Afford Anything - PSA Thursday - The Affordable Care Act, with Tanja Hester

Episode Date: October 31, 2020

With the uncertainty of the Affordable Care Act (ACA) looming before us, many are asking: How can we plan for healthcare - now and in the future? How much will I need to save to cover healthcare in retirement? What can I do if I can't afford the expensive premiums?  As a community of entrepreneurs and early retirees, this is a major concern. To help us understand the healthcare landscape, Tanja Hester, author of Work Optional and the blog Our Next Life, joins us. For more information, visit the show notes at https://affordanything.com/psathursday Learn more about your ad choices. Visit podcastchoices.com/adchoices

Welcome to PSA Thursday. This is a special weekly-ish bonus segment of the Afford Anything podcast in which we talk about how to handle money, work, and life in the midst of a pandemic. These episodes aspire to come out on Thursday, but of course this episode is coming out on Saturday. So this is really PSA end of the week. My name is Paula Pan, I'm the host of the Afford Anything podcast. If you are new to the PSA Thursday segments, here's what you can expect. These are stripped down bare bones versions of the podcast. These are nothing like our normal episodes.

There's no intro music, no outro music, no sound effects. We do minimal editing. The interviews have no key takeaways. Each episode is typically shorter than our usual material. And we try to focus every episode on getting a comprehensive, in-depth understanding that is applicable, ideally applicable to your life, about some topic that relates to 2020. So, for example, in the past, we've talked about how you can find funding if you are a small business owner or an entrepreneur, both by covering the PPP, the Paycheck Protection Program, as well as discussing other options or other alternatives outside of that. We have talked about donor advised funds.

If this year has inspired you to give more to donate, what is a donor advised fund? How can you set one up? Where should you set one up? We covered all of that. Those are some examples of many of the topics that we've covered in previous PSA Thursday. episodes, you can find the archives at affordanithing.com slash PSA Thursday. In today's episode, we are going to attempt the impossible, which is we are going to try to have a reasoned, thoughtful conversation that is applicable to your life about how you can plan and budget for upcoming health care

expenses. So we are going to try to discuss the Affordable Care Act in a not political way. The objective of today's episode is to leave you with specific actionable takeaways that you can apply in your own life because many of the people who are listening to this episode right now are people who either buy health insurance out on the individual open market because you're self-employed, your entrepreneurs, your freelancers, your early retirees. So you're you're, you buy your own individual health insurance, as I have done since 2008, and you're wondering what changes are coming up and how do I prepare, how do I financially plan? Many of the people listening fit into that category, and many of the other people listening fit into the category of

you don't buy individual health insurance yet, but you plan to one day. You have a five-year plan or a 10-year plan of quitting your job to become an entrepreneur or quitting your job to become an early retiree. And you are trying to figure out how to plan for a future that is in some ways inherently unplanable because we don't know how policy is going to change. We don't know what the environment will be. So how do we financially prepare? We had an incident recently in our Facebook group where somebody asked about health insurance and they said, you know, if the rules change, what should I do? It was a very genuine question. They were trying to plan for their own future, a very action-oriented question of what might happen and how do I plan. And we had to

close the comments on it because it quickly devolved. Some people, unfortunately, hear the word health insurance or hear the letters ACA and have an instant knee-jerk reaction. That makes it very difficult to have a conversation around personal planning. So very quickly, in less than one minute, I want to reiterate what I said on a previous episode about the distinction between what what you think and how you think. This framework comes from the blog, Wait, But Why, we'll link to it in the show notes. They presented this framework, a thinking framework, in which what you think belongs on an x-axis.

It's a horizontal line on a graph. And you can be anywhere on that horizontal line, left, right, that line represents what you think. But there's also the y-axis, that vertical line that represents how you think. And that line could be lower-level thinking, knee-jerk reactions, unthinking, unchallenged, primitive reactionary, that's lower level y-axis thinking, and then there's higher-level y-axis thinking where you're thinking from your higher mind. Your position on the y-axis does not determine your position on the x-axis, and what we are concerned about is coming from a high place on the y-axis.

So given what happened in our Facebook group recently, seeing the impossibility of asking the basic question of how should I plan, I don't want to belabor the point. but I thought it may be prudent to spend less than one minute issuing a reminder that we are a community that is dedicated to living high on the Y axis. So with that said, I'd like to introduce the guest for today. Here to discuss how to budget for your future health care is Tanya Hester. Tanya is the author of the book Work Optional. She writes a blog about early retirement called Our Next Life,

and she is the host of a podcast called The Fairer Sense. She retired at the age of 38. She is a prominent member of the fire community, the financial independence retire early community. And she is extremely knowledgeable about health insurance and about how to get coverage if you are not covered by a workplace plan, either due to self-employment or due to early retirement or due to working for a small employer that doesn't offer health insurance. With that said, I would like to introduce Tanya Hester. Hi, Tanya. Hey, Paula. How are you? Oh, you know, 2020. I'm doing well for the situation, I guess. How are you doing? About the same, about the same. And you have, just to establish how your 2020 has been, you have been quarantining hardcore since March. Yeah, that's right. I have not set foot in a building or a business since March 8th.

