How to bridge the gap between a health plan at work and Medicare

Losing access to health insurance through work in your fifties or early sixties, when good coverage is critical but you’re still too young to qualify for Medicare, can feel like a nightmarish scenario.

Whether you’re retiring early, have been laid off, or you’re no longer working for a company that provides coverage, the dilemma is the same: You’ll likely face sharply higher premiums buying an individual policy at precisely the same time as your healthcare needs and costs are probably increasing.

In fact, some people toying with the idea of early retirement, decide to stay put after calculating the costs of individual health insurance, says Karen Pollitz, a senior fellow working on health reform and private insurance at the Kaiser Family Foundation.

The 2018 PwC Employee Financial Wellness survey backs this up: In it, 32% of baby boomers said needing to keep healthcare coverage was the reason they delayed retirement—the first time that healthcare concerns ranked higher than simply wanting to continue working.

Many people don’t have a choice. More than half of the respondents in a Fidelity survey last year who had retired before age 65 said they’d stopped working earlier than planned, many because of a health issue or work event outside of their control.

Whatever the reason you’re transitioning from workplace insurance to the individual market, finding solid, affordable coverage  is now job Number One.

If you’re able to switch to a spouse’s plan, that’s likely your best bet. Not an option? Take these steps to find a plan that’s right for you.

Price coverage on your state’s health exchange

If your new circumstances mean you will be earning less money going forward, a policy on the government health insurance exchange created by the Affordable Care Act (ACA) may be your most affordable option. That’s because you probably have a good shot at qualifying for federal subsidies that can dramatically reduce the cost of coverage.

The limits change slightly every year but use this year as a gauge: In 2018 subsidies were available to single people earning up to $48,240, couples who make up to $64,960, and families of four with household income of as much as $98,400.

The difference in cost is huge. A couple with one spouse who is 60 and the other age 55 with $55,000 in annual household income, for example, would pay an average of $438 a month for a mid-level benefit “silver” plan, according to the Kaiser Family Foundation.

If they didn’t qualify for a subsidy, their monthly premium would jump to $1,857. (You can estimate your costs here.)

With or without subsidies, you’ll pay considerably more than younger healthcare consumers. Insurers selling policies on the ACA marketplace are allowed to charge customers 50 and older up to three times more than younger policy holders. 

There are some caveats to keep in mind when shopping for a policy on the government exchange.

For one thing, most of these plans have fairly restrictive provider networks that may not include your doctors. Relatively few policies (possibly none in your state) include out-of-network coverage, and the ones that do typically are very expensive.

Also, if you’ve had a big change in income that makes you eligible for a subsidy, clarifying this to the government can be a bit of a headache.

When you apply for coverage, Pollitz warns, your estimate of future income will be reviewed but so will your most recent tax return. A big difference between the two figures will be flagged.

You will then have 90 days to document why the inconsistency exists, then should get an all-clear notice from the government. Be sure to follow up if you don’t receive approval, Pollitz advises.

Don’t qualify for a subsidy? Look at COBRA

Only 6% of early retirees get insurance through COBRA, an acronym for the law that allows you to continue to purchase coverage on your employer’s health plan for up to 18 months after you leave your job.

The chief reason: It’s expensive because you are now paying the full cost of your insurance premiums, vs. the 20% to 30% you’d typically as an employee, with your company picking up the rest of the tab.

The difference can cause some well-justified sticker shock. But if you don’t qualify for an ACA subsidy, you may find that your COBRA payments don’t look so bad after all. They may even be lower than some unsubsidized exchange plans, especially if you need family coverage.

What’s more, you may have the added benefit of staying with your network of health care providers or receiving some coverage for out-of-network providers. If remaining with your doctors is important to you, as it may be for people in the midst of treating a health condition, you may find COBRA is worth the price, Pollitz says.

Check if you qualify for retiree coverage at an old job

About one-quarter of large companies offer retiree health benefits to long-time former employees, down from 66% in 1988. Most of those that provide this benefit extend coverage to people younger than 65.

If you’re fortunate enough to have worked for one of them, and you’re eligible for coverage, it can be a good value. Often the insurance is less restrictive than an ACA plan, similar to COBRA except that it costs a lot less because the company usually still subsidizes part of the cost.

That’s probably why more than a third of early retirees elected to get health insurance through their previous employer, according to Fidelity. If you spend many years with the same company, particularly if it’s a big one, check with human resources to see if they offer coverage and, if so, whether you qualify.

Beware of really cheap alternatives

The Trump Administration recently issued a ruling that allows associations to market health plans to small groups and individuals. Billed as a more affordable option than the exchanges, premiums for these plans are projected to be $9,700 less per year than premiums in the individual market, according to a 2018 analysis from health care consultants Avalere.

The tradeoff for lower costs: less coverage. For instance, these plans are not required to provide the 10 essential health benefits required under the ACA, which means that you may not be covered for things like prescription drugs, mental health, and substance abuse services.

In addition, the administration has passed a new short-term coverage rule that would allow plans that provide insurance for up to three years to be exempt from any ACA requirements.

“Cheap insurance is cheap for a reason,” says Pollitz. “These plans are less expensive because they offer you less protection.

Of particular note to anyone with a health issue: Although these insurers are still required to sell plans to patients with pre-existing conditions at the same premium rate as healthy people, under the administration’s proposed rule, they would not have to cover treatment for those conditions, Pollitz says.

In addition, she worries that coverage for hospitalization, chronic diseases, and other ailments could be severely limited or not covered at all.

“When you get to be our age,” says Pollitz, who is about to turn 60, “things can go south health wise. You want good coverage because chances are you’re going to need good coverage.”