What Does the Affordable Care Act Mean for Retirees?

Starting Oct. 1, the Obamacare health insurance exchanges open their virtual doors for business in all 50 states.

What does the Affordable Care Act mean for retirees? It all depends on your age. If you're 65 or older and on Medicare, there are no big changes for you to worry about. But the ACA offers important new options for retirees who aren't old enough--or eligible--for Medicare.

Older adults often have trouble finding affordable individual insurance policies or can't get coverage at all because of pre-existing conditions. The ACA changes all that. Insurers can't turn you down for a pre-existing condition, and the law puts a floor under the benefits that policies must provide. Finally, the premiums will be affordable if you qualify for the law's sliding-scale tax subsidies and credits.

Here's a look at some of the key questions retirees face this fall as the ACA's final implementation kicks in.

If I'm retired, do I use the Obamacare exchanges or Medicare?
There's been some confusion about this question among seniors--in part because the ACA insurance exchanges are launching right around the same time that Medicare's fall enrollment period for prescription-drug and Advantage plans begins (Medicare enrollment runs from Oct. 15 through Dec. 7). The ACA exchange launch is supported by heavy publicity and advertising, and there's been a great deal of news coverage. Federal officials are worried that the noise is confusing some seniors, who may try to enroll on the exchanges--or fall victim to fraudulent signup campaigns.

For example, a survey released in September found that one in five seniors thinks (mistakenly) that they can enroll in a medical and prescription-drug plan through a health insurance exchange; 17% think health exchanges could replace their Medicare plan altogether.

So here's a clear message: If you are enrolled in Medicare Part A (hospitalization), you do not need to enroll on the exchanges to meet any of Obamacare's insurance coverage mandates. What's more, it may even be illegal for anyone who knows that you already have Medicare to sell you a policy on the exchange.

Medicare prescription-drug and Advantage plans are not available on the Obamacare exchanges. If you already have one of these plans, it's a good idea to reshop your coverage at least every couple of years, but you should do that just as you have in previous years, using the Medicare Plan Finder.

If you're retired but are too young for Medicare or don't meet the program's eligibility requirements (generally, 10 or more years of employment in positions that withheld FICA taxes), the ACA exchanges provide a new opportunity to get covered.

What do I do if I'm enrolled on an exchange and then qualify for Medicare?
If you buy an exchange policy and then qualify for Medicare sometime in 2014, enroll in Medicare (Part A and B) as soon as you qualify. Then you can drop your exchange coverage, but be sure to coordinate the end date with the effective date of your Part B coverage.

What's new in Medicare enrollment for 2014?
For Medicare Part D, 2014 is very much a year of status quo. Although some have worried that Obamacare would raise prescription-drug costs, average Medicare prescription-drug plan premiums won't jump next year--they are projected to stay around $30 per month, on average. But that doesn't mean individual plans won't make big changes, so it's still worthwhile to take a close look at your plan, even if you've been satisfied. Half of the 10 most popular plans are raising premiums at double-digit rates, according to Avalere Health, a health-care consulting and research firm. And plans sometimes change the deductibles or shift the rules on what drugs will be covered from year to year.

Cost controls in the doughnut hole are mostly unchanged from this year. The hole is the gap in coverage that starts when combined spending by you and your drug-plan provider reach $2,970, continuing until spending hits $4,750. As in 2013, there will be a combined 52.5% discount on brand-name drug coverage from manufacturers' discounts and government discounts. The discount for generics during the doughnut hole will increase to 28% from 21%.

The doughnut hole will be a bit smaller next year--by roughly $80 for most enrollees. But there's a wrinkle: Seniors will enter the gap at a somewhat lower level of spending next year--$2,850. Then, they'll exit at $4,550. This change isn't related to the ACA--it's determined by a formula tied to per capita total drug expenses of the Part D program, which are falling.

How do I shop the new insurance exchange?
First, make sure you're in the right place. You may be eligible for tax subsidies and credits, depending on your income (more on that below)--but they're only available if you shop in your state's official exchange.

Some states are running exchanges, and where they aren't, the federal government will be offering one. Find the official exchange in your state by visiting Healthcare.gov, the federal government portal on health reform. Input your ZIP code, and it will direct you to the correct state or federal exchange website.

