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Personal Finance FAQ

Is Obamacare Viable for Early Retirees?

Joe Biden
I know what he thinks the answer is. Is he right?

“This is a big f—— deal.”
–Joe Biden

One of the biggest expenses that people who want to retire prior to age 65, when they become eligible for Medicare, is health. With healthcare inflation far exceeding inflation for the rest of the economy, and with most employers providing at least some health insurance for their employees, the cost of health insurance is one of the biggest expense surprises that early retirees have to account for.

With the enactment of the Patient Protection and Affordable Care Act (PPACA, or ACA), one of the biggest issues in receiving health care coverage for early retirees is off the table – insurability. Since previous conditions are not one of the criteria for coverage or pricing, there is no longer a need for early retirees to maintain coverage just in case they develop a condition that would make them uninsurable or put them into a high risk category in the future.

Now, early retirees have three options for health care coverage:

  1. Self-insure. If you get sick, go to the doctor and pay cash. Need a prescription? Go to the doctor and pay cash. Since insurers can no longer deny coverage, if you develop a condition that will require long-term care or will be expensive to treat, you can apply for coverage at that point, although you may have to wait up to 90 days before you are covered. There is a cost, besides what you’d pay out of pocket, for choosing this route. The ACA implemented an excise tax that is the greater of 1% of your modified adjusted gross income (MAGI) or $95 in 2014, rising to $695 and 2.5% in 2016. For the family making $75,000, that’s $750, rising to $1,875. If you’re healthy and rarely need medical or health care, this may be a viable option, assuming you have the assets to pay for catastrophic care. I can imagine a nightmare scenario where you’re in a single car accident and in an ICU for weeks or months, unable to move, much less apply for health insurance.
  2. Get private health insurance. Just as people have done in the past, you could go to a private insurer and get regular health insurance. Although I am neither an actuary nor an insurance expert, I would not be surprised to see, relative to the healthcare exchanges provided under Obamacare, rates drop slightly, as the high risk purchasers will move to the public exchanges, lowering the risk profiles of those seeking private insurance. Don’t quote me on that one, please.
  3. Go onto the public exchange and get health insurance. With the opening up of the exchanges on October 1, 2013, early retirees will have another option for receiving coverage.

I was curious how the three would play out for a couple in Fort Worth, Texas who decided to retire when the healthcare exchanges opened.

Which one was cheapest?

For this exercise, I’m going to assume that the couple makes $75,000 in MAGI, the male is 40, and the female is 39. Neither smokes.

I’m going to evaluate the Obamacare Bronze plan – the one that I think is the best for nearly every situation – in Fort Worth, Texas versus a high deductible healthcare plan (HDHP). The reason I chose an HDHP is because, if you’re retiring early, you should have sufficient liquid assets to cover an annual deductible. If not, you’re retiring too early and should postpone your retirement a little.

The first calculation I checked was the Obamacare subsidy calculator from the Kaiser Family Foundation. This calculator tells you whether or not you get a health insurance tax credit based on your income. In this case, the family would not receive a tax credit. We’ll explore more on that topic in a bit.

Then, I went to eHealthInsurance to get a quote for a HDHP plan – subject, of course, to underwriting, since it is private health insurance. According to eHealthInsurance, this couple could get a BlueEdge Individual HSA Plan VIII for $247.00 per month. That would provide them with PPO catastrophic coverage, a $10,000 deductible, and 0% coinsurance once the deductible was met.

Finally, I looked at the ACA rates for the minimum Bronze plan rate according to the Department of Health and Human Services. The cost for a 40 year old is $186.23 per month, and the cost for a 39 year old is $183.90 per month, totaling a monthly cost of $370.13. The maximum out of pocket cost – the deductible – is $12,700.