Wow, not a grocery store, not a gas station, not a nightclub. Yeah. No, not a thing. We are paying a huge premium to have all of our groceries delivered. I'd much rather be shopping myself and all that stuff, but I'm high risk in multiple different ways, so don't really have a choice. Yeah, well, I'm sorry to hear that, but I'm glad that you have, glad that you don't have COVID. Oh, gosh, yes. I am glad to. I already have some of the things. that a lot of folks who are dealing with the long COVID or the post-COVID syndrome have, like dysotanomia, sometimes called pots, postural orthostatic tachycardia syndrome, where you get a high heart rate from doing a lot of things. And I do not wish this stuff on folks. So, you know, having not had the virus, I'm glad about that.

I can't speak to that. But the stuff that comes after for folks, it's not good. I do hope that folks are taking it seriously and doing everything they can not to get it because you don't want that stuff. I'm so glad that you've been able to make a full, recovery and aren't dealing with those things. Oh, thank you. Yes, I got very lucky.

I've been following stories on Twitter about people who have long COVID, and it sounds awful. So I got very, very lucky that I don't have that. Mm-hmm. So let's talk about the ACA. You and I both buy health insurance out there on the open market. Mm-hmm. I've been doing so since 2008. let's establish for people who are listening who maybe have never bought an individual health insurance plan on their own.

Let's establish sort of what the ACA did, what was the landscape before that, and how did it change the health insurance landscape? This is a topic where a lot of folks will assume that you're getting political. And I want to reassure everyone, this isn't a political conversation. We're simply talking about the law of the land, a law which, by the way, could go away, perhaps very soon. And so I know we're going to talk a little bit about what that could mean. But the Affordable Care Act, or ACA, is also sometimes called Obamacare. There's interesting confusion if you look at public polling. There are a lot of folks who say they hate Obamacare, but like the Affordable Care Act. And in fact, they are one in the same.

So if you like one, you actually like all of it. And it's a common misconception that the Affordable Care Act, which let's just say ACA from now on, to keep it shorter. But, that the ACA is only relevant to people who need to buy health insurance on the open market. And that's not true. In fact, the bulk of the law is a set of patient protections that are geared toward giving everybody insurance that's comparable, that is, in fact, comprehensive so that, you know everything's going to be covered. And it also limits insurance company profits before they were, in some cases, limited,

in some cases not. Now, if you buy an open market plan, the insurance companies are limited to 20 percent for overhead and profit. And if you have a large group or a workplace plan, they're limited to 15 percent, which is a huge reduction. So that's a really good thing for people. It also covers or forces the plans to cover 10 essential health care services, things like prescription drugs, which weren't necessarily covered before if you had insurance, forces plans to cover pregnancy, maternity care, prenatal care, forces them to cover preventive care, to cover rehabilitative services like physical therapy or also if you need something more serious, like if you fall and break a hip,

all of that stuff has to be covered, as does mental health care services. Before the ACA, and there is a little bit of confusion because it phased in in a number of chunks. So the exchanges primarily launched in 2014, but a lot of provisions of the law kicked in much sooner back in 2010, like kids being able to stay on their parents' insurance until age 26. That was something that didn't happen before. Before, often you were forced off your parents' plan when you graduated from high school or left home. And the only way you could stay on was if you lived at home and there were certain circumstances, but insurance companies really tried hard to kick kids off. Also, before, there was actually no way that many individuals could even buy health insurance at all.

If you lived in an area that had a comprehensive HMO, you might be able to buy into that. You might be able to buy a catastrophic plan to cover something like if you got in a car accident or needed lengthy cancer treatment. but it was very limiting the number of folks who could actually buy a comprehensive and affordable health insurance plan. And the law said that the insurers had to cover everybody. It said that they couldn't deny you coverage because of preexisting conditions, said they couldn't charge you more for preexisting conditions, which was huge because in the past, you might technically be able to get a plan, but it might cost $4,000 a month and who could pay for that. So it did a lot to try to make it much more fair. And it did, of course, also add some subsidies, sometimes called advanced

tax credits to let people make the care even more affordable if you're in the lower and middle income categories. So the law really did a lot. And they're mostly things that protect us as consumers of health care, as patients, as people, with a few aspects that some folks don't like. You know, the individual mandate that said everyone had to have health insurance was certainly politically charged. And that's since been struck down. And so it's not actively part of the law, but it is still part of the Supreme Court challenge that's happening next month. So there's a lot to it.

