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What about health insurance if I retire early?

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What about health insurance if I retire early?


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This article was updated on November 28, 1999.

Please Note

For the most current state-by-state health insurance information see the Georgetown University Institute for Health Care Research and Policy.

There is also continuously updated information on the Health Insurance forum on Insure.com, see www.insure.com

Even if you've done everything else right, health insurance is the one thing that could prevent you from retiring early. More than 40 million people in the United States lack health insurance. You probably shouldn't retire early if it means joining them.

One thing that's almost guaranteed is that health insurance when you retire is going to cost more (often a lot more) than it did when you were employed. That's because most employers subsidize the cost of health insurance. For example, it typically costs between $150-250 per month for comprehensive health insurance for a single person. An employer might charge workers $15-20 per month for the coverage, absorbing the balance of the cost. When you retire, you'll be responsible for the entire cost of the policy. (Note: This article assumes your employer is not providing retiree health benefits. For example, folks that served their country for 20 years in the military, police officers, and firefighters are often able to retire in their early 40's with the government picking up the cost of lifetime health care. The rest of us have to make other arrangements.)

Do I really need health insurance ?

I've read at least two books on early retirement where the authors suggest you can eliminate the cost of health insurance (which you might not qualify for anyway) by putting away a little money in case you get sick. I call this the "Dr. Quinn, Medicine Woman" method. It may have worked for the pioneers as they made their way West, but its not viable today in the age of MRIs and organ transplants. It could also put your entire retirement nest egg at risk. The problem is that if you self insure, you end up buying your health care at retail prices. And with the cost of health care today, you might have to set aside $100,000 or more as a reserve for medical expenses.

There are two things to remember:

1) You really do need health insurance.

2) For the same coverage, it's going to cost more than you're currently paying.

Now that you know that you need it, and that it's going to cost more, let's see if there is any way to limit the damage.

How should I handle health insurance if I retire early ?

Obviously, it's easier if neither you nor a member of your family has a "pre-existing condition." In any event, here's some strategies for obtaining low cost insurance you may want to consider.

  • Buy a high deductible health insurance policy. You can insure a family of four for less than $100 per month with a $10,000 per year deductible. If you believe your family's medical expenses will be minimal, this is an effective strategy.
  • Move to a foreign country. There are many delightful places in Europe and Latin American with socialized medicine. Comprehensive health insurance in these countries is a fraction of the cost of similiar coverage in the United States.
  • Game the system. By doing some sophisticated estate planning (i.e., putting all your assets in foreign trusts to keep them out of the reach of creditors), you can become indigent in the eyes of the law and get free health care in the United States. When the hospital sends you the bill, you can merrily "round file" it and escape payment.

If you or a member of your family has a "pre-existing condition", and you want to remain in the United States without "gaming the system", there is another way to continue your health insurance:

What's a COBRA ?

Under Federal law, when you leave a company you are allowed to continue your employer provided health benefits (medical and dental) for 18 months if you pay the cost. These are commonly referred to as COBRA benefits. COBRA stands for the Consolidated Omnibus Budget Reconciliation Act of 1985. Congress passed this law in 1985 to amend some rules regarding pensions and health benefits, but that's more than you need to know.

Your employer may charge you 102% of his total health premium cost. (The extra 2% covers administrative costs.) So if the coverage you had cost your employer $200 per month, you could extend that coverage for 18 months at a cost of $204 per month. By and large, it's a good deal.

COBRA should provide you with adequate health insurance for the first 18 months of your retirement.

What do I do when my COBRA benefits expire ?

Up until this year, you were basically screwed. Fortunately, Congress passed a law that improves the situation for most people. The Health Insurance Portability and Accountability Act of 1996 (commonly known as the Kennedy-Kasenbaum bill) allows people who have exhausted their COBRA benefits to obtain individual (i.e., non-Group) health insurance policies for themselves and their dependents without restrictions on "pre-existing conditions."

