In 2010, individuals can contribute up to $3,040 ($6,150 for families) to an HSA. Those 55 and older can make a $1,000 catch-up contribution.
You should have no trouble finding ways to spend the money tax-free even after age 65. After you qualify for Medicare, you can use your HSA funds to pay Medicare co-payments, deductibles, premiums for Medicare Part B and Part D, and Medicare Advantage premiums (but not medigap-insurance premiums). You can also use the money to pay for long-term-care insurance premiums (up to the IRS limit) and out-of-pocket prescription drug costs. (Starting in 2011, however, you'll no longer be able to use money tax-free from an HSA for over-the-counter drugs without a prescription.)
For now, insurers can still reject people because of poor health. If you have issues that make it tough to find an affordable policy, then COBRA may be your best bet. But not everyone is covered. The federal law requires only companies with 20 or more employees to provide COBRA coverage (although some states have similar rules for smaller companies), and the coverage disappears if your employer goes out of business. Plus, COBRA lasts only for up to 18 months after you leave your job.
If you're nearing the end of your COBRA eligibility, it's important to investigate your options. For example, insurers must provide you with some type of continuation coverage after COBRA expires, as long as you don't have a 63-day break in coverage. The specifics vary by state. Some states require insurers to provide continuation policies after you exhaust your COBRA coverage; other states provide coverage through their high-risk pools. The National Association of Insurance Commissioners (www.naic.org) provides links to state insurance departments. The Foundation for Health Coverage Education (www.coverageforall.org) offers detailed information about each state's rules and resources.
People with medical issues will be among the first groups to benefit from health-care reform. The new law sets aside $5 billion for a temporary high-risk pool to help provide coverage for people with medical conditions who have been uninsured for at least six months. The special pool will remain in effect until 2014, when insurers will no longer be able to reject people for preexisting conditions.
The new pool's policies must cap annual out-of-pocket spending at $5,950 for individual coverage or $11,900 for families (not including premiums). And insurers will be limited as to how much they can charge for premiums, although the details have not yet been worked out. You need to be uninsured for at least six months to qualify for the new pool, which is a stricter requirement than some state pools impose now. States and the federal government are still working out how existing state pools will interact with the new federal pool. If you have health issues -- whether or not you currently have coverage -- contact your state insurance department to learn about your options.