Scaling Back: How to Plan For Health Costs Pre-65

By Sarah Rubenstein
4 May 2006
The Wall Street Journal
(Copyright (c) 2006, Dow Jones & Company, Inc.)

Larry Hartzke thought he had his finances in order when he decided to retire at age 52. So he was startled by the letter his health-insurance company sent him just over a year into his retirement.

Mr. Hartzke, who had worked in state government for several years but whose health benefits ended soon after he left, learned from the letter that he would have to swallow a 25% rate increase if he stuck with the health-insurance plan he had bought for himself and his wife after he retired.

"My investments aren't going up 25% a year, I'll tell you that," says Mr. Hartzke, now 54. "Five or 10 years down the road, what is that going to mean in terms of what we can afford to do?"

The cost of health insurance can be a jolt for early retirees whose employer coverage ends or gets scaled back, not to mention self-employed older people who pay for their own health insurance. Too young to sign up for Medicare, which kicks in at age 65, early retirees often must buy their own coverage for the first time in years, or ever. What they find in the individual-insurance market may lead them to wax nostalgic about the health benefits that their former employers provided.

At work, employees contributed an average of $51 a month for single-person health-insurance premiums in 2005, according to the Kaiser Family Foundation and Health Research and Educational Trust. In the individual market, monthly premiums can cost people in their 50s and 60s hundreds of dollars. Prices often increase according to an enrollee's age. In most states, individual applicants can see additional increases -- or outright rejection -- if they've had health problems, as this article describes.

The issue is becoming even more pressing as employers cut back on the health benefits that they offer to retirees, and as baby boomers age into this group.

When Robert Connors lost his job around the time he turned 63, the former insurance customer-service representative in Lakeland, Fla., looked in vain for a new job, ultimately deciding to retire. In the two years until he was enrolled in Medicare, he says he blew through more than $20,000 to pay for health coverage for himself and his wife, Diane, who has adult-onset diabetes. They're currently paying $605 a month to cover Mrs. Connors, 61 years old.

"It's not something I'd anticipated when we got into retirement," says Mr. Connors. "In fact, it was a shock."

There aren't a lot of quick fixes for people nearing 65, short of finding a job with benefits. But that's not exactly what early retirement is all about.

Here's advice that may help keep the costs from being a shock and may even help reduce them a bit.

Make health insurance a line item -- a big one -- in your future budget. Owen Malcolm, a fee-only certified financial planner in Norcross, Ga., says it's important to adjust your mindset to view health insurance as a major expense, even potentially a deal-breaker as you decide whether to retire. "Make an aggressive assumption as far as how much money you're going to need," he says.

The cost of health insurance catches people off-guard in part because it's so unpredictable. Prices can vary widely according to a host of factors, including where you live, the benefits a plan provides, the size of a deductible and your health conditions.

Mr. Malcolm advises couples to assume they'll pay about $1,000 a month for coverage -- plus a deductible of $1,000 or $2,000. A $1,000 monthly premium is slightly more than what some people pay, he says. But that amount is reality for many of his clients.

There are ways to come up with a more fine-tuned prediction. You could describe your health history to a health-insurance broker who is familiar with your regional market. The goal would be to get a range and make sure you wouldn't get rejected, says Dick Harlow, a broker in Reston, Va. and a former president of the Association of Health Insurance Advisors.

Another option may be to apply directly for coverage before you leave your job. There can be a fee for that, and many insurers also require you to submit the first month's premium with the application, though you typically get the premium money back if you don't end up enrolling in the plan.

Expect your costs to increase. Once you have a sense of what you'd pay in the first year of retirement, factor in price rises for the following years.

"Double-digit increases" -- 10% to 20% year over year -- "are not uncommon at all in the individual market," says Jim Oatman, chief actuary for individual medical insurance at Assurant Health, a Milwaukee-based insurer that provides coverage to individuals and small businesses in most states.

Jeanne Koonce, 62, of Sun City, Ariz., says she has seen her monthly premium rise to $685 a month from about $250 in 1993, when her retired husband enrolled in Medicare and she got her own coverage on the open market. At first it was a "gradual increase," she says. Eventually, "you couldn't believe your eyes when you saw it."

Mr. Hartzke, who faced the 25% increase, says the original cost of his plan, which had separate $5,000 deductibles for both him and his wife, came out to $356 a month. His insurer, in its letter, said the increase was because of "an increase in health care utilization and medical costs" and was "not based on your personal claims experience."

Control what you can. Applying for individual health insurance can be especially tough for early retirees, because they're more likely than younger people to have health problems that scare insurers.
But there are certain aspects of your health over which you have more control -- and could impact the insurance premium you get.

For instance, do you smoke? If so, you may end up with a higher premium. On ehealthinsurance.com, for example, one Blue Cross Blue Shield of Georgia plan in Atlanta for a 60-year-old, non-smoking man costs $413.41 a month, with a $2,000 deductible. The plan costs $501.47 a month if that same man smokes.

You also may start with a higher premium if you're overweight, though just a few extra pounds doesn't normally have an impact, says Kathy Thomas, a consultant based near Milwaukee who helps insurers design their products and advises them on underwriting. If you're morbidly obese, in many cases you'll be rejected, she says.

Factor health insurance into your move. In retirement, health insurance may be a factor in deciding where to live.

State health-insurance laws can vary significantly. Five states -- New York, New Jersey, Maine, Vermont and Massachusetts -- have the most comprehensive "guaranteed issue" laws that prevent insurers from rejecting applicants. Also, laws in these states place significant restrictions on insurers' abilities to adjust the price of plans based on your health or other factors. One of the issues, though: Often coverage for pre-existing conditions may be excluded for a set period of time such as six or 12 months.

For young and healthy people, insurance often is more expensive in these states than what might be available elsewhere. But if you're older and have health problems, you may find options in these states that are more attractive than what you would get elsewhere. For Brooklyn, N.Y., ehealthinsurance.com lists just one insurance plan that's available. The site says a 60-year-old can get that plan for $365.50 a month, with no deductible.

Moving solely for health-insurance reasons is "not a realistic decision for a lot of people," says Karen Pollitz, a Georgetown University Health Policy Institute project director who studies the individual-insurance market. Still, she says, occasionally "I've seen people do it."

This Web site has consumer guides that explain how insurance laws work in different states. Some states also have "high risk pools," another coverage option, though your costs under these plans can also be high. This Out of Pocket column explains HIPAA, a federal law that also helps protect some people from being rejected.

One other pointer if you're moving: Regardless of your health, inexpensive insurance is often tough to come by in rural areas, says Bob Hurley, vice president of customer care for eHealthInsurance.