Should you ditch your employer’s insurance for Medicare?

Editor’s Note: Medicare open enrollment extends through this Sunday, Dec. 7. Make sure you’ve signed up for the best package of coverage for 2015 or, by default, you may be locked into your current plan. After open enrollment ends, questions about this complicated program will not. Making Sen$e has turned to journalist Philip Moeller, who writes widely on health and retirement, to provide the Medicare answers you need in “Ask Phil, the Medicare Maven.” Send your questions to Phil.

Medicare rules and private insurance plans can affect people differently depending on where they live. To make sure the answers here are as accurate as possible, Phil is working with the State Health Insurance Assistance Program (SHIP). It is funded by the government but is otherwise independent and trains volunteers to provide consumer Medicare counseling in state and local offices around the country.

Moeller is a research fellow at the Center on Aging & Work at Boston College and co-author of “How to Live to 100.” Follow him on Twitter @PhilMoeller or e-mail him at medicarephil@gmail.com.

Anonymous: I’m a financially sophisticated, still-working 70-year-old who always gave credence, if not full allegiance, to the argument that more consumer choice in health care would spur competition and lower costs. But now that I’m faced with a choice myself — two different health care plans and/or Medicare — I’m bothered and bewildered (though not to my knowledge bewitched).

I’m sending you the plan details, but in essence, one is cheaper with a higher deductible and a health savings account (HSA) and both are with the same no-hassle insurer I’ve had for years, United Healthcare (UHC). My main question concerns Medicare, however. In both plans, coverage of the employee — me — is pretty cheap, given the employer contribution, but covering my wife balloons the 26-times-a-year premium to be taken out of my paycheck. Would it make most sense for me to take the single coverage and my wife to switch to Medicare? What would we be giving up? Longer waits for appointments? More paperwork?

Phil Moeller: This question reminds me why health insurance is too complicated for people to understand. It has joined a growing list of things that defy comprehension – taxes, Social Security (see Making Sen$e’s Ask Larry), how DMVs work, climate-change deniers and in-laws, to name just a few.

But Ask Phil didn’t sign up to just play slow-pitch ball. So, with the aid of a lot of follow-up questions to this reader and interviews with Medicare experts, here goes. This is neither quick nor easy going, so I won’t be offended if you read this on the installment plan.

What this questioner seeks is a multi-layered comparison of his health insurance choices. And while his question is, of course, specific to his situation, it also applies to the decisions that millions of us face as we contemplate leaving the health insurance world of Employerland to enter Medicareland.

We love to complain about life in Employerland, but in terms of health insurance, it’s a pretty simple existence. You used to have only one health plan and the only real choice was whether you were signing up for individual or family coverage. You can choose from a bigger menu today but things are still pretty simple. Whether they realize it or not, until recently, people didn’t have to flex their gray matter much in Employerland.

Employerland is getting more complicated. Insurance options were expanding even before the Affordable Care Act, which has further added to the changes. This person’s Employerland choices include his employer’s basic UHC plan, with a monthly premium of $451.56 ($5,419 a year) to cover him and his wife. But his payment represents only roughly a third of the cost of this insurance, and his employer pays out another $838.60 a month. Beyond his premium, he and his wife face additional out-of-pocket charges that are capped at $4,500 during 2015. So, their maximum out-of-pocket insurance expense will be $9,919 for the year.

This maximum is based on using only the health providers within the UHC provider network. Charges are higher outside the network, and their maximum could rise by as much as another $3,500 to $13,419. The reader’s employer has been using UHC for some time, so he’s become comfortable with his network choices. But for anyone new to an insurance network (and such networks exist in Medicareland as well as Employerland), checking out the network status of your preferred health care providers might save you lots of money and aggravation.

The UHC plan that includes an HSA has a monthly premium for this reader of only $265.31 ($3,184 a year), and his employer pays out another $755.13 a month. While these high-deductible plans offer lower premiums, they have higher deductibles. People who don’t need much care will save money. They also get access to the tax advantages of an HSA, which I’ll explain in a bit. Both plans have similar maximums for out-of-pocket expenses.

The reader’s additional out-of-pocket maximum is $6,000 a year and would produce maximum expenses of $9,184. However, his employer is contributing $1,500 a year to the HSA, which reduces his out-of-pocket maximum to $7,684. If he and his wife used lots of out-of-network providers, their maximum spending would rise by up to $6,000 to $13,684.

The HSA adds another layer to their decision. The reader is free to use pre-tax dollars to place up to $7,650 in his HSA ($6,650 plus another $1,000 because he’s older than 55). He then can spend these pre-tax dollars on qualifying health care expenses.

Without an HSA, he would use post-tax dollars to pay such charges. Now, it’s true that such spending would be tax-deductible, but only after it exceeded 7.5 percent of his adjusted gross income. This percentage is 10 percent for taxpayers younger than 65 and will rise to 10 percent in 2017 for all taxpayers. The point is that it would take a lot of medical spending – far more than his maximum exposure – to qualify for a tax deduction.

