EDITOR'S NOTE: This article was originally published in the August 2012 issue of Kiplinger's Retirement Report. To subscribe, click here.
With the health care law moving to center stage in the presidential campaign, it's easy to get confused by all the rhetoric. Time for a reality check: If you are in your fifties or sixties and need to find an individual insurance policy, you'll likely be better off in the future health care marketplace.
Starting in 2014, the law, which was recently upheld by the U.S. Supreme Court, will prohibit insurers from denying applicants coverage -- or charging them more -- based on preexisting conditions, such as heart disease or Parkinson's. Also, tax credits to help defray the cost of premiums will be available to married couples with modified adjusted gross income of up to $60,520 and to individuals with modified AGI of up to $44,680 (those numbers are in 2012 dollars and will be adjusted for inflation in 2014).
Moreover, the law will narrow the difference in premiums between policies sold to older applicants and younger ones, leading many experts to believe that costs for older adults will decline. The new "age rating" rule, together with the subsidies, could mean that older adults who didn't have the money to buy coverage in the past "can make a different judgment about affordability now that they have a little help," says Geraldine Smolka, senior strategic policy adviser at the AARP Public Policy Institute.
Despite the likely improvements for a large number of older applicants, many seniors, especially those who are not eligible for tax credits, could still have a tough time affording the premiums, co-payments and other out-of-pocket costs. Medical costs are likely to continue to rise, and it's unclear whether subsidies will keep pace with rising premiums in future years.
Still, many early retirees and the growing number of older adults who are self-employed are likely to get some relief. The number of uninsured persons ages 50 to 64 has exploded in the past decade -- to 8.9 million in 2010, up 71% from 2000, according to an analysis of U.S. Census data by Smolka and co-researchers. The increase has been due in part to growth in that age group, rising health care costs and the loss of employer-based coverage during the economic downturn.
Under the health care law, about 3.9 million uninsured older adults would be eligible to receive tax credits, and 3.4 million would be eligible for Medicaid coverage, according to the AARP study. (Medicaid estimates would change if some states reject federal funds to expand the program, as the Supreme Court ruled that states could do.) The study also estimates that more than half of the 4.2 million older adults who were covered by individual plans in 2010 would be eligible for tax credits or Medicaid coverage.
To be eligible for tax credits, you must buy a commercial policy on a state-based insurance exchange. The exchanges will offer four benefit plans, varying in price by the percentage of the total expenses that the plan would cover. For example, the "silver" plan, the second-lowest benefit plan, would have a 70% actuarial value, meaning that consumers would pay on average 30% of the expenses, including deductibles, co-insurance and other out-of-pocket costs.
Even if you're not eligible for government aid, many experts believe costs of individual policies will decline for many older adults. That may be especially true for older adults who are paying high rates because of a medical condition.
The law will allow insurance companies to continue to charge older, sicker applicants more than younger ones -- but there will be restrictions. Depending on the state, insurers can now charge older applicants five or six times more than what they charge younger applicants in the same geographic area, says Carrie McLean, consumer specialist with eHealthInsurance.com, an online broker. Under the new law, the "age band" can be no wider than three-to-one for the same health plan, even for older applicants with costly preexisting conditions. McLean says she expects that premiums will drop for less-healthy older people "because so many younger, healthy adults will be brought into the insurance market."
According to one private analysis, premiums could decline by about 12% for individuals who are 55 to 64 in states that now allow insurers to impose a five-to-one age rating. Premiums in these states could rise for young adults, according to the study.
Tax credits to defray the costs of premiums will be available to applicants with AGI of up to 400% of the federal poverty level, or $44,680 for an individual and $60,520 for a couple in 2012. The credit will limit the share of income that a person will pay for premiums, and the credit's size will shrink as income rises.
For example, someone at 133% of the poverty level ($14,856 in 2012) will not pay more than 3% of income for premiums. Someone at 400% won't pay more than 9.5% of income. Those with incomes below 133% will generally be eligible for Medicaid. People with incomes of up to 400% of poverty also could get subsidies for deductibles and co-payments.
The size of the tax credit will be tied to the silver plan's cost. Consider a 55-year-old whose income is 350% of the federal poverty level -- $39,095 in 2012. Based on estimates that the silver plan could cost a 55-year-old $8,495 in 2014, she could pay $3,714 (9.5% of income), and the subsidy could be $4,781.
Because the premium could rise with age, older individuals at similar income levels could get bigger subsidies. A 64-year-old whose income is 350% of the poverty level could pay a premium of $10,172. He could pay 9.5% of income, or $3,714, while the government could kick in $6,458. (You can check your own possible tax credits with the Kaiser Family Foundation's calculator at http://healthreform.kff.org/subsidycalculator.aspx.)
Most individuals who do not buy coverage will pay a flat fee or a percentage of household income, whichever is greater. The penalty will be $95 (or 1% of income) in 2014, $325 (or 2%) in 2015 and $695 (or 2.5%) in 2016.
Some companies could decide to end health benefits to early retirees who are not yet eligible for Medicare. The 3M Corp. has already announced it intends to drop coverage for early retirees and instead give them money to buy individual policies on the exchanges. "You can argue that employers who provide retiree health benefits have done so because of the dysfunctional individual insurance market," says Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute. "Employers may decide that they don't need to do this anymore because there will be a viable alternative."