But bottom line is it made health care much more widely available. Absolutely. And this is relevant to any person who doesn't have or isn't covered by a workplace plan. I mean, like, as you were saying, many people, myself included, got kicked off of their parents' plan at a young age. I got kicked off of my parents' plan when I was 19 years old. I was covered as a college student. I was covered through the university, through a plan that I bought as a student, which

I qualified by being a full-time student at the university. So that covered me until I graduated. And then after that, I had insurance for two years while I worked at a newspaper. And then after that, I was out of luck. So from 2008 onwards, I was not covered by any type of plan. I bought my own policy. and I bought a catastrophic only policy, and it did not cover things such as pregnancy or maternity. And similarly, it did not cover any preexisting conditions.

Fortunately, I didn't have any. But, you know, something like pregnancy, you and I have had conversations in which I've told you that I often, at the time that I had that insurance, thought, geez, if I ever were to get pregnant, I'd have to leave the country. I'd have to go to Thailand in order to have this baby. Thailand or Costa Rica, I'd have to go somewhere where I could cash flow this child because in the U.S. it would cost 20 grand, 30 grand. Yeah, on the low end, probably. Yeah. Yeah, that's if nothing goes wrong.

Something that was also true before is they could impose waiting periods on things. So my dad was disabled for most of my time growing up, and he got his health insurance through Medicare, which you can get early if you're on Social Security. disability. That was how he got his insurance, but you can't put your kid on Medicare. And this was before the existence of the children's health insurance program or CHIP. So I had no way he could insure me. My parents were divorced. And so the one requirement that my dad wrote into the divorce stuff was that I always had to be able to be on my mom's insurance. Well, she changed jobs pretty frequently

every year or two. And every time she would switch, there would be a new clock of at least a year before I could get any coverage for all of my stuff that was preexisting. And the one that was most urgent was asthma, which I've had my whole life. Every time she switched jobs, then I could not go to the doctor for asthma. I could not get a new inhaler covered. And asthma is not something where you can defer care for that. If you're having an asthma attack, you need treatment right that moment. You literally can't breathe. You will die. I was so fortunate that I never had an incident that required emergency care, but we would have been forced to go to the emergency room and to probably default on that medical debt, maybe face bankruptcy just because there was this year-long waiting period,

which ultimately that's much more expensive to force someone to the emergency room rather than just cover their preventive care. But the insurance companies weren't really worried about that back then because they were just looking at profits. They were just looking at how can we pay the bare minimum and make as much money as possible. And the ACA forced them to cover all the preventive stuff that keeps people from having those much more expensive incidents down the road. It's not to say emergency care isn't necessary. Of course it is. It saves lives. But we can prevent a lot of that stuff if we stay on top of the regular care. And frankly, we should all want that. Whatever your political persuasion is, the more preventive care everyone gets, the healthier

population we have, the less emergency care we need, the cheaper for everyone. Right. Pre-ACA, when I had catastrophe-only insurance, I went for a routine checkup, just an annual routine physical and I got a $1,200 bill for it. That was a time in my life where I had to call them and make a payment plan. Yeah. And I see people say things. You know, part of why I really wanted to have this conversation today, I think let's just be frank, is I see a lot of people who, especially in the fire community, who talk about

health care as something that they can hack, as something that they can engineer down to the penny the way they do with other things. And I think that's just wrong. I wish it was true. I wish we could all do that, but we can't. I see people saying, well, I'm not worried about insurance because I'll self-insure. I have all this money saved up. I want to give just one quick example that I think is really illustrative of why that's not a great idea. Not long after we retired and we were first on our exchange plan, which we buy on the exchange. I went and got routine medical care. It was, I think, a checkup. And part of that was labs, just regular blood draw. They checked a bunch of levels of stuff. The kind of thing everybody should do every year. year. And the initial statement that I got from the health care provider for the lab test was somewhere in the neighborhood of $1,200. It was well over $1,000. It said, this is not a bill. So I just sort of set it aside and held my breath a little and thought, oh, like I hope my insurance is going to pay most of that. Well, I got an explanation of benefits, the document you get from your insurance company

a few weeks later that says how much they paid and what the patient responsibility is. And it said, this has been fully settled. We've paid the whole thing. Patient responsibility is zero. Guess how much my insurance company paid? How much? I kind of want to make you guess, but it's also deeply unfair. They paid $13.13.13. Less than, I mean, approximately 1% of what the hospital had originally billed. If I was self-insured, I'm sure it's true that I could have called the billing department and negotiated that down. And let's say maybe I could have knocked a big chunk off and paid only 800. But there is no way I could have gotten it down to $13. And so people really underestimate the value of having an insurance negotiated rate in there. And that's huge. And you can't get that on

your own, no matter how hard you negotiate with them. So I just share that in hopes that it is eye-opening for folks of what we're talking about. You know, uninsured people end up paying the absolute highest price, and those with insurance pay a much lower price. So it's important to keep in the conversation. Can we briefly go over? You've touched on the 10 essential health benefits that the ACA has guaranteed. And we've anecdotally touched on a few of them in this back and forth that you've been having, where I gave the example of being on a catastrophe-only plan that didn't cover any pregnancy or maternity, and wondering how I would then eventually plan for having children, given lack of pregnancy coverage.