What's a "pre-existing condition" you ask? A "pre-existing condition" is any medical problem or physical injury you already have. It's perhaps the most profitable concept in the health insurance industry. Even a "football injury" you suffered 30 years ago might be classified as a pre-existing condition and prevent you from buying an affordable individual health insurance policy. If you live long enough, you're bound to get some kind of injury or health problem, so pre existing conditions effect almost everybody.

"Pre-existing conditions" aid insurance companies in another very profitable practice known as "cherry picking." "Cherry picking" simply means the insurance company writes coverage on the best risks (i.e., the healthiest people) and denies coverage to bad risks (i.e., people with pre-existing conditions.) It's the free market - capitalism at its best.

All this attention on "pre-existing conditions" and "cherry picking" is called "medical underwriting." The insurance company hires medical doctors and actuaries to figure out the odds that folks will get sick or injured. Then the insurers jack the premiums up as much as possible. Like any business, it's in the insurance companies' interest to collect as much money as possible in revenue (premiums) and pay out as little as possible in expenses (claims paid.) The cost of all this underwriting and finding the right cherries to pick comes out of the insurance company's administrative expenses. Administrative expenses can run as high as 30% of the premiums collected. But it's not all "cherry picking." Fuel and maintenance for your health insurer's leather upholstered Gulfstream jet also comes out of the "administrative expense" pot.

On a slightly more serious note, insurance companies do need to worry about pre-existing conditions. "Adverse selection" is the insurance term describing the phenomenon that if insurance was readily available when people got sick, nobody would buy it when they were healthy. And if that happened, the insurers would quickly go bankrupt.

While Congress has guaranteed you can get insurance, it hasn't mandated what you should pay for it. The Kennedy-Kasenbaum bill allowed the states some leeway in implementing the legislation. Each state was given about a year to come up with a fair way to spread the risk of providing health insurance for people with "pre-existing conditions" who had exhausted their COBRA benefits. If a state legislature couldn't agree on how to provide coverage, the Kennedy-Kasenbaum law provides a "Federal fallback" position that may provide the best deal for folks seeking health insurance.

States that have taken a position on the issue fall into three camps: "high-risk pools," "guaranteed issue" insurance, and "Federal fallback."

The "high risk pools" place people with pre-existing conditions in a separate, often state subsidized pool. The premiums charged people in the high risk pool can be 50% to 200% higher than the premiums charged holders of standard issue health insurance policies. In addition to being expensive, many high risk pools also have more limited benefits than standard issue policies. The insurance industry favors the creation of these high risk pools since it allows them to continue the profitable practice of "cherry picking."

Several states, many in the Northeast, have "guaranteed issue" laws that require insurers in the individual market to offer coverage regardless of a person's health. Many of these "guaranteed issue" state laws are actually broader than the requirements of the Kennedy-Kasenbaum bill. The individual insurance rates in these states are often higher than they would be otherwise to cover the cost of people with pre-existing conditions.

The "Federal fallback" position requires that insurers in a state offer people exhausting their COBRA benefits the choice of the two most popular health insurance policies offered by that insurer. This is probably the best deal for early retirees since they have their choice of policies and insurers, and they pay the same price as every other policyholder.

Several state legislatures have voted to adopt the "Federal fallback" position. At least two states had the Federal fallback forced on them after their state legislatures couldn't agree on a course of action.

The Wall Street Journal had an excellent article on this subject back in August 1997. A tabulation of what each state is doing appears below. Some states have until 1998 to decide a course of action since their legislatures were not in session in 1997.

