FIRE and the Affordable Care Act (ACA)

Today I’m thrilled to have a guest post from Michael Dinich.  Michael is a professional financial advisor and the founder of Your Money Geek. He often writes about Finance, Taxes, Politics, Renewable Energy and Geek Culture.  He provides clients with the confidence and security to enjoy retirement.  You can also find Michael’s work at MichaelDinich.Net.

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I have written about FIRE and the health insurance before, and medical costs in general. Managing health care costs are one of the biggest challenges for people seeking FIRE. When you leave your employee sponsored plan, you are forced to navigate the various health exchanges. The blogosphere is flush with opinions on what you should do.

Today in this Guest Post, I am going to talk about how to use the ACA to reach FIRE, and what to do to hedge in the event legislation around the law is rewritten.

I have seen opinions on these matters range from purchasing programs with health cost sharing ministries to medical tourism. Call me old fashioned, but traveling oversees for a medical emergency sound more like an episode of The Simpsons than sound financial advice. Health cost sharing ministries are not health insurance, and consumers do not have the same levels of protection with these programs as they do with insurance.

The most popular form of health insurance for those leaving employer-sponsored coverage is to purchase insurance on the exchange. (If you are not familiar with the ACA, check out my guide on hacking the ACA) Some people, such as Accidental Fire, have expressed concerns with the long-term viability of the ACA. I can understand the concern; the bill is politically unpopular and confusing, which has deemed it a winner and a loser at the same time.

Note: As a producer of content, I feel as though I have a responsibility to remove any political bias from this content. The ACA is the current law of the land. If you are not happy with it, please write your elected officials. I cannot change the law.

Firstly, a little perspective: private health insurance was available prior to the ACA. It was fairly expensive but not insurmountable for people in their 50’s and early 60’s. People who planned ahead for early retirement were able to purchase policies. So, the good news is, if the government repeals the ACA in its’ entirety, we should revert to pricing and policies that were previously available. (Adjusted for inflation, of course.)

Secondly, if the government repeals the ACA, change is going to take time. The ACA is a massive piece of legislation which affects not just insurance, but also taxation. The insurance products are regulated by the states, and it would take the states time to adjust to changes in federal mandates and incentives. Additionally, the insurers would need time to re-price products and get new product offerings approved by the state. I cannot promise anything, however, I feel fairly confident in thinking that any program which impacts the IRS, each state, and insurers will not happen overnight.

 

4 Steps To What Should You Do

1. If the ACA would be a benefit to you and your family, you should structure your finances in a way to maximize your benefit. The ACA uses modified adjusted gross income to determine the amount of your Premium Tax Credit. If you’re worried about the repeal of the law, use the current money savings to build an emergency cushion.

2. Contribute the maximum to your Health Savings Account (HSA) each year. Funding your HSA will reduce your taxable income. More importantly, the funds in the HSA will grow, and can be used to purchase health insurance. Many HSA custodians offer options to invest your HSA in your choice of various investments. Should you build up your HSA over a period of several years and invest wisely, you will now have a renewable income resource to help pay for or reduce future insurance premiums on a tax-advantaged basis (some restrictions apply).

3. Model some price and political instability into your calculations for Financial Independence. Individuals that are part of the Lean Fire movement may find increases in insurance premiums or even inflation in health care costs exceed their estimates and they may not have sufficient assets. Many insurers invest their cash reserves into various investments, and a downturn in the market could cause losses in the insurers’ portfolio, which will oftentimes cause insurers to raise premiums. Obviously for the investor, particularly one who is Lean Fire, getting hit with an increase in insurance costs when their portfolio is down in value can be upsetting, if not detrimental.

