Staring Into the Early Retirement Health Care Abyss

We thought we had our health care plan for early retirement all figured out. We were going to buy a silver plan off the exchange, and even optimize our income around it. We’d have a predictable premium because we’d have a low income, we’d know that any pre-existing conditions would be covered, and our out-of-pocket max would be low enough that we could pay it every year and not decimate our budget. Then we’d each get to our 60s and switch to Medicare, which wouldn’t cover all of our expenses, but would do enough to give us peace of mind.

All of that is out the window now, except maybe the Medicare part.

That’s a bummer, but it’s not in itself catastrophic. The system changes, and you adapt to it. You formulate a new plan. The problem is: there’s no new system to plan around. For early retirees, or those who plan to be them soon (hi!), that’s a huge problem.

Such a huge problem that The New York Times offers this advice: Don’t retire now. Keep working until it’s clear that you can afford health insurance under whatever system comes next.

Without the subsidies and protections the A.C.A. put in place, health care coverage would be more difficult to obtain, cost consumers more where available, and provide fewer benefits than it does today.

That means that if the A.C.A. is repealed, retiring early would become less feasible for many Americans.

— Austin Frakt, “If Obamacare Exits, Some May Need to Rethink Early Retirement,” Feb 27, 2017

And he’s not wrong. Early retirement is now officially less feasible for many people in the U.S., even before a new system is passed, because of all the uncertainty that has been introduced into the health insurance marketplace.

Related post: Making Peace with Working the Full Year // Health Care, Philanthropy and Saying No

Stay tuned — we’ll talk all about the impact of any new laws on early retirees just as soon as it’s clear what’s likely to pass. The current iteration seems likely to die at the hands of the CBO or the Senate. Here’s a detailed nonpartisan analysis from the Kaiser Family Foundation if you just can’t wait. But in the meantime…

The question any potential early retiree should seriously be asking right now is: Is this the right time to retire? Or should I hold on at work a little longer? 

Of course we all talk about the importance of being flexible and being willing to adapt, but the budget implications of the Affordable Care Act going away are potentially so significant for early retirees that it’s worth some serious come-to-Jesus thinking.

Today we’ll talk about the factors to consider when deciding how the health care law — or current lack thereof — impacts your early retirement timing.

The Fluke of Employer-Based Health Insurance

The U.S. is one of the only countries in the world to rely heavily on employer-provided medical insurance for the health of its population, a system borne not out of thoughtful policy discussions, but entirely by accident. This episode of This American Life has a fascinating breakdown on how it happened, and you won’t be surprised to know that it was driven by the desire to increase hospital profits, and later to attract workers to companies without having to pay them more.

The employer-based coverage system wouldn’t be so bad if everyone could work who wanted to, and if employers offered fairly similar coverage. But of course we know that some companies offer much more generous (untaxed!) benefits packages than others, and having “employer-sponsored coverage” doesn’t even necessarily mean that the employer pays the bulk of the cost. It mostly means that they get to choose what kind of coverage you’ll have and how much it’s going to cost you, which is a bizarrely unfree-market thing if you think about it, given how the employer-based model is the preferred option for free market proponents. (In a true free market model, we’d all individually have the full range of choices of providers, levels of coverage and premium/copay amounts.)

But in relation to early retirement, this employer-provided coverage model is problematic, because it means that there are few good options available for folks who have otherwise made themselves self-sufficient and have no other reason to work aside from health insurance.

There are still a load of details to work out before we’ll have a new health care law, but assuming that Congress is going to follow some core principles it has set out from the beginning, you will basically have two options, assuming that you do not intend to go uninsured (something a rich person would never do): If you keep your income low enough (like under $10,000 a year low), you may still be able to qualify for Medicaid in the absence of the ACA and its Medicaid expansion in some states, but Medicaid coverage is fairly lousy in many places, and is certainly not universally accepted. Or, if your income is above the most bare bones levels, you can buy health insurance at whatever the going market rate is, with no legal caps on premiums, copays or out-of-pocket costs. There may end up being a third option, to buy a catastrophic coverage policy, but those plans will offer far less benefit than those under the ACA that are still required to cover some preventive care and the 10 essential health benefits.

How Health Insurance Can Impact Your Bottom Line

The Affordable Care Act is poorly understood by many Americans, with a recent poll showing that a third of us don’t know that the ACA and Obamacare are the same thing. So it’s probably safe to say that many of us also don’t know the provisions of the ACA inside and out, and therefore don’t know which of our current benefits could go away under a new system.

Related post: What the Election and a Trump Presidency Mean for Early Retirement

This is not an exhaustive list, but is a brief overview of the parts of the ACA that we can expect could go away or change significantly that will impact your bottom line as an early retiree:

Premium subsidies — Premium subsidies are widely expected to go away, perhaps in favor of the current tax credits being proposed in their place. Depending where this nets out, it could actually benefit higher income earners, while disadvantaging low income earners, but remember: income and cashflow are not the same thing. Most early retirees following the Mr. Money Mustache model to any extent will fall into the low-income end of the spectrum. Bottom line: the net cost of insurance will go up for many early retirees, and may be offset by a larger tax credit for some.

Premium limits — Currently the ACA requires that 80 percent of insurance premiums, copays and other charges must go directly into paying for care, which effectively limits the amount of profit that insurance companies can tack on. In addition, large premium increases for exchange plans must be justified and reviewed. If this provision goes away, premiums for publicly available plans can rise any amount insurers feel like raising them. Bottom line: the cost of insurance could go up across the board.

