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Health Care Planning: What Are My Options?

Not many of us enjoy learning about health insurance or dealing with insurance providers. Whether it is about the cost, trying to compare the coverage under each kind of insurance, or simply learning about the different available options, chances are that you may find the effort confounding. Here we delve into a few aspects of health care planning, both for those under 65 (private health insurance) and those 65 and older (Medicare).

Health insurance 1

Health Insurance – Under Age 65

The first question is, “Do I have medical insurance?” With the passage by Congress of the Affordable Care Act which brought us the Health Insurance Marketplace, you may face a monetary penalty if you are not insured in 2014. The fee for 2014 is the higher of1:

  • 1% of your yearly household income above the tax filing threshold ($10,150 for an individual) with the maximum penalty being the national average premium for a bronze plan, or
  • $95 per person for the year

The fee for not having minimum essential coverage2 will increase in subsequent years. While the penalty may seem expensive, it is trivial when compared with the cost of a medical emergency, which could be financially devastating.  If you are curious about average prices in your area for certain health care services, check out: www.healthcarebluebook.com.

With the Health Insurance Exchange, there are four main levels of coverage among which to choose:

  1. Platinum
  2. Gold
  3. Silver
  4. Bronze

Each plan level corresponds to the percentage, on average, you will pay as your share of health care costs, under the insurance.  For example, the bronze plan is 40%, meaning you will pick up the tab for roughly 40% of your health care costs through deductibles and co-insurance, while the insurance company will cover the remaining 60% of the costs.  The percentage of health care costs you pay for Silver, Gold, and Platinum are 30%, 20%, and 10%, respectively.  Obviously, as the coverage goes up (and your co-pay goes down), the monthly premium also rises.  Depending on the amount of health care services you need in any given year, one plan might make more sense for your situation than another.  You will need to analyze your expected health care expenses to decide if you would prefer to pay higher premiums and less out of pocket costs for each visit, or vice versa. Keep in mind that a Platinum plan from one insurance provider might be less expensive than a Gold plan from another provider.  Not every plan among insurers is priced equally. Here is where shopping around really makes a difference.  Although the coverage provided is standardized, the prices are not.  This is the purpose of the federally mandated “marketplace” where insurance companies are competing for customers, based on price.

As far as obtaining health insurance, you have a few options:

  • Enroll in your employer’s health insurance plan.
  • Contact an insurance company and enroll directly.
  • Wait until November 15 when enrollment opens again for coverage through the Health Insurance Exchange. Visit www.healthcare.gov to learn more. For small business owners, there is no limited enrollment period, meaning you can offer coverage to your employees immediately and at any time.

One benefit of the Health Insurance Exchange is that depending on your income you may receive subsidies for health insurance, making the total cost of insurance lower than going directly to an insurance company and purchasing it.  For example, in King County a woman born in 1955 with a household income of $30,000 would pay an estimated monthly premium of $130.98 after receiving a $319.40 tax credit for a Bronze Plan from Premera Blue Cross with a $5,250 deductible.  You can find out if you qualify for a subsidy by going to www.healthcare.gov and click “Get Insurance”.  Here in Washington, the healthcare.gov website redirects to Washington’s own Health Insurance Exchange.  Along with determining whether or not you qualify for a subsidy, the insurance exchange is a good resource for comparing prices.

As far as the type of insurance you should obtain, there are three main options available to you:

  • Health Maintenance Organizations (HMOs)
  • Preferred Provider Organizations (PPOs)
  • High Deductible Health Plan (HDHP)

HMOs typically have a network of doctors and hospitals you can use as a member.  In order to see a specialist, you generally are required to receive a referral from your primary care doctor. Typically, costs are lower if you use the providers in their network, and if you go outside their network, you may end up paying the entire cost.

PPOs are different in that you are able to get care within or outside of your provider network. Typically you pay more for providers outside of your network, but unlike HMOs, some of the costs are usually covered. Additionally, you don’t need referrals as is the case when enrolled in an HMO.

HDHPs are usually chosen by young people or others who choose to “self-insure” up to a certain amount.  People typically choose these plans and contribute before-tax dollars into a health savings account (HSA) to pay for qualified out-of-pocket medical costs.  With HDHPs you have lower premiums and save on taxes, but have higher annual out-of-pocket maximums, meaning you could end up paying more with this type of plan if you continually pay under the out-of-pocket maximum each year.

Choosing between the types of available insurance can be difficult, particularly with the unknown variables in your life.  We recommend speaking with a Health Care Navigator to learn the advantages and disadvantages of your plan. A Navigator is an unbiased individual or organization trained to help you look for health coverage options.

Health Insurance – 65 and Above

The preceding information relates to health care coverage for people 64 and younger; at age 65 health insurance is substantially different, as at this point Medicare is available to you. Medicare is a federal health insurance program for people aged 65 and older, certain people with disabilities, and people who have End-Stage Renal Disease or ALS.   Medicare is divided into several parts.

