How to Analyze Early Retirement Health Insurance Options

When more than half of Americans receive health coverage through their employer, it’s natural to be lost when thinking about health insurance after full-time employment. In 2017, 56% of Americans had employer-based insurance for some or all of the calendar year. What’s a person looking at early retirement, or even just switching to part-time, supposed to do for health insurance? I’ll explain how we analyzed our own early retirement health insurance options.

If you do not qualify for a government-sponsored plan—you’re welcome to the final 16% who get to figure it out themselves.¹ This is the slice of the pie that I get to enjoy. I will share what I’ve discovered about health insurance and the jump to part-time work as someone on the path to early retirement.

Health Insurance When Working Part-Time

I need to have decent health insurance. I am generally a healthy individual but I do have autoimmune diseases that have to be managed quarterly. Plus, I want to be prepared for the what-if scenario. Going with no health insurance was never a consideration when looking at my early retirement health insurance options.

Being prepared for medical expenses should be part of your early retirement plan. Yet, without doing a direct plan comparison, and factoring potential deductions, it may be hard to choose the best course of action.

This is a lingering question that you might get asked with deciding to move towards early retirement. It is a big question, especially if you have ongoing health issues that need to be managed.

When I sat down with my boss to say I wanted to take the new PRN position, which would let me transition from full-time to part-time work, the first question they asked me was: “what will you do for health insurance?”. At the moment, I was so excited to have this opportunity to step down, that I did not even consider all the research I would need to do to answer that daunting question.

No Longer Qualified as a Dependent for Insurance

During pharmacy school, I was on my parents’ health insurance until the end of my 23rd year. I was living on my own and no longer considered a dependent. My mom warned me that individual insurance would be expensive and to take advantage of their plan before the end of the year.

At the time, I was living off-campus, sharing housing & living expenses with Chris. My time earning my PharmD was our first experience living the city life. I had a part-time internship at Walgreens to supplement my student loans. This was all that supported me throughout pharmacy school. So I took my mom’s advice and scheduled the doctor visits I had put off.

I went to the dermatologist, had my annual physical with labs, and even had my wisdom teeth out before the end of that year.

And then I was on my own.

Student Life: Broke but Healthy

At this point in my life, I was unaware of FIRE. I did not have very much money saved. I relied heavily on student loans even though I did not completely grasp what I was getting myself into—I ended my student experience with close to $200,000 in loans after loans. We were in the negative net worth territory on our path to become millionaires. Each loan disbursement barely got me through the semester, I knew I had to be money conscious.

So I researched the cheapest student health insurance plan I could find which was Golden Rule under United Health Care. I don’t remember the monthly cost or what it covered but I know it wasn’t appropriate to my financial situation. I tried not to use it much and I was fortunate that many of my health issues would come later in my life.

It’s a funny thing about health insurance: you struggle to own it, then try not to use it to avoid the cost. That was my struggle then, and I didn’t want to be in that boat again. Fortunately, I made it out of pharmacy school without a catastrophe or a mountain of medical bills—atop my student loans—on my plate.

Full-Time Benefits: Having a Company Sponsored Plan

After graduating from pharmacy school and residency, I landed a position with an independent pharmacy. They offered benefits including health insurance. Although the plan was a high deductible insurance plan, they covered 100% of the premium and 50% of the deductible.

Over the years, the cost of health insurance for small businesses rose. Eventually, many employees had to take on a small percentage of the premium cost.

However, over my past 10 years with this company, my overall health-related costs have stayed fairly low. Our current 2020 plan with Anthem Healthkeepers, has a high deductible at $6,550 with 0% coinsurance and $6,550 out of pocket (OOP) max. My employer pays 90% of the monthly premium and funds an HRA at $3,000.

My only typical monthly expense is a $42 pretax paycheck deduction towards the premium. Doctor and pharmacy copays are paid from the funds in my HRA. In the past 10 years, my medical expenses have exceeded the HRA benefit of $3,000/year, only one time. Even then, I had the comfort of knowing that as long as all my claims were within the network, my max out-of-pocket costs would be $3,550.

Early Retirement Health Insurance Options

As I transition from full-time to part-time, I will lose my health insurance benefit at the end of June. I have the choice to stay with my current plan through COBRA, find an alternative plan on the Healthcare Exchanges or a private plan. Even though it is not the time for open enrollment, I am eligible for the exchange since I have a qualifying circumstance from losing my coverage. I wanted to make sure I had the data to make the right financial among my early retirement health insurance options.

How COBRA Insurance Works

COBRA was passed into law in 1985. It requires that private-sector employers must offer continuing group health insurance coverage for some employees and their families after certain qualifying events mostly related to job loss. Generally, employers with 20 or more employees must offer it and fortunately, the independent pharmacy I work for follows this standard.