Deductible limits — The ACA limits deductibles for exchange plans to $2,000 per individual or $4,000 per family. If that rule goes away, deductibles could get higher, meaning both higher costs and higher risk of having to pay that full amount. And, as Choose Better Life, an ER physician, recently wrote in a comment: “Health insurance used to pay most medical costs, but not everyone had insurance. Now, most people have insurance but deductibles are so high that patients are still paying most medical costs before any insurance benefits kick in. But most patients can’t afford this and many aren’t paying, leaving doctors and hospitals struggling to keep the lights on and the doors open. If deductibles continue to increase, the situation will get worse and many hospitals will close.” Bottom line: costs and risk could go up for many people, and higher deductibles could have devastating ripple effects across the health care system. 

Annual out-of-pocket limits — Under the ACA, annual out-of-pocket maxes are capped for anyone up to 400 percent of the federal poverty level (limits are about $4,000/year for the lowest income families, and about $8,000/year for those at 400%, which is set at $98,400 for a family of four in 2017). Those limits mean that you can budget for the most you could have to pay in a year, a massive boon for early retirees and anyone else on a fixed income. If these limits go away, as they are likely to, then there’s theoretically no limit on how much you could have to pay in a given year, and infinity is hard to budget for. Bottom line: it will be harder to budget for potential out-of-pocket health care costs, and out-of-pocket maxes are likely to be higher for most.

Lifetime limits — In addition to capping out-of-pocket limits, the ACA also prohibits insurers from imposing lifetime limits on insurance benefits. If lifetime limits return, a person facing a costly extended illness or extended injury rehabilitation could find that they essentially run out of insurance and have to pay for all future expenses. Again, it’s hard to budget for infinity. Bottom line: lifetime costs could increase dramatically for some.

Guaranteed insurance and pre-existing condition coverage — One of the best things about the ACA, regardless of how you feel about it politically, is that it requires insurance companies to cover everyone, even the oldest and sickest among us under the high risk pool. While Congress has promised to retain the pre-existing condition coverage, assuming you maintain continuous coverage (which, by the way, was what the law required before the ACA — the ACA guarantees pre-existing condition coverage even if you have a gap in your insurance), it has made no such promises about the requirement that insurance companies offer policies to everyone or keep them on their plans even if they get sick. Before the ACA, people could be turned down for coverage, or could be dropped from their insurer if they got cancer or another costly illness. If this protection goes away, it will be catastrophic for some people. Bottom line: costs could increase dramatically for those who are currently sick or anyone who gets sick in the future.

Essential coverage — Currently the ACA requires all insurance companies to provide preventive visits at no charge (no copay, and you don’t have to have met your plan deductible). It also requires insurers to cover 10 essential health services including prenatal care, mental health care, outpatient care, etc. If this requirement is eliminated, preventive visits may no longer be covered at 100 percent or covered at all if the deductible hasn’t been met, and certain services may not be covered at all under some plans. Bottom line: preventive health costs could go up for everyone, and costs could go up dramatically for services removed from essential coverage.

Medicare Part D — Though Medicare was not the focus of the ACA, it did include several provisions that benefit Medicare recipients, namely reducing the cost of Part D prescription drug coverage, and limiting costs of Medicare replacement policies. Bottom line: costs for Medicare recipients could increase.

What To Do With This Information

I have zero interest in telling anyone they should work longer than necessary, but I also have zero interest in sugar coating potentially bad news and saying that everything is going to be just fine. Flexibility in early retirement is super important and super helpful, but being flexible won’t necessarily be enough if your health care costs triple or quadruple (not unthinkable, especially in years with a major health event — a single uncovered MRI could cost thousands of dollars out of pocket, not counting whatever treatment the MRI indicates you need).

The best thing the ACA did for early retirement is introduce some level of cost predictability for a lot of folks — not perfectly, and not for everyone — but it helped many early retirees know approximately what to budget for.

Regardless of what comes next, it’s unlikely based on indications we’ve gotten so far that we’ll have nearly as much predictability moving forward on premium costs, office visit or procedure costs, or annual out-of-pocket limits, and that’s a whole lot harder to plan for.

None of us spend years working hard and saving aggressively so that we can live a short life with poor quality of life. We’re all banking on a lot of awesome years, and that means we’d be outright idiots to shortchange our health or health care, or to assume that best case scenarios will always be the outcome.

Emergencies happen, and otherwise healthy people who do everything right still get sick suddenly. We can’t always hop a flight abroad to get health care somewhere cheaper, and we can’t assume we don’t really need good insurance until we’re older.

So don’t brush off this discussion. Make sure you have a good-sized cushion to cover increased health care costs, and have a realistic backup plan. If you have those things in place, and you go into your retirement timing decision with a clear-eyed perspective on how your costs could increase, then we’ll be here to cheer you on.

Is Health Care on Your Mind, Too?

Anybody else have health care on the brain pretty much constantly these days? It’s a hot topic of discussion in the ONL house, and not just because I’m eager to blog about whatever the new law ends up being. Has the health care uncertainty changed your thinking on timing? Or still planning to forge ahead with your original timeline? How are you adapting your plan to account for the end (or significant revision) of the ACA? Anyone just feeling generally anxious about health care and want to commiserate about it? Let’s chat about it all in the comments!

P.S. The header photo is a completely unretouched view of the Pacific Ocean through the window of a Dreamliner 787. How trippy are those windows?