Medicare Advantage or Disadvantage?

You may have seen the ads on TV for Medicare Advantage Plans. I've noticed several in the past couple of weeks. Insurance companies want to provide you better and less expensive coverage than Medicare. The chances of you seeing these ads has a lot to do with where you live.

Medicare Advantage Plans (HMO's and PPO's) and a subset Private Fee-for-Service plans work for the insurance companies in places where the payments they receive from Medicare are generally greater than the costs of providing those services. So the marketing is generally targeted to the most profitable areas for the insurance companies.

Many plans will advertise broad acceptance, but you should check with your personal physicians and other health care providers before you make a decision, sometimes the delivery is less than the promise.

The New York Times reported recently that the GAO has questioned the effectiveness of Medicare Advantage plans:

"But, the report said, certain costs are not counted toward the out-of-pocket limits established by some insurers. Thus, it said, among Medicare plans with out-of-pocket limits, 29 percent exclude the cost of some cancer drugs, 23 percent exclude the cost of some mental health services and 21 percent exclude home health care expenses."

The plans can be cost effective by reducing your total premium payments or increasing your benefits. If you choose a PFFS plan your medigap policy becomes unnecessary, but the should you decide to go back to traditional Medicare coverage a new medigap policy may cost more. You generally sign up for these plans November 15 through December 31 of each year. Once you have enrolled you remain in the plan for at least the next calendar year.

If you did not select a medigap policy during the guaranteed acceptance window one of these plans could be a good choice for you, but check for any restrictions on access before you move outside of the traditional Medicare coverage.

Health Savings Accounts - New and Improved!

In the waning days of the republican controlled congress an update to the rules governing Health Savings Accounts passed with little fanfare, but the new legislation can make a big difference in the usefulness of HSAs.

As of January 1, annual HSA contributions of $2,850 for individuals and $5,650 for families are allowed regardless of health insurance policy deductibles (you still must use a high deductible plan), and you now have the ability to transfer assets from an IRA into a HSA.

Why is this such a big deal?

If you are a healthy high wage earner or young self employed individual you could find the savings of a high deductible health insurance policy coupled with tax deductible contributions to a HSA very attractive.

Look at the HSA as another IRA. You can reduce current taxes by making contributions to your HSA and when you do have a need to spend the accumulated balance on health care needs you can withdraw it tax free! This makes it like a blend between a regular IRA and a Roth IRA. Current deductions - future tax free withdrawals.

If you retire early, whether by choice or by corporate downsizing, health insurance expenses can be substantial. Often times it is the overlooked expense that throws a wrench in retirement plans.

The new option of transferring money from your IRA into your HSA can ease the burden of insuring yourself and your spouse in the gap between retirement and your eligibility for Medicare. You can lower the expense of health insurance by using a high deductible plan, and by transferring funds from your IRA to a HSA you convert taxable withdrawals into tax free withdrawals.

Health Savings Plans are not yet widespread but this legislation could help change that.

Health Savings Accounts

We all know the cost of healthcare has been exploding over the years, far outpacing the rise in general inflation. The 2005 annual survey of employer health benefits conducted by the Kaiser Family Foundation and the Health Research Educational Trust found the average cost of health insurance for a family of four has grown to over $10,800 per year - nearly doubling since 1998. The survey also reported that in 2006 Starbucks will spend more on health insurance for its employees than it will spend on raw materials to brew coffee. An alternative that merits attention is Health Savings Accounts or HSA's.

Health Savings Accounts we created as a part of the Medicare Prescription Drug Improvement and Modernization Act signed into law by president Bush in 2003. HSA's are designed to help individuals save for qualified medical and retiree health expenses on a tax advantaged basis.

Any adult who is covered by a high deductible health plan (minimum deductible of $1,000), and has no other first dollar coverage may establish an HSA. Tax advantaged contributions can be made in three ways:

1. The individual or family can make tax deductible contributions to the HSA even if they do not itemize deductions.
2. The individuals employer can make contributions that are not taxed to either the business or the individual
3. Companies that offer cafeteria plans can allow employees to contribute untaxed salary through salary reduction.

Once an individual enrolls in Medicare they can no longer contribute to an HSA. Amounts contributed to an HSA are the property of the individual and are fully portable. Funds in the account grow tax deferred and are tax free when used for qualified medical expenses.

Using myself as an example I currently pay about $1,100 per month for a family of five. I have a deductible of $400 per individual, or $2,000 per year maximum out of pocket expense. The high deductible policy I am likely to buy will cost about $680 per month have a deductible of $3,000 with a $6,000 maximum out of pocket expense per calendar year.

Initially I expect to save about $420 per month in premium expense. With this savings I expect to contribute the $3,000 per year tax free in about 7 months. This means I expect to save about $2,100 net ( 5 months x $420). If I add in the tax benefit of the HSA, $3,000 x my tax rate 28%, I can expect to save another $840 each year in reduced tax liability. So my total saving works out to around $2,900 each year - sweet! This assumes I spend the entire $3,000 in deductibles each year - not likely. So maybe the HSA account will grow and leave me with some extra funds to cover expenses I will surely have when I reach Medicare eligibility age.

Resources:
US Treasury FAQ's
The Heritage Foundation

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