FIRE and Health Insurance: Four Plans in 21 Months?

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What are you doing about healthcare in early retirement?  This is one of the most common questions I’ve been asked since leaving my career.

Well, I have the answer for you:  I’ve had three healthcare plans so far in the first eighteen months and with open enrollment upon us, I’m about to sign up for plan #4:   

Here’s the history of our healthcare plans:

Health Insurance #1:  Large company COBRA.  We paid $875 per month for the first eight months to continue on COBRA through my Fortune 500 company.  The plan had high deductibles ($5,000 individual, then 80/20 up to $10,000 out of pocket), but came with a national provider network.  This was a decent short term option given the network, price, and the ability to save the receipts from my COBRA premiums to eventually reimburse from  my Health Savings Account.

Advantages:  National Network, HSA Eligible

Disadvantages:  Set expiration date on the plan, high deductible, and moderately expensive for its deductible level.

Health Insurance #2:  Small company plan.  I had a friend with an 800 person company that needed a little consulting help.  We agreed to structure this as W2 employment.  The plan was a subsidiary of Aetna and I enjoyed a national provider network .  I enjoyed a lower deductible of $2800 and was able to purchase this with pretax dollars through a payroll deduction.  Unfortunately due to COVID-19, we had to part ways and the COBRA option to continue was almost $1500 per month.  The owner was generously contributing $700/mo towards each employee’s healthcare.

Pros:  Nationwide network, Insurance was purchased with pretax dollars via wage deduction, and better overall plan.

Cons:  Company contribution made COBRA continuation impossible, some work required.  

Healthcare #3:  ACA plan.  Due to the loss of coverage, I qualified for a special enrollment period via the ACA exchange.  The plan I chose was $681 per month for a $13,500 deductible bronze plan.  The insurance pays exactly nothing until we’ve spent $13,500 as a family, then it pays 100%.  However, it only pays 100% in my state’s provider network with zero coverage outside of emergencies for out-of-state care.  

I would not qualify for the premium cap based on 2020 income, but in the future if we earn less than $68,960 plus whatever the inflation increase is for 400% of the Federal Poverty Level, we can get a silver plan with premiums capped at  premiums will be no more than 9.5% of our income, or capped at 9.5% of income, or $546 as of 2020.   As of right now, that savings is not more than my need to make significant Roth IRA conversions to reduce our pre-tax investment holdings.  As we get older (or if we move to Hawaii with much higher limits), that gap between market rate and the premium capped rate may expand and I would reconsider it.

Pros:  It’s health insurance?

Cons:  Expensive for benefits, high deductible, limited network

Health Insurance #4: Pending Open Enrollment on November 1st

Where Do We Go From Here: My Thoughts on the Future of Healthcare for Early Retirees:

*Disclaimer:  This portion will be both political and involve opinions, as healthcare policy ultimately is driven by decisions made by politicians.  It is unlikely everyone will like what I have to say*

I believe politicians have a habit of wanting to grant a benefit, but not either pay for the benefit or accept the negative consequences with it.   This tends to happen when a single political party takes control and begins passing things without opposition.   Unfortunately the trend of a single party taking control is happening more often and we’re likely to continue seeing this.

Government funded / involved healthcare in the United States in the last 20 years

  1. Party #1  in complete control gave us the medicare prescription drug benefit in 2003, when the medicare funding mechanisms were starting to tilt.  Instead of increasing payroll taxes accordingly, the benefit was given with no offsetting funding.  
  1. Party #2 passed the Affordable Care Act, increasing the benefits insurance companies must charge, restricting the spread that can be charged between younger and older individuals, and claiming it can be paid through an “individual mandate”, which was never large enough or vigorously enforced.  The mathematics of this strategy created adverse selection, where young people would still not buy insurance and total costs would increase dramatically for everyone else in exchange for pre-existing condition coverage.   Meanwhile there were only token tax increases while deficits for medicare expanded with no increase in it’s payroll tax for the majority of people.
  1. Party #1 regained complete control and further distanced the Affordable Care Act from the individual mandate, while taking steps to reduce government revenue while medicare’s costs continued to grow.

So what happens this cycle with the ACA or Healthcare Reform?  

It appears we’re about to experience the bottom of the second inning in our new “winner take all” political system, which probably gives us some incremental healthcare benefits with no real funding mechanisms to pay for them.  The last I saw, the likely winner’s proposal is for eleven trillion in new spending over ten years while only raising three trillion in additional revenue (doesn’t it all sound like funny money at this point?).  Giving benefits today without the offsetting payment mechanisms doesn’t seem sustainable, but each party seems to be good at perpetuating this and so far we aren’t experiencing the potential consequences (debasing the currency/rapid inflation/stagflation).  In the meantime: maybe we get some more healthcare benefits in exchange for this budgetary insanity?

