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Health Costs: Weaving Your Own Safety Net

Personal Business


Lulled into a false sense of security by years of automatic employer-sponsored health insurance, many people don't give enough thought to how they're going to pay medical bills after they retire. They don't realize that the good old days of lifetime health-care benefits are gone and that many companies are either asking retirees to pick up the premiums or axing the coverage altogether.

"People have to wake up and realize Corporate America isn't going to take care of them," says Allen Steinberg, a benefits consultant at Hewitt Associates in Lincolnshire, Ill. According to a poll by Foster Higgins, a New York benefits consulting firm, 35% of 1,787 large employers provided health-care benefits to retirees last year, down from 57% in 1987. Among smaller companies, only 9% offered continuing coverage.

People can't necessarily depend on Uncle Sam either, despite talk of national health reform. Many of the Clinton proposals favoring retired workers are expensive and may not pass. "You've got to plan for retirement health care as if the Clinton plan didn't exist," cautions Joan Gruber, a Dallas financial planner.

Yet when a retiree has to pay full price, the cost of health care can be staggering. Until 65--when government-run Medicare benefits begin--an early retiree can expect to spend $2,500 to $5,000 a year for a traditional indemnity insurance policy, and maybe half of that for a health-maintenance organization. (An early-retirement couple will pay $5,000 to $12,000 for indemnity insurance.) At 65, insurance to supplement Medicare coverage is likely to cost $600 to $2,500 annually. And a 65-year-old who worries about being wiped out by a nursing-home stay will pay about $1,800 a year for lifetime long-term- care insurance.

If you're already retired, there may be little you can do beyond reaching deeper into your wallet. But if you're still some years away, you have options. First, as if you needed another reason to stash away the maximum in your 401(k) plan, keep in mind that some of the savings will probably have to fund medical expenses as well as day-to-day living expenses and travel. The sum you'll need could buy a vacation condo. Assuming costs rise 10% in the first few years and then decline 5% as reforms kick in, a married 45-year-old would need $275,000 for individual medical and dental insurance premiums from retirement at 55 until age 80, according to Actuarial Sciences Associates, a benefits consultants subsidiary of AT&T.

Some companies are experimenting with VEBAs, a savings vehicle designed to amass funds for medical expenses. Short for voluntary employee-benefits association, it allows you to invest aftertax dollars in an account that builds tax-free. The best part is you don't owe any taxes when you take out money, as long as you use it to pay medical bills. You can make withdrawals at any age. However, if you leave the company, you can no longer contribute to the account.

WRITTEN PROMISE. Many companies offer generous benefits packages to coax graying workers to depart. Before accepting a buyout, get in writing that any health benefits promised can't be changed or terminated, advises Laurie McCann, an attorney with the American Association of Retired Persons.

If you want to retire early but don't qualify for continuing health coverage, you can still buy company insurance for at least 18 months. Under the Consolidated Omnibus Budget Reconciliation Act of 1986, or COBRA, companies with 20 employees or more must offer departing workers this option.

Once on your own, buying insurance at a group rate through a trade or professional association is usually cheaper than an individual policy. If you can tolerate limits on your choice of doctors, an HMO may be the cheapest alternative. Douglas Hyer, a Manhattan insurance consultant, says one of his clients, a 56-year-old retired executive with two dependent children, pays $11,900 a year for a traditional indemnity policy that covers 80% of expenses after a $1,500 family deductible. If the family opted for Group Health Inc.'s HMO coverage, it would pay a flat $6,996, plus $10 per office visit.

For retirees 65 or older, Medicare supplies very basic coverage. Prescription drugs aren't covered, and health providers are often reimbursed below prevailing rates. Medicare Part A, which pays for hospitalization, is free to almost everyone, while Medicare Part B, covering doctors' visits, is $41.10 monthly. Many benefits consultants believe affluent retirees will eventually be charged more for Medicare, just as higher-income seniors are now taxed for Social Security benefits.

Without company benefits to supplement Medicare, many retirees must turn to Medigap coverage. There are 10 plans that differ by whether they cover such extras as prescription drugs and skilled nurses. For more details, you can obtain a free booklet, Consumer's Guide to Medicare Supplement Insurance, from the Health Insurance Association of America (800 942-4242).

A small but growing number of HMOs cater to Medicare patients. By paying an annual flat fee of about $120 plus $5 per office visit, patients receive broader benefits than under traditional Medicare. (In some competitive areas, the annual fee is waived.) These benefits are usually capped and include eye exams and preventive- care programs. Call the HMOs near you to see if they accept Medicare patients.

Retirees fear that a serious illness will wipe out their savings. Given that the average cost of a year's stay in a nursing home is $40,000, well-off retirees should consider a long-term-care policy that protects assets. Some 135 insurers sell individual policies, but a less expensive option--if available--is to buy long-term-care coverage through your employer at a group rate. Only a fraction of employers now offer such insurance to employees, retirees, and sometimes their parents, but more are expected to do so.

When shopping for long-term care insurance, look for financially sound insurers that offer policies with broad coverage, including adult day care. Experts advise covering 80% to 100% of the costs of nursing homes in your area; daily benefits are typically $50 to $250. If you don't think you'll need long-term care for 10 to 15 years, consider a more expensive policy with a clause that protects against inflation.

New York, Connecticut, and Indiana encourage elderly residents to buy long-term-care insurance by promising that when coverage is exhausted, they will qualify for Medicaid without having to deplete their assets. Typically, when savings shrivel to $2,000, people become eligible for Medicaid--which, unlike Medicare, pays for extended nursing-home stays. Other states are expected to adopt such programs.

Nobody wants to believe that a serious illness will destroy a much-anticipated retirement. But if that happens, knowing that you weighed your health-care options in advance should give you some comfort.



401(k) plan This general tax-deferred account can help pay for medical costs and everyday living expenses.

VEBA Lets you accumulate aftertax dollars in a tax-free account to pay for medical bills and insurance premiums. But many companies still don't offer it.


Extended company medical benefits Many employers are either asking retirees to pick up a bigger portion of the premium or eliminating the coverage entirely. If your company now offers health benefits to retirees, check whether it can alter them later.

COBRA benefits If your company health insurance

doesn't continue, you can purchase the coverage for at least 18 months after you leave.

Private insurance Explore buying group insurance from an HMO or professional association. These options are less expensive than individual major medical plans.


Medicare Government program covers only the most basic doctor and hospital bills.

Medigap insurance Choose one of 10 standard plans to supplement Medicare reimbursements, varying by whether they cover such extras as prescriptions and preventive care. Premiums range from $600 to $2,500 a year at 65.

Long-term-care insurance Costing about $1,800 a year for lifetime care if you sign up at age 65, it pays for extended nursing-home stays or at-home care.

Medicaid If nursing home costs shrivel savings to $2,000, the federal health-care program will pay for your stay.


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