Besides pregnancy and maternity, what are some of the other essential health benefits, the 10 essential health benefits, that the ACA ensures? Yeah, so the 10 essential benefits are ambulatory patient services, which really means anything outpatient you would do at the hospital. It's an incredibly broad category, which is good for patients. Emergency services.

And in most cases, emergency services have a capped amount. If you go to the ER, as long as you're not admitted to the hospital, hospital, usually they can't charge you more than about $350, assuming you've met your deductible, which is a really good thing, too. Hospitalization, so surgery, overnight stays, overnight stays associated with childbirth, which is its own category. In fact, the next category is that pregnancy, maternity, and newborn care before and after birth, all of those have to be covered.

Mental health and substance use disorder services, which includes counseling, psychotherapy, medication, all those things. they can say you're entitled to X number of visits per year. Often it's something like 40. That's also true for something like physical therapy. But those things have to be covered at some level. Prescription drugs have to be covered. They can do all kinds of complicated things. In fact, most plans do of saying generics are X percent of the cost. And then they have usually a formulary brand name list to things that are preferred that are a bit cheaper. And then if you go off the formulary, then they can still be quite expensive, but they have to be covered or at least discounted. rehabilitative and habilitative services. So again, that's things like physical therapy, inpatient rehabilitation services if you break a hip or, you know, that kind of stuff. Laboratory services. So any of your lab tests, that also includes imaging, diagnostic services. Preventive and wellness services and chronic disease management are all required to be covered. And pediatric services, so all coverage for kids. And then in addition, kids' plans have to cover oral and vision care.

So that's dental vision coverage, all the stuff that isn't necessarily covered for adults. That's usually a separate plan. For kids, it has to be included. So it's quite a wide range. It's frankly everything you should expect that would be covered. And in addition to all that, you're entitled to one absolutely free visit every year to do your preventive care, your annual physical. Right. The thing I got billed $1,200 for.

Exactly. And people often make the mistake of not telling the doctor to bill it as your annual preventive visit. But if you tell them, bill this is my annual preventive care, it's important also to specify. So if I say anything that needs a separate visit, please tell me and I'll stop talking about it so that I don't get billed for this. Some doctors are cool about that. Others are much more strict on the rules. So just make sure you know what those rules are. But that's true, even if you have a high deductible plan and you haven't met your deductible, your preventive visit is still free by law.

So what might change, given that there is a large percentage of a large percentage of, this audience who either currently do not have workplace provided insurance because many of those of us who are listening, are full-time entrepreneurs, full-time self-employed, we have to buy our own policies. Many people listening are earlier retirees who have to buy their own policies. What might change and how do we prepare for it? Basically, since the passage of the Affordable Care Act, Republicans have been suing at various levels to get rid of it. So it's been under essentially constant court challenge from day one. It's already been upheld by the Supreme Court in a pretty important ruling, but it's going to be before the

court again next month. And it is possible. People say it's unlikely, but you just never know. So it's possible that the entire law could get struck down because there is an illegal argument. Again, legal scholars say it's a very weak one, but essentially that without the individual mandate, the rest of the law can't stand. And since the mandate's been removed, theoretically, that means it could all go away. So if that happens, what most health policy experts say is that the exchanges are likely to stay in place. So you will as an individual still have the ability to buy insurance. However, the protections against being charged more for your age or for pre-existing conditions would almost certainly go away. And insurance companies would shift pricing back to what I call the game theory model, if they would

price things based on how likely they think you are to pay that price, not based on what it actually costs to insure you. And so people who are the most desperate for insurance would be charged astronomical rates because they have no choice but to find a way to pay. And people who are healthier would be charged very little because folks know that a lot of those people are willing to roll the dice and go uninsured for a while if they need to. So that would go away. Some of the things that are built into the law that we didn't talk about yet, there's just so there's so much in it. So it can't cover it all quickly. But one of the things is there is currently no cap allowed on how much benefit you can receive in a year or a cap on lifetime benefits.