COBRA isn’t a separate health insurance plan, rather it just shifts the premium expense burden from the employer to the employee and continues with the same coverage. That meant that if I continued on COBRA, I wouldn’t lose how much I’ve paid into my deductible for the year or access to the doctors and services I’m already using.

Alternatives to Traditional Health Insurance

We researched a variety of uncommon avenues for health insurance. There are medical cost-sharing programs—often through religious organizations, plans offered through colleges or pharmacy organizations, and private health plans.

I learned that unless I wanted to enroll as a student, my best options were on the exchanges, private plans, or sticking with COBRA.

Now it’s time to crunch some numbers.

High Deductible Healthcare Plans (HDHP) vs COBRA

High healthcare deductible plans are what I am used to and what I am currently on. For comparison, I researched a few other high-deductible plans to consider for the rest of 2020 or for 2021.

I compared two other plans with my current plan. Both had reasonable monthly premiums and were available on or off the healthcare marketplace at a fairly similar rate. My concern was the plan would start in July, halfway through 2020, giving me only 6 months to reach the deductible for any new plan.

Using Healthcare.gov to gather data, I plugged the numbers into my spreadsheet. I’ve reproduced my data in the table below.

With a quick glance, you might think Plan A would be the best choice: it has a lower deductible and similar premium expense. However, I have already met $1,414 of the $6,550 deductible & out of pocket max—nearly a quarter—via my employer-funded HRA.

HDHP HSA Eligibility and COBRA HRA

Of the two exchange plans I’m considering, Plan A is HSA eligible. This Health Savings Account (HSA) would give me the option to invest up to $3,550 per year in a savings account for healthcare-related expenses. This amount is tax-deductible (spoiler alert: I eventually opened an account alongside an HSA—I wrote a follow-up post about my top HSA questions and answers, too!)

The HSA account would also be eligible to invest the balance in stocks and bonds, just like an IRA. In addition, when I’m older, I’d be able to use the HSA balance for retirement just like an IRA.

For my current analysis, the $3,550 tax deduction would be worth $852 in reduced taxes due to my estimated tax bracket for the year.

Additionally, my current healthcare plan that I could stay on with COBRA has a Health Reimbursement Arrangement (HRA) option. Maintaining access to the HRA would cost me about $512 for the rest of the year. The remaining value in that HRA would be $1,586 for healthcare-related expenses.

Maintaining Deductible Amount with COBRA

For either new healthcare Plan A or B, I would start from zero paid into my deductible.

I would need to meet the deductible to qualify for most benefits. To determine if I would even reach the deductible this year, I calculated my estimated costs for upcoming doctor visits for 2020 using past EOBs.

Even with another $1,400 in expected medical expenses, I would not reach the deductible for any plan. If this is the only consideration, then Plan B would be the best choice. Yet, if you consider the $1,300 difference in the OOP max between Plan A and B, then Plan A would a safer bet with only $45 in expected costs.

But what about the unexpected?

My Best Early Retirement Health Insurance Option

Given we are currently in a pandemic, I wanted to evaluate the maximum total healthcare expense I may have to pay in 2020. I needed to include premiums, copays, and deductibles. Premiums, for example, are an additional cost outside of a plan’s “out-of-pocket maximum”. Understanding this maximum healthcare cost for each of your choices will help you picking among your early retirement health insurance options.

Know Your Maximum Healthcare Cost

I wanted to overweight the importance of this because there’s a remote possibility I’ll need minor surgery and additional doctor visits.

With my COBRA plan, I learned that my maximum total healthcare expense would be $6,090.

This is more than $2,000 less than Plan A and about $4,000 less than Plan B!

Interestingly, the COBRA plan will have the highest (guaranteed) monthly expense. That additional monthly expense will likely blow up our FIRE budget compared to last year, but create a net lower total cost for healthcare.

In doing this analysis, I had to make a lot of assumptions. I assumed similar negotiated rates between plans and that all providers would be in-network. Make sure you take those details into your own review if you’re facing a similar set of choices.

Settling on COBRA for 2020

I have decided to stick with COBRA for 2020. However, the tables could turn for 2021.

Later this year, I’ll pull out my spreadsheet, crunch some numbers, and make another decision once the insurance plans for 2021 are released. Fortunately, the analysis I’ve done here will be something I can repeat against those plans.

Let’s hope that the ACA is still around to make that an easy choice when we review our early retirement health insurance options for 2021.

FOOTNOTES

1. “In 2017, private health insurance coverage continued to be more prevalent than government coverage, at 67.2 percent and 37.7 percent, respectively. Of the subtypes of health insurance coverage, employer-based insurance was the most common, covering 56.0 percent of the population for some or all of the calendar year, followed by Medicaid (19.3 percent), Medicare (17.2 percent), direct-purchase coverage (16.0 percent), and military coverage (4.8 percent).”
   [Source: Census]