4. Get healthy! Easier said than done, I realize. If you are committed to FIRE, then you should also be committed to becoming as healthy as possible. Now, you don’t need to be as healthy as Accidental Fire and bike and run a million miles a day, but let’s face it: if you put on some weight, losing that weight and hitting the gym a few times a week will improve your health and reduce health care costs.  (AF Comment: It’s a million a year, not a day, I’m not totally crazy.    …wait…)

 

Hedging Against the Fall of the ACA

It’s going to be helpful to have a side hustle or some form of business income in this event. There is a type of health insurance that was available prior to the ACA, survived the ACA, and theoretically should survive the ACA’s fall: partially self-funded health insurance. There are a few different variations of the programs, so I will just touch on the concepts briefly.

In a partially self-funded plan, the employer (you if you’re the business owner) chooses an amount of money that you feel comfortable self-insuring. The intention is that the policy is purchased to provide benefits after the self-insured amount is exhausted. Think of it like having an extremely high deductible. Each year when you pay premiums, a portion of the premium goes into a reserve account. In the event you require medical care, the funds are drawn on the reserve account. Once the reserve fund is depleted, the insurance policy kicks in. If the funds in the reserve account are not used, the funds can be returned to you, or used to offset the following years’ premium.

Note: These programs can be used in combination with an HSA.

There are some advantages to a partial self-funded plan such as:
a) they are exempt from certain provisions of the ACA; and
b) the coverage can be medically underwritten.

Since the policy can be medically underwritten, a healthier individual may see lower rates of insurance as compared to an ACA policy.

The disadvantages to these plans are:
a) they are exempt from some of the provisions of the ACA; and
b) they can be medically underwritten.

If your health is compromised, you may not qualify or see a premium reduction. There is no mandate that these programs will accept you as a policy holder, and the policies are not guaranteed to be renewable.

 

Why Haven’t I Heard About This?

Simple answer: it’s complicated and boring! No one likes talking about health insurance, and it’s certainly not as sexy as travel hacking. There are numerous variables and exceptions: policies vary by state, and often by county. These plans are not for the do-it-yourself crowd. A few things are necessary, such as the requirement to hire a third-party administrator (not as scary as it sounds) and some choices need to be made about what coverage options you feel comfortable with.

Additionally, the FIRE crowed is a bit different than the average consumer of health insurance. If you are reading a blog such as Accidental Fire, it’s clear you’re taking a more active role in your financial future. While most advisors would not feel comfortable recommending plans with such high deductibles to the average consumer, an educated consumer who understands the risks and benefits and is willing to work to optimize their benefits may see a 30% reduction in insurance costs.

 

The Approach

While pursuing FIRE, max out your HSA every year. Try to avoid using the money for health care. The goal is to build up the HSA account as much as possible.

If you plan on leaving your employer, structure your income to maximize your benefit under the ACA. Keep funding your HSA each year if possible. Focus on your health and do everything possible to get and stay healthy. The key is to build a sizable cushion in the HSA.

Once you have built a decent balance in the HSA, you have the option to go with traditional insurance or partially self-funded insurance if the ACA is repealed. If you decide to choose the partially self-funded plan, set your “at risk” amount to less than you have saved in your HSA. Each year that you do not have a claim and are healthy, keep funding the HSA, and increasing your “at risk” amount. Each time you increase the amount of money that you deem “at risk”, your insurance premiums are reduced accordingly. Be sure to set the difference in insurance policy costs aside for your emergency fund.

The goal is to build up your balance in the HSA. If you have been following this approach for a number of years, you may find that you have enough money accumulated in your HSA that you can use the income from the HSA investments to reduce or offset traditional insurance premiums.

 

The Bottom Line

There may be other options outside the ACA that are worth exploring. Finding the right insurance coverage may take some piecing together of different and moving parts, but once you discover how the pieces fit together, insurance will be one less thing you have to worry about.

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Thanks Michael for this incredibly useful information!  I honestly did not know much at all about partially self-funded plans.  I wrote about my adventure in minor knee surgery a little while ago and as regular readers know, healthcare worries are the #1 reason I stay part time at my job even though I’m financially independent.  Knowledge is king, and this information will allow me to consider new options in the future.  If you’d like to learn even more information from Michael about the ACA, you can listen to his recent episode on the MoneyPeach Podcast.