  • Part A – Hospital Insurance
  • Part B – Medical Insurance
  • Medicare Supplements, also called Medigap plans
  • Part C – Medicare  Advantage Plans
  • Part D – Prescription Drug Coverage

Medicare Part A covers in-patient hospital care, skilled nursing/rehabilitation facility care, certain home health services, and hospice services. If you (or your spouse) paid into Medicare for at least 10 years, you pay no premium for Part A, hospital insurance.  While you don’t pay a premium, you are responsible for a deductible (up to $1,216 per admission) and a co-payment of $304/day if you remain in the hospital for more than 60 days.  Like all medical insurance, you need to check coverage.  Medicare determines what items and services are medically necessary. Your medical providers are required to inform you if a service is generally not covered by Medicare.

Medicare Part B covers two main types of services: medically necessary services (including doctor visits, tests, outpatient services and durable medical equipment) and preventive services. Part B services come with deductibles and co-pays/coinsurance as well.  For 2014, there is an annual deductible of $147, and co-pays, which are generally 20% (you pay 20%, Medicare pays 80% of allowable costs). As with Part A, it is wise to ask what services and supplies are covered before receiving the service.  If you are already receiving Social Security, you will be automatically sent enrollment materials and a Medicare card three months before your 65th birthday.  If you are not receiving Social Security, you will need to contact Social Security to enroll in Medicare Part A and B.  You do have the option of suspending Medicare Part B, if you have creditable coverage provided through your employer.  However, if you do not enroll when you become eligible (at 65) and do not have such coverage, you will be assessed a penalty applied for the rest of your life if you decide that you do need to enroll at some later date.  The premium for Part B insurance is currently $104.90 each month.

If you or your spouse are still working and have coverage through your employer you should contact your benefits administrator to find out how your group health plan coverage coordinates with Medicare.  If you have adequate coverage through your employer, you do not need to sign up for Part B right away, however if you do not have coverage and fail to enroll in Part B, you will face penalties when you do enroll.  If you do postpone enrollment in Part B, you will need to enroll in Part B promptly when you are no longer covered by your (or your spouse’s) employer.

Note:  Medicare is medical insurance and does not cover long-term custodial care.   The costs of assisted living or nursing home or in home custodial care can be alleviated through long term care insurance, which is also an important planning issue, but not the subject of this article.  Other items not covered by Medicare Parts A and B include routine dental care and dentures, alternative care (acupuncture/naturopathy), hearing aids or exams, routine vision, and eyeglasses.

Beyond Hospital (Part A) and Medical Insurance (Part B)

Parts A and B are what is known as Original Medicare.  But the choices and options do not stop there.  This is extremely important, because there are decisions that you need to make and options that you have when first enrolling in Medicare which may not be easily available to you later.  First, you may wish to purchase a Medigap (Supplemental Insurance) policy.  These policies serve to fill the “gap” between the allowable costs and what Medicare pays, that is, Medigap policies pay the 20% coinsurance and hospital deductible and co-pays.

Medigap plans come in several standardized flavors, defined by the government, but offered by private insurance companies.  And here, similarly to coverage under the Affordable Care Act, the same standardized plan does not have a standardized price.  You can pay more or less for the same exact level of coverage.  Information is key to making a wise choice.  Although you can apply for a Medigap policy at any time, there are certain times at which the companies must  sell you a policy at their community rate, regardless of your health status.  This is called a Guaranteed Issue period; the most important one occurring for the six month period starting with your enrollment in Part B.

Medigap policies vary widely in price between companies, and premiums increase with recipient’s age.  After explaining another option, Medicare Advantage, we will briefly discuss some of the considerations that go into the choice between Medigap and Medicare Advantage.

Part D – Prescription Drug Coverage

Prescription drug coverage under Medicare (Part D or included in a Medicare Advantage Plan) is provided by private insurance companies and comes with a confusing array of premiums, co-pays, deductible and coverages.  Each company has its own formulary and own system for classifying drugs.  Fortunately, there is a government website http://medicare.gov/, into which you can enter your prescriptions and dosages, and the secure system will calculate how much those drugs will cost you on an annual basis under each plan.  Although the plans often change, as may the prescriptions you need, you are allowed to change plans once a year during open enrollment (October 15 – Dec 7), so that you have an opportunity to adjust to those changes.  Similar to Part B, failure to have prescription drug coverage after age 65 can result in penalties if you do wish to sign up at some future time.

Medicare Part C

Your other option is to go with Medicare Part C, better known as Medicare Advantage Plan.  This health insurance is offered through private companies that are approved by Medicare. To take part in Medicare Part C, you must have already enrolled in Part A and B.  You still must pay your Part B premium, but instead of Original Medicare, you deal directly with the private insurance company.  These private plans often take the form of HMOs or PPOs. These plans must cover the same services as Medicare Part A and Part B, but they do have different costs and rules associated with the plans. Additionally, they may include services or offer discounts on items not covered by Original Medicare, such as vision and dental care.

Many Medicare Advantage plans include prescription drug coverage and if this is the case, you will not need to purchase a Part D Prescription Drug Plan. Since these plans are offered by private companies, and the services vary from plan-to-plan, it is extremely important to compare the costs and coverage of each plan.   Here again, you can use the Medicare.gov website to determine the coverage and costs of your individual prescriptions under each company’s plan.  You can also compare the differences in co-pays, deductibles, and other features on the website.