If you don't qualify for subsidies and credits, you may want to shop unofficial exchanges, which are required to meet many of the same regulatory requirements as policies sold on official exchanges, but be careful--the federal government is warning consumers to be wary of con artists soliciting personal information and money for policies.

Enrollment runs from Oct. 1, 2013, through March 31, 2014, for this first year of the new system. Don't leave shopping for the last minute because there are bound to be plenty of hitches and kinks in this new system. States are hiring health insurance navigators who can provide assistance, though the staff-up process has been uneven.

What happens if I don't buy a policy?
The individual mandate, of course, has been the focus of much controversy. That's the requirement that people who don't already have coverage buy insurance or pay a penalty. For an individual, the penalty next year will be the greater of $95 or 1% of income; it rises gradually from there, to the greater of $695 or 2.5% of income for an individual in 2016.

What are the insurance options on the exchanges, and what will it cost me to get covered?
You'll be able to choose between four levels of plans: Bronze (lowest premiums), Silver, Gold, and Platinum (highest premiums). Plans with the higher premiums will have lower out-of-pocket costs. Bronze plans, on average, will cover 60% of enrollee costs, with the rest covered by deductibles and coinsurance. Gold and platinum plans will cover 80% and 90% of costs, respectively.

Insurance companies are permitted to set premiums up to 3 times higher for applicants over age 50 because of these applicants' higher utilization of health care. But for many, total premium costs will be held down by the tax credits and subsidies.

The tax credits are available to families with incomes between 100% and 400% of the federally defined poverty guideline. At 400%, families aren't required to spend more than 9.5% of income on premiums.

Next year, the subsidies are available for individuals with annual incomes between $11,490 and $45,960, and from $23,550 to $94,320 for a family of four. The definition of income used here is modified adjusted gross income, or MAGI, which includes wages, salary, foreign income, interest, dividends, and Social Security benefits. Although those figures may not sound very high, they will apply to many under-65 retirees, who--after all--don't have high levels of ordinary income because they aren't working.

The Kaiser Family Foundation has a subsidy calculator that illustrates health insurance premiums and subsidies under the new health insurance exchanges. State exchanges will also be offering calculators using specific insurance pricing.

Here's an example, courtesy of the KFF calculator: A 60-year-old individual (nonsmoker) with annual gross income of $85,000 and no dependents could enroll in a Silver plan at an unsubsidized annual premium of $8,191. But if the same individual had income of $40,000, she'd pay $3,800.

How are these plans different from the old individual insurance policies?
This is one of the least understood features of Obamacare. Insurance policies sold on the exchanges must comply with a set of rules. Insurers can't turn you down because of pre-existing conditions. They also can't put lifetime limits on the dollar value of coverage and can't rescind coverage. Deductibles also are limited. Exchange administrators also have the power to limit the number of plans that can be offered by an insurer to keep policy choices simple and understandable.

Will my retiree health benefits change under Obamacare?
A relatively small percentage of retired workers receive health benefits from their former employers. Only 7% of private-sector employers offered health benefits to early retirees in 2010, and 6% offered it to Medicare-eligible retirees, according to the federal Agency for Healthcare Research and Quality, or AHRQ. But among those that do, a growing number are eying the public exchanges as an opportunity to cut their health-care costs.

Sixty percent are considering moving retirees into the exchanges for prescription-drug or other benefits, according to a recent Aon Hewitt study. A recent flurry of news headlines reinforce the survey results:  International Business Machines (IBM),  Time Warner , and  General Electric (GE) have all announced plans to shift retiree coverage to the exchanges. 

The impact on retirees probably will vary. Retirees who enjoyed especially robust policies may find that their coverage isn't as good. In other cases, coverage won't be diminished. For example, companies that provide prescription-drug benefits for retirees on Medicare are finding they can shift coverage to the exchanges without losing much in terms of the delivered employee benefit. That's because the ACA enriches Part D drug benefits significantly by closing the doughnut hole in catastrophic coverage and mandating discounts on brand-name and generic drugs.

Mark Miller is a retirement columnist and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living. The views expressed in this article do not necessarily reflect the views of Morningstar.com.