In this case, the private insurance option was the cheapest. However, if the couple wanted to roll the dice, they could pay $750 in an excise tax and have no health coverage, compared to a minimum cost of $2,964 with private insurance. The downside is that the couple could be on the hook for unlimited medical bills until they could get underwritten and approved for health insurance, whereas the maximum annual out of pocket expense with the private insurance would be $12,964. The question is whether or no saving $2,214 a year is worth it, and if you’re retiring early, you shouldn’t be on such a thin margin that $2,214 a year makes a difference in whether or not you could retire. It’s not a path I recommend.

Private Health vs Obamacare Bronze for Family Earning $75,000 Annually by Hull Financial Planning

The calculation becomes more interesting when the early retiree family earns below the 400% federal poverty level, which for a family of two, is $62,040. Again, using the Kaiser calculator, if that family earned $50,000, then they could receive a tax credit of $1,745. This makes the Obamacare Bronze option $267.44 per year cheaper.

However, the deductible is $2,700 per year higher. A family that goes above the $10,000 deductible threshold could quickly blow through the benefit; however, if the family’s out-of-pocket expenses – not including the premiums – are below $10,000 annually, then the Obamacare option is viable.

Private Health vs Obamacare Bronze for Family Earning $60,000 Annually by Hull Financial Planning

Since the median annual household income in Fort Worth was, in 2009, $47,634, it’s not a stretch to believe that there would be cases where this family actually would have an early retirement income that would qualify them for Obamacare threshold subsidies and make it a better economic decision to use the public healthcare exchange than to go with a private insurer.

Before you disregard the public option as viable as you transition into early retirement, make sure that you compare prices, both overall out of pocket totals and monthly premiums after factoring in tax subsidies, before deciding what healthcare coverage you will take.

By

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

12 replies on “Is Obamacare Viable for Early Retirees?”

Jason, we have had a LPHDHSA plan for 10 years now, and it has really been a wonderful option. My fear is that private insurance companies will not be able to sustain profitability if too many people go onto the public programs. We’ll wait and see. For us the low premium major medical is paid by my husband’s employer, and the HD HSA portion is our responsibility–but it is also OUR money, which rolls over annually and is OUR money to do with whatever–meaning at retirement, if we want to take a cruise, we just pay our taxes on the part we spend on non-health care, and there is no penalty after 65. Good deal, I think. It’s like having a tax-deferred savings account. Not a good idea to spend much like this though.

The point is, it’s ours, and it accrues, and can even be invested. And our HSA contributions are 100% pre-tax, and no tax is ever paid on those funds or the growth of the funds, unless not spent on health care. That alone makes this option the best for us–pre- and likely -post retirement.

I like your math examples though, because those are really the bottom line.

I’m a huge fan of the HDHP for the reasons you cite. Bronze plans under Obamacare still count as HDHPs, so participants can contribute to HSAs. For those who can afford it, I also like people who have HSAs not to tap into them when paying medical bills.

My gut feeling is that the Obamacare plans are underpriced. If Congress mandates a certain premium cap, then health insurance outside of Obamacare will be more expensive. Somewhere, someone has miscalculated, as I doubt many of the uninsured chose to self-insure.

Very interesting numbers. In theory, I support Obamacare because I think everyone should have at least major medical insurance. I would say the vast majority who go without have nowhere near the savings to be self insured. The reason I think it won’t work is because the penalty for choosing not to insure is too low. I can see most of the young healthy people taking the penalty, while the sick or older ones will use the exchanges. This drives up the price for everyone, thus making more people take the penalty and drop coverage. Then they have a major medical issue, get on Medicaid when they can’t work, and it’s on the government’s dime, sending us further into debt.

If there were a true penalty that hurt a bit more, I think the chances for success would be greater.

Hey, Kim – Thanks for commenting! There is a catastrophic coverage option for people under 30 who can’t find insurance for less than 8% of their income, and it won’t provide the tax credit, which means that the bronze plan is probably still the best option.

