Open Forum

For the past few weeks, we've been looking at issues related to health benefits open season. I'd like to continue the insurance theme this week by responding to some reader feedback on the previous columns.

What does this subject have to do with retirement?

Good question! Retirement planning involves preparing for life after government service. Health care costs can significantly affect your finances in retirement and having excellent health care can affect your physical well-being. I consider discussions that help employees and retirees choose the best health coverage to be important for retirement planning. So I guess I don't need to change the name of the column.

I am not a dumb person, but trying to understand all the different [high-deductible health] plans is too confusing to me. So I must stay with what I understand even if it might cost more.

My response is, that's why I keep writing about this. And here are some comments from readers who have actually used HDHPs:

• "For my family, the HDHP account has saved us money, and we've hit the deductible for two years."
• "The first key to this kind of plan is to convert the premiums you are saving from your old plan into contributions for your new plan. (If you don't have the discipline to do this, you will still save money on the premiums, but you might not have it to cover the high deductible if one of the kids breaks a leg.) The second key to this kind of plan is to take advantage of the opportunity to move money you were putting into your flex spending account into the health savings account, where you can keep it if you don't use it."
• "I switched to a GEHA HDHP last year from Blue Cross Blue Shield Standard. I'm very pleased with the GEHA HDHP and will keep it in 2010. Be aware that for prescription drugs ordered thru Medco mail order, you will pay full price until you've met the $1,500 deductible, then the 25 percent cost kicks in. So if you take prescription drugs, count on spending $1,500 (but remember, they give you $740 at the start of the year in your HSA)."
• "I switched to Aetna HDHP last year and am quite pleased with it. With the HDHPplan, they give me $750 per year in my HSA and I can add up to the max in before-tax dollars, so it is a bit of a shelter. My premiums are under $31 per pay period, so my insurance costs are about $50 per year after subtracting the money they give back. I use the debit card like a credit card with providers and they have stayed true to the charges listed in Aetna's listings, which are much less than their stated charges. My dental cleanings were free."

HSAs undermine the original intent of insurance. They help drive up the costs of coverage for everyone. It allows the insurance industry to cherry-pick healthy members. Individuals and families who are not willing to gamble on their coverage are then left to be in a smaller pool of insured members.

All federal health plans have catastrophic coverage that will limit the amount of out-of-pocket expense you will have. The idea behind high-deductible health plans is that if consumers spend money from an account that belongs to them and accumulates over time, they might be more cost-conscious when purchasing health care. How many times do you go to the doctor and not even ask how much it is going to cost? Have you ever contacted more than one doctor to see which one charges the least for your visit? Of course, choosing a doctor is about reputation, quality and service, not just price. But if you have three or four good choices to choose from, wouldn't you want to take the least expensive?

Contributing to health savings accounts and flexible spending accounts will reduce your future Social Security benefit. Not only that, but employees who participate in premium conversion do not pay Social Security taxes on the cost of their health insurance (along with federal income tax and most states' income taxes).

This is true. If you lowered your taxable income by $10,000 this year, you would reduce your future Social Security benefit by approximately $3 to $8 per month if you were eligible for benefits today.

But here's the flip side: You also would pay $765 less in Social Security taxes this year, and $1,500 to $3,500 less in federal income tax (depending on your tax bracket). And in most states, you'd reduce your state income tax by the amount in your health savings account, your flexible spending account and the cost of your health plan. In theory, if you took the amount of your tax savings and invested it, you could save more money for your future than you would be losing in your Social Security benefit.

Could you address the differences between consumer-driven health plans and high-deductible health plans? Why does Aetna offer both, and which type is better for most people?

CDHPs have lower deductibles and a lower catastrophic out-of-pocket expense limits than HDHPs. The other difference is that under a CDHP, your health care is covered 100 percent up to a dollar limit ($1,250 for self only and $2,500 for family) along with dental coverage (the first $300 for self only and $600 for family). After you exhaust this coverage, then you will have health insurance that will require you to pay your deductible and co-pays, as with traditional health insurance. If you don't exhaust the funds that provide the first dollars of your coverage, they will roll over to the next year.

An HDHP allows you to contribute to an HSA, if eligible, for additional tax savings. You will have a higher deductible and might be subject to more out-of-pocket expenses because of the higher catastrophic limit. The tax savings can make up the difference in these extra expenses. This plan will contribute toward your HSA or HRA in the amount of $750 for self only or $1,500 for family coverage. The premiums for HDHPs tend to be a little lower than CDHPs.

Both plans encourage you to be a consumer of health care and be aware of your expenses. Both provide most preventative care at 100 percent without spending any of your plan benefits. The CDHP will require less upfront cost from you, since the plan will cover a large portion of your initial health care expenses. But you can't make contributions to an HSA, which can provide substantial tax savings and a pool of money to pay for future out-of-pocket expenses. The HDHP might cost you more out-of-pocket, especially if you don't have a balance in your HSA to use if you have expenses that occur early in the year. If I were to guess, I would say that a CDHP might be better for a lower-salaried enrollee who doesn't need a major tax break and is in fairly good health. The HDHP might be more attractive to higher-salaried enrollees who are looking for ways to lower their taxable income.

I wonder how many younger federal retirees are aware that when they turn 65 and apply for Medicare, with Medicare then becoming their primary provider -- and the Federal Employees Health Benefits Program becoming a secondary provider -- their FEHBP premiums are not reduced by one cent.

This is true. Retirees pay the same premiums for FEHBP as employees (with the exception of postal workers, who pay less for FEHBP than other federal employees). The government continues to pay its share of the premium, which is an average of about 72 percent of the total.

One of the reasons federal health plans cost as much as they do is because of who is enrolled. Consider the annual health care costs of a 35-year old employee compared to a 75-year old retiree. Look at the health care costs of a family of four with two young children that get occasional ear infections and broken arms compared to a retired couple who each have chronic illnesses like diabetes and heart disease. FEHBP covers all of them. Here's more information on this subject from the Office of Personnel Management.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.