That was something where before, if you needed cancer treatment, for example, it was very common for you to get dropped by your insurer and for them to say you hit your lifetime cap. We don't have to pay out anything more for you. You're on the hook for everything else. That's currently illegal. That could revert back. And likewise, the annual out-of-pocket maximum could disappear. So right now, if you look at a plan, common out-of-pocket max is about $12,000. So you would see, okay, I'm on the hook for my premiums, and then I could additionally have to

pay up to $12,000 in a year. That could easily disappear, and you could have essentially no limit on what you might be on the hook for, just some percentage. There are also, certainly the subsidies would go away. So you'd be on the hook for full price, which for most people is at least $5 to $800 a month for an individual, a bit less per person once you get into a family plan, but you'd be looking at that full price. HSA's health savings accounts could go away. Those are a feature of the law that I think would also be challenged. So there are a lot of possible things that could shift. I think a few

things for folks really to take very seriously are a popular option for what I would call health coverage in air quotes for a lot of folks in the fire community is the health care sharing ministry, what I'll shorthand as health shares, things like Liberty. There are other companies out there. But these market themselves by being cheaper than health insurance. And the main reason is that they are not health insurance. They are essentially a discount plan, but they have been sued by multiple states attorney generals for not covering bills as promised. They have a lot of morality clauses. They can refuse to, for example, cover expenses related to rape because they could argue that that was an immoral act that you put yourself in that position. Or they've said, you know, if you were riding with a drunk driver, we're not going to cover your expenses. even if you didn't know that person had been drinking because that was immoral. They're not friendly to the LGBTQ community. But the big concern that folks should have is that the current law says you have to be covered for your preexisting conditions. If the ACA goes away and that protection is no longer in place, we will revert back to the old law, which was an HR law called ERISA that said companies had to cover your preexisting conditions. They could impose that year-long waiting period.

but they had to cover them if you had no gap in health insurance. However, from a legal perspective, we don't know if health shares would be considered health insurance or not. They might not be. And so you could be deemed, even if you've been paying for health shares for years and years at this point, it could be deemed that you did not have continuous health insurance and you could be denied forever coverage on anything deemed to be preexisting. And let's just go over stuff that could be considered preexisting conditions. It's, you know, of course, asthma, high blood pressure, diabetes, things like that. People know. But if you've been raised, that's considered a pre-existing condition by many plans. If you had COVID, that's going to be

considered a pre-existing condition and could block coverage on anything heart, lung, circulation, respiratory-related. I mean, it's a vast array of things where they could deny coverage for you. Things like having been sick once as a child with a particular virus could be considered a pre-existing condition. I mean, it's truly anything you can fathom and you have to just think about what the incentives are. Insurance companies are for-profit companies. They are trying to take in as much money as they can and pay out as little as they can. So their incentives are diametrically opposed to yours. Your incentives are to go to the doctor and to try to stay healthy and to not put off care that you need. But with that model, you're likely to do that. You're likely to put care off because the cost is so high

and in many cases unknown. And so even people with very good insurance, there's lots of documentation around this. They'll put off much needed care because of the perceived cost of it. So it's a scary landscape. I think that's why this is so important. I understand why a lot of folks don't want to face down these costs and risks, but health care bankruptcy is still a thing in the age of better patient protection. So if we take that away, having a million, two million dollars, that could easily be wiped out in one medical incident. And I think that's something we need to talk about more because it's a very real risk. Absolutely. You mentioned annual caps and lifetime caps, And I clearly remember when I was buying individual insurance prior to the ACA that my plan had, I believe it was a cap of a million dollars or so.

I think it was. Yeah, that was common. Yeah. I think I had one million annual and five million lifetime, I believe, was the cap or something to that effect. And with a catastrophic plan like that, they probably didn't have negotiated rates. So you were paying, you were getting a million dollar cap on the essentially $1,000 lab test, not on the $13 lab test. Exactly. So that million dollars stretches even less far with that kind of a plan. Exactly. Yes. Hence the $1,200 routine physical. Yeah. Oh, and that same year, they charged me $150 for a flu shot. I'll never forget

that. You almost certainly could have walked up into a drugstore and gotten it for much, much less. Exactly. Exactly. I stupidly agreed to get the flu shot at the doctor's office, just not thinking, and then paid $150 for it. I was so mad, I embarrassed to say. this, but I then did not get a flu shot for years and years and years afterwards because I was just so scared of what the price would be. Yeah, that is a great example of where the incentives are all wrong. You didn't do something that's very good for your health that would have protected you because you were thinking about the price, which is honestly why I'm not a big fan of health savings accounts, HSAs, because they push people to go to higher deductible plans. And there's a direct correlation

between higher deductibles and putting off care. There is, in fact, research that shows that people with a net worth over a million dollars who already have a cancer diagnosis put off initiating treatment six weeks longer than other folks if they have a high deductible plan. And these are people who can afford it. Obviously, if you have a net worth over a million dollars, you can afford your deductible. You may not want to pay it. I think that's clearly what's going on, but you can afford it.