I agree that most young healthy people will take the penalty given that it’s 1%. If they truly get sick, they’ll show up at the ER of a city hospital. The doctors won’t turn them away. So, it’s the hospitals and the doctors who will eat the costs of treating the uninsured. We’re so afraid as a country to let people live with the consequences of their actions that we create no downside for risk. I agree with how you portray what will happen, and Medicaid will cover them.

I believe, as well, that people should have at least catastrophic care coverage, but I also think that we should live with the outcomes of our decisions, good or bad.

Argh. Feeling the sucking quicksand of being pulled into a political discussion! 🙂

Jason, in your three different financial scenarios, I noticed you only listed the payment of the penalty when the couple chose to have no insurance. In the case they selected a HDHP plan (not bronze) that was not Obamacare-compliant you don’t mention the 1% penalty. I thought the penalty had to be paid if you are insured if the insurance does not meet Obamacare standards and is not grandfathered?

Vicky–First off, thanks for commenting! You’re correct. If you don’t have a private insurance plan that meets the requirements (Bronze, unless you’re under 30, in which case Catastrophic) or is grandfathered, then you would need to pay. I can’t imagine an insurer selling health insurance that wouldn’t avoid the penalty, but I guess it’s possible. The Kaiser Family Foundation has a good infographic on whether or not you’d have to pay the penalty.

The question I worry about is will my doctor accept the fee schedule that goes with the plan? No one has addressed the doctor aspect of the ACA plans.

I worry about the % for lab and xrays under the Bronze versus the $ charge for the Silver. Doctors tend to order lots of lab tests and numerous xrays have been a part of my medical history. All these prices are negiotated. Maybe the fees under the Bronze plan are not as restricted as those under the Silver plan. This could result in big differences between the costs if you are a normal user of medical services. I assume the $ charge for lab tests is per each and not for the cadre of tests ordered at one time. I do understand that the Bronze wins if you are a heavy utilizer of medical services.

Hi Royce – That’s a good question. I wonder if you’ll see doctors not accepting ACA like some don’t accept Medicare. I’m not a doctor, but I can imagine that, were I doctor, I’d be more likely to accept Bronze patients who had sufficient funds to pay the deductibles, because I’d get that money up front without having to mess with insurance reimbursement filing.

I also think that it’s wise to pre-negotiate tests and services before you use them. You will have to become a more informed consumer. You’ll also want to talk to your doctor or his/her billing manager to see what the plan for accepting ACA payments is.

Based on what I’ve seen, unless you can qualify for a premium subsidy enough to make the difference in costs significant (see the 60 year old couple I cite as an example in this article as an exmaple), it’s probably worth it to go with private insurance if you can. I realize not everyone will be able to go with private insurance, though.

I also anticipate that there will be a cottage industry of consultants (if there isn’t already one popping up) who will take your financial and health information and determine if it’s financially better to go with private insurance or get on the Obamacare exchange.

The ehealthinsurance.com policies and exchange policies have different rates for your example? That’s odd. For me, the rates are the same. The lowest level Bronze (BCBS bronze HMO 005 or 006) is about $396 in the exchange, and $396 in ehealthinsurance.com. It’s the same for the other policies (I only looked at the lower level bronze plans). Why would they be different? They’re both the same plan, with the same coverage, with a one-on-one contract with an insured. It’s just that for one, the ins. co. might get part of the payment from the govt. I did notice about a $2 difference when going onto a particular insurer’s website vs. ehealthinsurance.com. I assume that the ehealthinsurance.com administrator charges the insurer a small fee?

Hi Donna–

I picked the average and low rates from California that were published at the time of the first announcement of the insurers.

I suspect you’re right regarding ehealthinsurance.com. They’re probably charging a convenience fee.

Thanks for commenting and good luck in finding a plan!

The exchange isn’t selling govt policies. It’s a clearinghouse for the same private plans sold by the insurance companies through other sites and the ins. co. sites. It’s all private insurance.

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