The Healthcare Reform Law and how it Affects Retirees

The health care reform law will bring a mixed bag of good and bad news—with many of the changes affecting benefits provided to retirees by former employers. Here's a look at the key trends that will impact retiree health care spending.

 
Good News: Improved Medicare Prescription Drug Benefit----The Affordable Care Act (ACA) boosts the value of the Medicare D prescription drug plan by closing the notorious “doughnut hole.” That's the coverage gap that starts when a beneficiary's annual drug spending hits $2,830, and resumes at the catastrophic level ($4,550). Fidelity estimates that about 30 percent of seniors enter the doughnut hole in any given year.

Good News: Pre-65 Insurance Options Multiply--Workers who retire before age 65 – sometimes involuntarily – face some tough challenges replacing the group health coverage they enjoyed at work. The ACA creates new public health insurance exchanges that will open for business in 2014. Their aim is to create competitive marketplaces offering individuals high quality, affordable coverage. At the same time, insurers will be barred from turning away applicants due to medical conditions, or charge them higher rates – although they will be able to charge up to three times the differential between the oldest and youngest insured in the plan. Finally, the ACA offers a combination of credits and subsidies aimed at keeping policies bought in the exchange affordable

Mixed news: Health Savings Accounts Proliferate--Health Savings Accounts (HSAs) can help workers save money to offset health expenses down the road in the retirement. Created during the Bush years, HSAs have very attractive tax features: contributions and account growth are tax free—as are withdrawals, so long as the funds are used to pay for healthcare. Unused funds can be rolled over from year to year, and the accounts offer IRA-like portability. HSAs are gaining ground among workplace plan sponsors, mainly because they are tied to high-deductible insurance plans that reduce premium costs up to 30 percent. About 27 percent of retiree plan sponsors offer an HSA option, according to the Towers Watson/National Business Group on Health survey. But 25 percent of companies plan to convert their current retiree health coverage subsidy in the coming year But the jury's still out on HSAs as a retirement saving vehicle. Most participants use the accounts to fund current-year expenses, since insurance plan annual deductibles linked to HSAs must be at least $1,200 for individuals, or $2,400 for family coverage. And the deductibles can run much higher. As a result, Fidelity says only 24 percent of HSA accounts at plans it administers are used for long-term saving.And, since HSAs have only been on the scene a few years, average account balances are quite small, averaging $1,355 in 2010.

Bad news: Affluent Retirees Face Steep Hike in Medicare Premiums--The ACAACA freezes the threshold at 2010 levels through 2019, starting this year. The ACA also extends the income threshold formulas to seniors enrolled in Part D prescription drug plans. The changes will affect just five percent of Medicare enrollees this year, although that figure will rise to 14 percent by 2019 as more seniors jump past the frozen income threshold levels, according to the Kaiser Family Foundation, a non-profit health policy and research organization. High-income seniors who pay both Part B and Part D premiums could see their combined premiums rise anywhere from $300 to $700 per month by the end of the decade, according to Juliette Cubanski, associate director of Kaiser’s Medicare Policy Project. “That’s a considerable sum, considering that the base Part B premium for most people this year is $96.40,” she says. The new income thresholds also affect people who choose a Medicare Advantage plan (Part C). These are privatized managed care plans that replace traditional Medicare, and usually incorporate prescription drug coverage. Advantage enrollees typically pay the monthly Part B premium plus a supplemental premium to the Medicare Advantage plan; now, these premiums are being adjusted to factor in the higher-income amounts for Part B and Part D coverage, where applicable.

Credit to Mark Miller who is a journalist and author and writes about trends in retirement and aging. He has a special focus on how the baby boomer generation is revising its approach to money, careers and lifestyle after age 50.