And knowing that, knowing that people are putting off. cancer treatment. I think that should give all of us very real pause. I know for me a couple of years ago when I was writing my bookwork optional, I had put myself up in a hotel and I came down with neurovirus. So it's basically like the worst food poisoning of your life. And I was super gross. But I was puking like every three minutes for over 24 hours. I got no sleep. I was dehydrated. It was a huge mess. And between throwing up, I was like going on the website of my insurance plan like, okay, if I go to urgent care, this much. If I go to the hospital, it's this much. And then I was calling the nurse hotline of like, okay, can urgent care actually treat me because I don't want to pay the emergency room fee?

And also, I'm not sure if we've met our deductible. And I should have just been going to the hospital and getting fluids and getting healthier. And I put it off for hours and hours and made myself suffer over the difference between a $35 urgent care and a $350 emergency room, which that was money we had. It wasn't like we couldn't afford that. It was just that I didn't want to part with it. But we shouldn't be making healthcare decisions that way. And so the bigger deductible you put in front of yourself, the less likely you are to get care that you need. And it's really important to recognize that. So that's my issue with the HSA is not the HSA itself, which is a lovely vehicle for saving. It's the high deductible that comes with it and what that does to us

psychologically. The behavioral implications. Right. So how do we plan for it? From a financial planning perspective. How do we plan for health costs given such uncertainty? It's hard, and I do not have a silver bullet type answer to this, but I think let's run through a few facts that are really important to consider. And I will say also, I wrote almost an entire chapter in work optional on health care because it is so complex. So most of what we're talking about is covered there as just a quick reference for folks. But the truth is that a lot of the things that we consider kind of gospel truth in the fire community are based on principles that don't actually apply in reality. So the 4% rule, for example, or maybe you're more conservative like

we are and you think about it as more like 3% or 3.5%. That is based on the idea that all of your expenses are going to stay in lockstep with inflation, that none of your expenses are going to go faster than inflation. Unfortunately, right now, healthcare is averaging an increase of about 10% a year, which is crazy high. Inflation averages 1 to 3% a year. But so we know even in the states that have managed to control it a bit, like my state, California, you still have health care costs going up at about three times the rate of inflation. Well, if you have a big chunk of your expenses going up at three times the rate of inflation, your 4% rule, your basic simple math, all that stuff, it doesn't work. It falls apart very, very quickly because quickly your healthcare expenses are overtaking

all your other expenses. So I really recommend that folks build a more detailed model that isn't just a simple assumption of one to three percent increase year over year in your health care costs, but you're actually creating a separate line item in modeling 10 percent more per year. It's also really important to know what your baseline is. So a lot of folks that I talk to, even folks who are saying, I'm planning to retire next year, how much should I be budgeting for health care? And I just think that's way too late to be asking this question. I'll ask them, have you gone on the exchange and just done sort of like a sample of if I put in my numbers that I expect in taxable income for next year, which again, that's not, if you're selling shares, the full share price is not your

income, just the growth, the cost basis in it is not income. So you have to factor that in. Of course, for folks who invest in real estate, different thing, but just the taxable part, or in fact, it's all of what they consider your income is what they count. So it doesn't let you take all your deductions out. It's the whole thing minus retirement contributions. So put that stuff in there, look at what it tells you both in terms of what your cost would be now under the structure with subsidies, because a lot of folks will qualify for some premium assistance, because especially if you're in a state that has expanded Medicaid coverage, the ceiling to get coverage is much higher income-wise. So you may qualify for that. But then also look at the full price of if you got no

subsidy, what would it cost? And for us, that number is about $1,400 a month for two of us in our early 40s. And it's going to be a big number. It's just going to be. And so look at that, tally up that total for the whole year and look at the out-of-pocket maximum and then assume that you could pay that every year and it could go up 10% every year. And I know that's a horrifyingly large number. But if those numbers scare the crap out of you, you may be under budgeting for entire minutes. Just doing the quick mental math, so if it's 10% compounding year over year, then that means it doubles every seven years. That's right. Let's hope that that's not true long term, but that is certainly what we're looking at right now. And if we keep talking about

healthcare is something that's so politicized, that's unlikely to reverse. We're likely to see that, if anything, accelerate. So again, I know this is scary. I know that this is the kind of stuff that makes people want to tune out and just sort of do the head in the sand thing. But this is real. These are things that you could have to face. And I know folks like to say, well, I'll just do health care tourism. As you said, I'll go deliver the baby in Thailand or I'll go to Mexico for my knee replacement. I mean, healthcare tourism is an option for things that are schedulable. But if you get in a car accident, you can't say, oh, hey, ambulance, will you please take me to India? Or you get a cancer diagnosis. you're going to need treatment for a year and a half.