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State by State Implementation of
Health Insurance Portability and Accountability Act of 1997
(Kennedy-Kasenbaum Bill)
Source: Wall Street Journal August 22, 1997
StateFederal FallbackState Guaranteed IssueState High-Risk PoolUndecided
Alabama--X-
Alaska--X-
ArizonaX---
Arkansas--X-
California---?
ColoradoX---
Connecticut--X-
DelewareX---
District of ColumbiaX---
Florida---?
Georgia---?
HawaiiX---
Idaho-X--
Illinois--X-
Indiana--X-
Iowa--X-
Kansas--X-
Kentucky---?
LouisianaX---
Maine-X--
MarylandX---
Massachusetts-X--
Michigan---?
Minnesota--X-
Mississippi--X-
MissouriX---
Montana--X-
Nebraska--X-
NevadaX---
New Hampshire-X--
New Jersey-X--
New Mexico--X-
New York-X--
North CarolinaX---
North Dakota--X-
Ohio---?
Oklahoma--X-
Oregon--X-
Pennsylvania---?
Rhode IslandX---
South Carolina--X-
South Dakota-X--
TennesseeX---
Texas--X-
Utah---?
Vermont-X--
Virginia---?
Washington-X--
West VirginiaX---
Wisconsin--X-
Wyoming--X-

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What steps should I take ?

As you can see, now more than ever, what you'll pay for health insurance depends on where you reside. So the obvious thing to do is:

Step 1. - Figure out where you want to live.

There may be significant savings in retiring to another state. The states that offer "guaranteed issue" or "Federal fallback" policies should be less expensive and provide better benefits that those states with "high risk pools."

Step 2. - Call the State Insurance Commissioner's office.

You should confirm how the state you're interested in is implementing the Kennedy-Kasenbaum law. I've found the employees of the several states' insurance offices I've contacted to be quite helpful. Most will be happy to send you descriptions of the rules and regulations governing the Kennedy-Kasenbaum law in their state.

Step 3. - Consider a non-profit HMO, if one is available.

Non-profit HMOs like Kaiser-Permanente often have lower premiums and better coverage than for profit insurers like Aetna and CIGNA. One can only imagine why this might be true. (Hint: "It ain't the shoes, so it must be the Gulfstream.")

Step 4. - Shop around.

Unless you end up in a "high-risk pool" state, (where you may have a "choice" of only one plan), you should shop around. Remember, health insurance is really a financial product - and the price of any type of financial product varies widely. What you'll end up paying is basically a measure of how easily you can be bamboozled. For example, in one state I looked into a non-profit HMO offered coverage for $110 per month for a single 40 year old while a for profit HMO offered a plan for $250 per month. You need to be careful. It's a real jungle out there.

Step 5. - Watch the deadlines. Follow all rules and procedures.

To qualify for Kennedy-Kasenbaum coverage, you can't have any gaps in your health insurance. Make sure you pay your health premiums on time. If you have a break in your coverage of 63 days or longer, it makes you ineligible. The 63 day period also applies between the end of your COBRA coverage and the start of your individual coverage.

Also, make sure you get a "Certificate of Group Health Plan Coverage" from your COBRA benefits insurer. You'll need this to qualify for an individual policy. To be safe, it might make sense to pay the last couple of months of premiums in advance so your insurer can issue the certificate a month or two early. You don't want to be scrambling over paperwork while the 63 day clock is running when your COBRA benefits are exhausted. Ideally, you should have your individual policy start the day your COBRA benefits expire. This is one arena where procrastination can really hurt.

Update: New article posted January 1, 2002 Purchasing Health Insurance for Retirees.

Related Web Sites for additional information.

U.S. Department of Labor - Pension and Welfare Benefits Administration Web Site - Your first stop for questions regarding COBRA benefits and the Kennedy-Kasenbaum law.

Georgetown University Institute for Health Care Research and Policy - State-by-state guidance on the Kennedy-Kasenbaum law. (Note: Make sure you go to the bottom of the Georgetown Univ. title page and click on "continue.")

The Health Insurance Portability and Accountability Act of 1996 - Labor's view of the the legislation prepared by the AFSCME, the American Federation of State, County, and Municipal Employees.

Ensuring Portability: The Health Insurance Portability and Accountability Act of 1996 - GrantThornton, the multinational accounting firm, weighs in on this issue from the employer's perspective.

COBRA Alert October 1996 - A Minnesota insurance agency's warning to its clients on the ramifications of the Kennedy-Kasenbaum law. Interesting reading.


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Copyright 1998 John P. Greaney, All rights reserved.

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