Long term, I believe the United States is heading towards a system of mediocre government provided (or government paid) healthcare while anyone with financial means will pay for non-hospital care privately.  This system should be funded by payroll taxes for everyone with a social security style cap or phase out, which would essentially move the money currently deducted for insurance to the tax pool.  Unfortunately there are so many entrenched interests in keeping the existing and dysfunctional system and no political will to discuss how to fund this benefit.  The rest of the first world uses some combination of payroll taxes and sales/VAT taxes to provide healthcare funding, but this is not being mentioned by any candidate in either party at this point.   

In the meantime, as an early retiree, here’s what I would prefer to see done:  

  1. Affordable Care Act:  For this to survive in its current form, the individual mandate must be enforced vigorously.  Regardless of which party you support, both actively worked to remove the funding mechanism for the “affordable” portion of the ACA, which was the mandate to purchase.   In order for insurance to be affordable, everyone must participate in purchasing.  The prior administration delayed implementing a penalty until after the 2012 election then actively exempted people from paying the penalty.  The last guidance before the penalty was removed was that you could prove a financial hardship by simply delaying paying your electricity bill until they sent a past due notice, then provide that if the IRS questioned your exemption after filing.   This allowed 25+ million people people eligible for insurance to choose not to purchase it on the marketplace. The uninsured rate continue to closely follow employment due to the lower cost/higher benefits in employer based plans compared to plans purchased on the exchange. This increased the cost for everyone who does have to use the exchange. 

    The current administration just removed the penalty altogether. Instead, the penalty should have been substantially higher and enforced by not accepting tax returns until proof of insurance is provided.  No health insurance?  No tax refund.  No government issued IDs.   Premiums were capped at 9.5% of income for people up to 400% of the Federal Poverty Level, so the penalty needed to be higher than that number.  
  1. Medicare:  The country must first fully fund medicare.  There’s often political rhetoric around government spending and deficits, but no one is actually willing to tackle the issue with medicare:  Payroll taxes bring in less than 40% of the funding required for medicare and it is falling.  These taxes must be tripled from 1.45% to around 4.5% immediately just to cover existing obligations.  Regardless of what party is in power, we will never see a balanced budget without tripling the existing medicare funding mechanism.  
  1. Forbid the Private Pay Restrictions in Insurance Contracts:   In my experience, insurance carriers prohibit a provider from taking direct payment if a patient has insurance.   I carry a high deductible plan from a major carrier, I should be able to go and direct pay for my care without the administrative nightmare of filing my claim with insurance.  Instead of me handing my credit card and direct paying, many people push paper around then I get a bill with a magically created “negotiated price”.  That “negotiated price” will be higher than the direct pay price because of the number of people that had to push paper and codes around.   The friction in the process is insane.

There are many other areas for improvement I could write about for hours, but those three issues are glaring flaws that I see.

Now that I’ve exhausted the page with opinions and thoughts, where does that leave us as early retirees?

We’re expecting to use the healthcare exchange to purchase some type of catastrophic coverage with a major insurance carrier for 2020.  While this coverage is expensive, I am not willing to take the financial risk of going uninsured or having a health sharing plan run out of money if we have a large hospitalization event.   We budgeted $10,000 or so a year for health care between the cost of insurance and the risk of using a substantial amount of healthcare from time to time.   

I’m not thrilled about all of the chaos, but as another early retiree once told me:  “Self employed people have been buying insurance forever” and it’s really just a financial cost.  If I lived in a universal healthcare country, I would have earned less money after tax and have a lower FIRE number, so it really isn’t much difference to me financially. I get to be more disgusted with the administrative waste in the system.

I think it’s unrealistic that politicians are going to remove pre-existing conditions coverage (regardless of what the shady political consultants who create the scare tactic tv ads say).  Politicians are historically bad at reducing any type of government program or benefit and if the anti-ACA group didn’t have the political will to accomplish this in the last decade, I don’t expect it to happen.  If for some reason the courts were to strike down the ACA (after it has been upheld many times), politicians may finally be forced to act with major reform.  I am an eternal optimist and believe politicians in the US will eventually do the right thing, but only after all other options have failed.  A court decision may finally force an uncomfortable deal to be hammered out by both sides.

If the ACA goes away with no replacement and pre-existing coverages can’t be obtained, my worst case scenario is doing some type of remote work or pushing carts in at Costco to get back into a group plan.   I will have enjoyed a nice career break and transition into a low stress job.   That’s still better to me at this point  than my old career.  