Are you really going to want to pick up and leave your friends and family and everybody and go do that abroad? And you may not even have that option if it's urgent. You may not have time to research facilities somewhere else in the world. Or like right now, if it happens during the pandemic, not many countries will let you in at this moment. And so you need to have a plan to get good care in the U.S. now. It's important to both look at the health care tourism options

and to know, how am I going to take care of things that might happen that are emergencies or that I can't plan for. So from what I'm hearing, at the practical level, what each of us can do now for our own personal finances is make that spreadsheet, model it with the assumption that our health care costs will rise at approximately the rate of 10% every year, the cost of premium coverage. And based on that set of assumptions, project what our expenses will be 10 years into the future, 20 years into the future, 30 years into the future, and then make sure that we

have a portfolio that is spitting off enough income that we're able to cover that over the long run. Yeah, I think that's exactly right. And I know that that will be a big number. And it's going to be alarming to some folks, especially folks who I don't like all the designations of fire, like fat fire and lean fire, but I'm just going to use the term because it's popular. But for folks who are more in the lean fire camp, whenever I see people say that they're retiring with under a million dollars saved, I get really concerned. Because, you know, you know, you could easily spend a million dollars just on your health care between when you retire early and when you get to Medicare age. And let me just spend a second on that too because I think this

is important for people's planning. Medicare costs are also going up pretty dramatically every year. The latest figure is about $300,000 for a couple in expenses in addition to your Medicare premiums from the time that you retire until the end of your life. By the time most of the people listening here, let's assume folks are in their 20s, 30s, 40s, 50s, that number is going to be much, much bigger. And so we have modeling that suggests that in less than a decade, people will be spending essentially their entire social security check on medical expenses. So for folks who are counting social security in your cash flow that you're going to be able to use on things, I would strongly caution you not to do that. And instead to think of social

security, if you expect to receive any of it, as essentially a health care buffer, as essentially extra dollars that will be set aside totally for health care. Even if you don't need them right when you're 65, when you first get on Medicare, it still makes sense to hold on to that stuff because you might need many, many, many times what you're getting in Social Security by the time you're 70, 75, 80. You know, let's hope we're all going to live long, healthy lives and be around at 100. But that's a lot of years of needing health care at rates that are going up all the time. So that's an important piece in planning. I highly recommend people do not count on Social security just for that reason so that you have a little extra buffer and contingency built in.

Absolutely. And I think that's great advice. I often, typically when I talk to people about retirement planning, I'm oftentimes talking to people who are in their 20s, 30s, 40s, early 50s, and particularly for younger people, it's so hard for us to reasonably project what our social security payout will be in the future anyway, that disregarding it is the simplest option. And so it's nice to hear that there are multiple reasons to disregard it, not only because of the complexity of calculating that number, but also because it could simply serve as health care buffer and we can earmark it as that. Yeah, that's right. I think, as you said, the complexity of it is vast. It's likely to get more complex by the time many of us listening get to that

age. I'm 41 currently. And so that's at least, let's say, 25 years before I can claim it. But by then, who knows, maybe the basic age to claim it will be 70. And they'll say you have between 70 and 76. I mean, we just don't know. They're going to have to continue to change the system in order to keep it viable. And so benefits could get smaller. The age at which you claim it could get older. There are many reasons not to count it. But yeah, I can't recommend that strongly enough, especially for health care. For people who do not currently have a sense of what their health insurance costs might be outside of a workplace environment, would their best way of estimating that simply be going to a website such as health care.gov or policy genius, which is a sponsor of the show, would it be to go to one of those websites and go through the estimator tool and see what their cost, their unsubsidized cost would be today? Would that be the baseline starting point? Yes, absolutely.

So you can always go to the health care.gov site, and it will channel you into either the estimator tool for your area if your state does not have an exchange or it will point you to your state's exchange or maybe you already know the name of it. In California, for example, it's called Covered California. And all of them have an identical tool where you put in your expected income, the size of your household, the ages of everyone. The only health question they ask you is if anyone is a smoker. They also ask if anyone is blind because that's just a tax designation.

And so you just enter a few things and it's an estimate. No one holds you to that. And then it will show you what your plan options are. And one of the great things that the ACA does is it standardizes plan offerings so that it's easier to compare plans against each other. So they all have to give you an info sheet where you can see how much does emergency care cost, how much does primary care visit, specialist, prescriptions, all that stuff. It's easy to see and to put two side by side.

