Bridging the Medicare gap

COBRA allows employees to remain in the group plan by paying the coverage cost out-of-pocket plus a small administrative mark-up. In cases where the employee or a family member had a serious pre-existing condition, the COBRA option could be a lifeline.

COBRA remains available under PPACA but John Barrett of Health Insurance Brokers LLC in Pasadena, Calif., does not view it as an attractive option for most early retirees, especially since the pre-existing conditions hurdle has been removed.

In his experience with the California health insurance market, employer-based coverage is 50 percent to 150 percent more expensive than individual coverage. Unless the employer's plan offers significantly better benefits than the available individual or exchange plans, it won't make economic sense to stay on the employer's plan. "Why would an employee remain in COBRA if the premiums were higher than he would obtain out of COBRA and for individual coverage?" Barrett asks.

Dan Mathews, CFP, a financial planner with Stepp & Rothwell, Inc. in Overland Park, Kan., echoes that sentiment. He maintains that most early retirees don't need the level of benefits their employer's plan provides.

"When it comes to health insurance for clients in the (Medicare) gap, I prefer that they drive over the bridge to age 65 in a Taurus versus a Cadillac," he says. "By that I mean they don't need the bells and whistles that many company-provided plans offer. They just need basic coverage that avoids a catastrophe."

Evaluating the options
Despite the federal exchange's website fiasco, early figures indicate strong interest in the exchange policies.

CNN reported that roughly 500,000 applications had been completed on the federal and state exchanges in the first three weeks of availability. That number certainly would have been much higher had the federal site worked properly.

If the COBRA option is unattractive, early retirees will need to compare the coverage available to them from individual policies and the public exchanges. The exchanges' "metals" plans—bronze, silver, gold and platinum—are tiered and will offer a scale of coverage and cost choices. For example, a bronze plan will pay 60 percent of covered medical expenses while a platinum plan covers 90 percent. In other words, the more expensive the metal, the lower the out-of-pocket costs but the higher the premium for the plan member.

The plan-selection analysis will need to consider an individual's risk tolerance, health and finances, says Jennifer Borislow, CLU, with Borislow Insurance in Methuen, Mass., and immediate past president of the Million Dollar Round Table (MDRT).

"You really have to evaluate what the individual absolutely needs covered," says Borislow. "If you're an individual who has some personal savings, you may be able to take a high deductible health plan, which would make for a lower premium contribution. Somebody who may need broad coverage and doesn't want any out-of-pocket expense may pay more in premium and get a richer program."

From the advisor's perspective, gathering coverage information and comparing benefits on the available individual and exchange plans will require an initial investment of time. Once the details are collected, though, updating the data won't require as much work. There is a payoff: Being able to help early-retiree clients understand their health insurance options could be a valuable service to offer.

See also:

• What's next for retiree health care
• Get the first decade of retirement right
• Labor rejects cash-for-coverage strategies