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*Any comments that begin with “it’s all Republicans fault”, “it’s all Democrats fault”, or “you’re just both side-ing” will be deleted.  My platform, my rules.  I don’t feel like arguing with people who refuse to think independently

19 Replies to “FIRE and Health Insurance: Four Plans in 21 Months?”

  1. As usual, nailed it.

    As in life, with most purchases, people want things and, if left alone with the choice, don’t want to pay.

    I think you nailed it with VAT tax likelihood.

    Think about the political suicide that comes with tripling (or heck even doubling) any part of FICA/Med. Just don’t see that ever happening. Feels like a GM like collapse then restructuring is the only logical conclusion.

    1. Thanks for the comment. I see the attacks on a current senator in my state who “dare” suggested increasing the spread allowed to be charged between younger and older people as a way to increase participation.

      The political ad involved a lady with an oxygen tube in a pretend southern accent saying “he might as well cut this tube”.

      The obstacles to progress are significant

  2. Good well-balanced discussion.

    Head-scratching that people with a 7-figure net worth have cart-pushing for Costco on the table as an option to pay for a hospital stay, yet here we are.

  3. I appreciated reading the clear descriptions of the options you’ve actually used so far. Figuring out future health care is one of the next steps in my planning for potential early retirement. We don’t need it immediately, but it is the big lingering unknown in future expenses. Unfortunately, I don’t see any clarity that will allow a realistic projection, so it’s all ballparking and hoping at this point.

    I do think we’re trending towards some form of universal care, though as you outline it’s unclear how we get there and what the other ultimate costs are.

  4. I am retired early with a part time gig and have set up an LLC/partnership with my wife. We get our insurance through a high deductible health plan from the ACA and currently defer our partnership income into i401K plans, fund an HSA ($9,100) and get a business tax adjustment/credit for a portion of our ACA premiums so we are able to stay below the 4x FPL limit (the limit for tax year 2020 is 4x the FPL for 2019, $67,640 for a couple). Like you I would prefer to start converting my IRA to a Roth IRA and not put any more into 401Ks, but it isn’t worth losing the ACA premium tax credit at this point and not having health insurance seems to be a risky play. I ride a bike for exercise and have increased my automobile policy PIP to the maximum which provides coverage in the event of a bike (or pedestrian) accident and only cost me $6 extra per month.

    1. I appreciate the feedback.

      I think that route is an option, especially in the future. I have a couple of things working against me in keeping my income below the limit:
      – A deferred comp plan will payout over the next thirteen years
      – Dividends/interest are running up my income until I’m a homeowner.

      I still need to get more funds out of pre-tax accounts, its over 50% of our assets and much of this game is balancing the incremental cost of health insurance against the long term tax consequences of letting assets continue to grow pre-tax vs. getting them into a Roth or real estate.

      It is tempting to get under that premium cap limit though, especially with the gymnastics available through a Solo401k

        1. We are currently using a catastrophic style plan with a $13,500 deductible. It’s really just financial protection for us at this point.

          Unfortunately the healthy lifestyle only gets us so far – we’ve lived in for 15 years and unfortunately my wife suffered a nasty spine injury almost four years ago during a routine workout. We hit the out of pocket maximum for three years related to that issue and it took 30 months in total dealing with the consequences.

          I remind everyone that a healthy lifestyle is about improving (but not guaranteeing) better outcomes.

  5. Took an early retirement exit from a major Fortune 50 company 13 years ago. More money in a 401K. Took several gigs with smaller companies doing similar work till 2017. Got laid off due to “corporate changes” but it really was age related cleanout. Had a major heart attack in 2010, and have recovered fairly well, but will always have a pre-existing condition to deal with. Can’t afford not to have insurance, and most of the non-traditional coverages aren’t available. Only real choice now is ACA. Got my real estate license in 2018, and now associated with a well flowing team. Add some side gigs, and we’re managing to stay just under the subsidy limit. SO healthcare insurance is mandatory, but the choices are small.

  6. If ACA got repeal and no replacement, $1mil portfolio with 4% withraw is $40k per year in capital gains. For family of 4 in california, I believe you can apply for medicaid. Of course, your living expenses have to be lower $40k in order for this strategy to work. Assuming your $1mil house is paid off, do you think we can live off $40k living expenses. $2 mil net worth and the thought of pushing cart in Costco make my head hurt. For the love of god, please keep ACA.

    1. No doubt the states will matter. Those with high risk pools and guaranteed issuance would attract a lot of early retirees

  7. “or if we move to Hawaii with much higher limits”

    Can you expand on this? Hawaii has much higher limits for what?

    1. The ACA “cliff” used to be higher in Hawaii because of how the Federal Poverty Level is calculated. Recent legislation changes make this a moot point for 2021 and 2022.

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