Health insurance 2

Medicare Choices

Here’s the hard part:  Should you go with Original Medicare plus Medigap, and Prescription Drug Plan or should you select a Medicare Advantage Plan.   Remember, this is a choice that needs to be made when you enroll in Medicare.  Which is better for you really depends on your individual financial and health circumstances.  Medicare Advantage is certainly simpler, and may well cost less in terms of premiums than the Original Medicare plus combo.  However, your costs may ultimately be higher with Medicare Advantage because of the co-pays and deductibles, which you will avoid under Original Medicare plus Medigap.

As mentioned above, Medigap eliminates most co-pays and deductibles. You have full (close to 100%) medical and hospital coverage. If your health is precarious, or if you have genetic risk factors, or if you just don’t enjoy risk and uncertainty, you may want to go with full coverage.  If you cannot afford a Medigap and a Part D Prescription Drug plan, you may wish to go with a Medicare Advantage plan, which may have a lower premium, but will have co-pays and deductibles.  You will pay these costs as you go along, when health issues occur.  If you are quite healthy, your costs could be lower on a Medicare Advantage Plan.  You can switch from a Medigap plan to Medicare Advantage plan, but you may not be easily able to go in the opposite direction.

Secondly, Original Medicare plus Medigap will allow you to see any doctor or go to any hospital in the United States that accepts Medicare.  With Medicare Advantage plans, you are limited to the plan’s service area, and to the doctors and hospitals that accept that particular Medicare plan, except in emergencies.  With an HMO, your insurance may not reimburse non-emergency treatment outside of their network.

There are no easy answers.  It depends on individual circumstances and preferences.  Also since there are so many companies competing for your business, you need to consider the biases and incentives of your information source.  For comprehensive, free, and unbiased information we recommend that you contact your state insurance agency.  In Washington the website is http://www.insurance.wa.gov/about-oic/what-we-do/advocate-for-consumers/shiba/about-shiba-services/index.html; in Oregon, http://www.oregon.gov/dcbs/insurance/SHIBA/Pages/shiba.aspx.

Since insurers (whether Part D Prescription Drug coverage or as part of a Medicare Advantage plan) cover only certain drugs and can change which medications are covered from year-to-year, our recommendation is to go to www.medicare.gov and enter the prescription drugs you are currently taking to determine the ideal plan for you.  Costs are substantially different from plan-to-plan, meaning you could save thousands of dollars a year by simply reviewing plans and paying fewer out-of-pocket expenses.  One important tip is to see the overall star rating on Medicare’s website. You will want to ensure you are selecting an insurance provider that has serviced people well in the past.

As health care costs continue to rise, it is increasingly more important to start estimating your health-related expenses in the future.  It is extremely challenging to build a retirement plan if you don’t have an accurate picture of expected future expenses.  One of the challenges you will likely face is estimating health care costs between retirement and age 65 when Medicare begins. It is worth asking now whether you can stay on your employer’s plan in retirement to estimate the costs.  If you can’t, you should research what it would cost to go through the health insurance exchange or directly through an insurer to obtain coverage.

Premiums aside, remember to have money saved in a “rainy day” fund.  Insurance won’t cover everything, and it is vital to have cash you can access for emergency medical situations.  While you can’t plan for every scenario, you can help protect yourself against financial struggles by being prepared.

As a closing reminder, since most medical situations are often very complicated and complex, it is always a good idea to ask questions about what is and is not covered.  We have covered general information and strategies related to many health care situations, but this information is not related specifically to your individual situation.  Since the laws are very specific and hospitals and doctors have their own rules, you should always inquire into how your medical benefits will be applied.

Regardless of your age, here are a few general tips:

  • Make sure that you have health insurance.
  • Check out the Health Insurance Marketplace and see what is available.
  • Be informed:  see what your insurance will cover before services are performed.
  • Set a reminder to consider enrolling in Medicare three months prior to your 65th birthday.
  • Before enrolling in Medicare, contact your state insurance agency and get free, unbiased advice from trained volunteers.
  • Shop around not only when first enrolling, but annually; plans, costs, and the services included change often.
  • Have money set aside for medical emergencies. You never think they will happen to you, but when they do, you will appreciate the safety net you have created.
  • Review your health insurance coverage annually to make certain it is adequate.
  • Research your options and potential penalties if you lose coverage and don’t enroll in another plan immediately.

We wish you the best of luck in reviewing your health insurance! If you have questions about how the costs of health insurance will affect your retirement plan, we recommend speaking with your Empirical Advisor.

References
2. Minimum essential coverage is defined as individual market policies, job-based coverage, Medicare, Medicaid, CHIP, TRICARE, and certain other coverage.

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About Ethan Broga

Ethan is head of the Financial Planning Committee which oversees the development and expertise of Empirical’s financial planning recommendations. He holds an M.S. in financial planning and is a Certified Financial Planner®.

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