Making Your Money Last

Health Care Reform:
What It Means for Retirees

Changes to Medicare and to the individual insurance market will affect retirees. Here are key details that you need to know.

By Susan B. Garland, Editor, Kiplinger's Retirement Report

March 24, 2010

EDITOR'S NOTE: This article was updated on April 30, 2010.

Here is how the new health-care reform law will affect retirees.

Medicare. The Part D prescription-drug doughnut hole will be gradually reduced by 2020. Seniors who reach the doughnut hole in 2010 will receive a $250 rebate. Starting in 2011, drug companies will be required to provide a 50% discount on brand-name drugs bought in the coverage gap. The federal subsidy for Part D premiums will be reduced for higher-income beneficiaries. Cost sharing for preventive-care services is eliminated.

A new advisory board would submit recommendations to Congress to reduce the rate of growth in Medicare spending. The board is not allowed to submit proposals that will ration care or change benefits.

More Medicare beneficiaries could be snared by the Part B premium surcharge for high-income seniors. The law freezes the income thresholds for income-related Part B premiums from 2011 to 2019.

Medicare Advantage plans. Studies have found that Advantage plans cost the government 14% more on average than traditional Medicare. To get costs more in line with traditional Medicare, the new law freezes federal payments to private Medicare Advantage plans at 2010 levels. These plans will be required to spend at least 85% of their revenues on patient care. Plans that prove they provide high-quality efficient care will get rebates from the government.

New taxes. The law raises the Medicare payroll tax by an additional 0.9% (to 2.35%, from the current 1.45%) on earned income above $200,000 for individuals and $250,000 for joint filers. It also imposes a Medicare tax of 3.8% on investment income, such as dividends and interest, for individuals with adjusted gross income above $200,000 and joint filers with AGI above $250,000. These taxes will go into effect in 2013. Distributions from pensions, IRAs, 401(k)s and other qualified retirement plans will be exempt. Self-employed people will have to pay the additional tax.

Medical tax deductions. Beginning in the 2013 tax year, the threshold for the itemized medical deduction rises to 10% of AGI, from the current 7.5%. Individuals age 65 and older, and their spouses, will be exempt for the tax years 2013 through 2016.

Early retirees and self-employed. For most workers who receive employer-sponsored coverage, the new law is not likely to have much impact. But the law provides a number of protections for those who need to buy insurance in the individual market. Six months after enactment, health insurers cannot place lifetime limits on the value of coverage or revoke existing coverage. Starting in 2014, insurers must accept all applicants, including anyone with preexisting medical conditions.

Until then, individuals with preexisting conditions who have been uninsured for more than six months will be eligible to enroll in a national high-risk pool and receive subsidized premiums. Cost sharing will be capped at $5,950 for individuals and $11,900 for families. This could be especially helpful to early retirees in Arizona and Nevada, which do not have state high-risk pools. It could also help Floridians, because Florida's is not open to new enrollees.

Exchanges and coverage subsidies. Nearly everyone will be required to buy coverage, or pay a penalty. Early retirees, the self-employed and others without insurance will be able to purchase coverage through state-based exchanges. Tax credits will be available to individuals and families with income between 133% and 400% of the poverty level (that's $19,378 to $58,280 for a couple).

Private insurance companies can sell policies through the exchanges. Buyers will choose among four benefit categories.

Retiree health plans. If you are 55 or older and receive retiree health benefits from your employer, you may benefit from a government reinsurance program. The program will reimburse employers or insurers for 80% of retiree claims between $15,000 and $90,000. Payments from the reinsurance program will be used to lower the costs for enrollees in the employer plan. The program will end on January 1, 2014. It will not reimburse costs for retirees who are eligible for Medicare.

Long-term care. In 2011, workers can enroll in a national insurance program to cover non-medical services in case of disability. After a five-year vesting period, the Community Living Assistance Services and Supports program will provide individuals who become disabled with a benefit of about $50 a day. The program will be financed with voluntary payroll deductions.

For more authoritative guidance on retirement investing, slashing taxes and getting the best health care, click here for a FREE sample issue of Kiplinger’s Retirement Report.

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