Health Care for Independent People: Part II

This post is part II in a series exploring the different options available to people who don't have health insurance through their jobs, or who are hoping to retire early or go freelance and need to plan for healthcare costs. In part I, I talked about self-insuring by setting up a large emergency fund for healthcare costs. For many people, putting away several thousand dollars in a dedicated account could take care of all maintenance healthcare costs as well as treatment for minor conditions and injuries. But in a country where cancer or a broken leg can bankrupt you, self-insurance isn't enough. Some kind of insurance is necessary.

One source of health insurance often mentioned in books on early retirement is joining a professional association that offers group health plans to its members. Since I plan to still do some freelance or casual work in retirement, this might be a good option for me. I checked out two well-known associations in my field to price health insurance through them. (It's worth noting that neither of these associations requires you to actually make money or have a registered business in the field in order to be a member--you simply must pay the dues. This is probably true of many other professional associations as well.)

Association A offers an HMO from a national insurance provider. The cost? $1287.58. Per month. For an individual. For a "family" (member plus spouse and children) it's $4043.00. They also offer a PPO, but it's even more expensive.

But they have another option--this one's only $26.95 per month, plus a $20 enrollment fee. This "customized discount plan" offers 10% to 30% off most health care costs. Sounds okay for physicals and prescriptions, as long as you don't get seriously ill or spend any time in the hospital. Cancer treatment can cost $300,000 a year. 30% off $300,000 is $210,000. That'll take a chunk out of anyone's nest egg.

Association B is a bit less grim. Their HMO is $477.08 per month for an individual. Still not a happy number, but one that's at least within the realm of possibility. They also have a "health savings plan," which seems to operate like high-deductible insurance. The deductible is $5200, and the annual premium for a family is $3016--less than the monthly cost at Association A.

I was surprised at the huge difference in cost between the plans offered by these two groups, so I checked out a third group, a group for graphic designers. This group offered the same HMO plan as association B. Their second option brought me to a site that offered quotes on many different types of plans, all of which were discounted because of membership in the association.

When I entered my information (fake contact info but accurate health and geographical info), I was given seventeen plans to choose from, ranging in price from $67.00 per month to $267.00 per month. Some of them were PPOs (what most people think of as "regular" insurance, in contrast to an HMO's "managed care") with quite good benefits. Others had high deductibles, but good catastrophic coverage. There were also a couple of health savings plans, none of which seemed as shady as the "discount plan" offered by Association A.

Are associations a good way of getting health insurance? From this quick survey, it looks like some organizations offer decent plans, but it depends a lot on the association. The largest association I looked at offered the best deals, and was also the most geographically diverse (the other two associations only offered plans in certain states and metropolitan areas). Even for associations with good health insurance offerings, there's still no guarantee that you'll be approved for coverage.

What about the prices? In the next post in this series, we'll see how these prices measure up by venturing into the frightening world of individually purchased health insurance.

Health Care for Independent People: Part 1

For anyone who wants to live outside the confines of regular employment, one of the biggest questions is, "What about health insurance?" This question is so big and scary that many resources on early retirement pretend it doesn't exist, or simply say, "You must have health insurance," as though it's a given.

Back in March, I laid out my rough plan for becoming financially independent by sometime in my thirties. I also examined how a potential child could affect my budget. Today, it's time to tackle healthcare.

The traditional solution to post-retirement healthcare is Medicare. There’s a heck of a long time between 35 and whatever-astronomical-age-I’ll-become-eligible-for Medicare, and I'm not overly confident that it will exist in a form like it does today by the time I get there. So for the purposes of this post, Medicare isn't a factor.

The first pillar of my healthcare plan, and one I would recommend to anyone who's planning to live without employer-sponsored health insurance, is to self-insure for routine medical expenses like maintenance prescriptions and annual physicals. The premiums for health insurance that covers these expenses are often astronomical, as we'll see in part two of this series. For many people, it will be far cheaper to pay these routine costs out of pocket.

At my current level of health, I would expect to pay about $1700 annually for health maintenance. This covers my two current prescriptions, which would cost about $105 a month, a yearly physical with blood work and a pap smear, which according to the bill from my doctor would have cost $359 without insurance, and perhaps a second doctor's visit for a straightforward health problem, which would cost about $150. These costs should be built into my baseline post-retirement budget.

I would also plan to "self-insure" (meaning I would pay out of pocket) any healthcare cost under $10,000. This would cover minor but less routine costs like some emergency room visits, extra tests, and minor injuries. I'd put about a third of this in a Health Savings Account, currently capped at $2850 in contributions per year. This account functions like a Roth IRA--money is taxed when you put it in, but is not taxed when you take it out. For long-term savings, this is an excellent deal, since the interest on your savings can far exceed the initial contributions. Unlike a Roth IRA, there are no age limits on when money can be used. Eventually, the HSA would become large enough to contain all of my self-insurance money. For the first few years, I'd put the balance of the $10,000 in a liquid and low-risk investment, like a high-yield savings account.

Even with a large amount of money set aside for self-insurance, major medical events like surgery or cancer can be catastrophic. Cancer treatment can cost $300,000 a year. Young people may get away with not having insurance for short periods of time (I have, and am none the worse for it), but any long-term budget must include some form of health insurance. What are the options for getting health insurance on your own? How much does it cost? We'll start exploring this in Health Care for Independent People: Part 2