HSA contributions may be placed in an investment account. If these investments increase in value, this reader will not pay any taxes on account distributions so long as they are spent on qualifying health care expenses. A 401(k) account is funded with pre-tax dollars and its investment gains are also shielded from taxes. But when money is spent out of a 401(k) it is normally taxed as ordinary income.

A Roth IRA, by contrast, is funded with post-tax dollars but its gains are shielded from taxes, and when money is spent out of a Roth, there is no income tax due. An HSA avoids ALL federal income taxes so long as its distributions are spent on health care. Furthermore, if this reader doesn’t need to spend all his 2015 HSA contributions next year, he is free to carry over his account balances. In this way, it’s possible to use an HSA as a very effective retirement savings account.

Now, HSAs can only be used with employer-provided health insurance. So, should the reader decide to drop his UHC coverage and opt for Medicare coverage, he could not use an HSA. He would, however, get to keep any funds in an existing HSA and use them to pay health charges not covered by Medicare.

His question indicates to me that he is leaning toward signing up for the HSA. Good for him. I love HSAs. Assuming he has the funds, I’d recommend he take the UHC HSA plan and put as much money in the account as is allowed. If he and his wife’s health remain good, they will save premium dollars and reduce their out-of-pocket expenses. If they face an adverse health event, their insurance will limit their out-of-pocket expenses. And they can use pre-tax dollars to pay a big part of their share.

Deciding What Your Spouse Should Do

The only remaining question for this reader, and it’s a big one, is whether his wife should stay on his employer plan or if she should file for Medicare. The first step in answering it is whether any of her health providers do not accept Medicare. The odds that they don’t are small, but a few phone calls are in order.

Assuming her key providers do accept Medicare, the issue is how much her Medicare will cost compared with the cost if she stays on the UHC HSA plan. Given the reader’s employer’s contribution to the UHC plan costs, it will be tough to find a cheaper combination of Medicare plans that matches his wife’s UHC benefits.

But going through this exercise is a good idea. First, the reader and his wife may find a better deal. Regardless, they will get an eye-opening look at what’s in store for them when their employer-provided coverage finally does end.

There are two basic packages of Medicare plans that make sense for most people. Earlier Ask Phil columns go over many of these details. The first option is to get basic Medicare (Parts A and B), a Part D prescription drug plan and, I’d suggest, a Medigap policy.

Medicare Part A costs are free to people with sufficient years of working and paying Social Security payroll taxes. The reader’s wife has worked for many years so this applies to her. Part B would cost her an annual deductible of $147 year and a premium of at least $104.90 a month. These premiums rise with income levels and will top out in 2015 at $335.70 a month. I do not know the income that this reader and his wife earn or whether they file joint or separate returns. If they do file a joint return, it might be worthwhile to explore what would happen to her Medicare Part B premium if she filed a separate return. The bottom line here is that the higher her Part B premium is, the less attractive it will be for her to file for Medicare as compared with a UHC plan.

Next, she’d need to get a Part D drug plan. She can use the Medicare Plan Finder to find out the costs of different plans based on the specific drugs she takes. Some plans have zero premiums but high out-of-pocket charges for drugs. The average Part D premium in 2015 is about $39 a month, according to an analysis from the Kaiser Family Foundation. However, as with Part B premiums, higher charges are levied based on income levels. The plans may charge an annual deductible of as much as $320, although some plans don’t impose all of this government-set maximum. Unless she takes a lot of expensive medications, her additional charges under a Part D plan should be modest.

Medigap policies plug the coverage gaps in basic Medicare, which can be large. States can have separate Medigap rules and Massachusetts is one of those states. In our back-and-forth, the reader gave me his ZIP code so I was able to use a Medigap tool provided by Medicare to see the available Medigap policies where they live. Massachusetts residents can choose either a “core” or “supplement 1” Medigap policy. I think his wife would want the supplement 1 policy because it closes a lot more Medicare gaps than the core policy, including providing health insurance for foreign travel.

Ten companies offer supplement 1 policies in their ZIP code. Their premiums range from $169 to $233 a month. Keep in mind that these would be in addition to her Part B premium.

Adding up premiums and deductibles and co-payments for Part B, Part D and Medigap, it is hard for me to see how his wife could do better than staying on his UHC plan.

The second, and simpler Medicare choice, is for her to get a Medicare Advantage plan that includes prescription drug coverage. This will cover her Part A, Part B and Part D drug needs. It will almost certainly be less expensive than the “à la carte” package with a Medigap plan. But it’s important here to see whether the Medicare Advantage plan plugs the gaps in her basic Medicare as effectively as Medigap. Again, the Medicare Plan Finder is the place to start this assessment. I found 16 Medicare Advantage plans offering drug coverage in the reader’s ZIP. But I still doubt she would come out ahead compared with the UHC policy.

Lastly, Medicare should consider adding “bender” coverage for a night on the town. After doing all this work, this guy and his wife deserve one!