It's also worth knowing that the plans are rated by what they call metal levels. So there's bronze, silver, gold, and platinum. The vast majority of people who buy plans on the exchanges by the silver plan, and they're rated according to the approximate percentage of costs that they cover. So bronze is 60 percent, silver is 70, gold is 80, platinum is 90. If you're very low income, but not at the Medicaid qualifying level, so just above Medicaid, you can sometimes qualify for a plan that covers something like 93% of your expenses, but that will usually be called a super silver plan, which is confusing. That probably won't apply to very many people, so don't worry about it. But yeah, go in there and see what your plan options are. Look at what it would cost with a subsidy

and without. Make sure that you could cover it without the subsidy if you had to. Usually the plans that offer HSAs are in the bronze category. I recommend that most folks do try to look at silver or even gold if you can afford it because it's going to give you much, much better coverage. something worth knowing too that folks fail to estimate, they sort of think like, okay, like right now at work, I have Blue Cross Blue Shield and looking at the exchange, I'm looking at a Blue Cross Blue Shield plan and they look pretty similar. So I'm going to assume that my health care costs are roughly comparable. But what people don't know is that workplace plans on average cover about 82% of your health care expenses. And the silver plans cover, again, 70%, which that sounds like, okay, 12 percentage points. But it's a much bigger difference than that in terms of. of actual out-of-pocket dollars. So your coverage goes from, let's just round it up to 85% to 70%, so you actually are now paying double what you would have been paying out-of-pocket with your employer plan. So just keep that stuff in mind. It is a big difference. Even if you go from one plan that looks like one thing to another that looks similar, your out-of-pocket can still go up a lot.

So it's worth also running your specifics because some plans will have better prescription coverage. You can also, if you know exactly what medications you take, usually you can click through the choices and you can see, okay, how much would this specific medication cost? You can often look and see, is my doctor on this network? We chose a slightly more expensive plan because it covers Mark's medication at a much higher level. He has to take a med every day that costs $1,200 a month generic. And so one plan, it was going to be like $300 a month and the other it was essentially free. and so paying $200 a month more in premium, it sounded like a lot, but we still come out ahead. So you might consider things like that.

But at the very least, put your numbers in and get at least a ballpark of what insurance would cost, because I've just found that a lot of folks haven't done that step and they just assume that, okay, it's going to cost what I pay at work or it's going to cost, you know, some imaginary number. It's far better to base your plan in reality. For planning purposes, should a person be looking only at the, their unsubsidized health insurance premium, or should a person look at that premium plus what they would expect to be paying in terms of a deductible or co-pays, should they add all of that together, take that as an annual number and say, all right, for planning purposes,

this might be annually what I spend unsubsidized on health insurance if I were to buy an individual plan today, and then extrapolate that out at a 10% compounding growth rate in order to project what they might be spending in the future. So realistically, most of us are not going to hit that out-of-pocket max most years, certainly not every year. There will be folks where, you know, if you know that you have a high likelihood of getting a serious cancer, runs in your family, or if you know that you have an autoimmune disease, or you have something that is going to require you to get a lot of health care, you might truly plan around that big total, which the things you would want to include in that total are your monthly premiums, the cost of drug deductibles. So it will be listed in,

the info sheet of what the deductible is on medication. And keep in mind that that is usually a monthly deductible, not an annual deductible. So it's a deductible every single month. Factor that in and then look at the out-of-pocket maximum, which that covers things like office co-pays, co-insurance, all this, you know, the your portion of a bill that you get. And add all three of those up. And that is the max that you could expect to pay. Again, under the current law, which could go away. It could be a bigger number, but make sure you're at least covered for that. And think about it maybe the way you would think about budgeting for when you need to buy a new car. So you might need a new car every, this totally depends on your preference. I'm sure I'll get in

trouble with some of the more conservative folks for saying this. But, you know, if you need a new car every seven years, let's say, maybe you assume that you pay that full out-of-pocket max amount every five to seven years, just to be safe. So you've got it built in there a bunch of times. And then you you sort of build that into your model. So you assume that most years you're paying your premiums plus a few thousand dollars and every so often you're paying the full out-of-pocket max. And of course, it's going to change by the size of your family. So you'll need to figure that in. But that's really what I'd recommend for folks. And then again, assume everything's going up 10% a year. So it's again, I know it's a big number. I know this is not good news. But it's so, so important because I just

hate to see people putting themselves in such risky spots or being reliant on free medical care or health care tourism, which isn't always viable, instead of just being really clear-eyed about what this stuff could cost. And, you know, if all this stuff makes you really angry that it's so expensive, then write to your legislators and demand a better system because that's certainly an option too, but that shouldn't replace planning for all this stuff. Well, thank you so much, Tanya. Where can people find you if they would like to engage with more of your work? My blog, which I've not been super active on lately, but there's a lot of stuff there on health care, health insurance, all that stuff. That's Our NextLife.com. My book is work optional, retire early, the non-penny pinching way until the new book comes out next year. And the place where I'm most active is on Twitter, and that's at Our underscore Next Life. Or you can just search my name, Tanya, J-A, Hester, and find me there. And I'd love to chat with you. I've been very active on Twitter lately. I have phases with.

Twitter. Sometimes I ignore it for months and sometimes I check it compulsively. These days I've been checking it compulsively. So I'm on there too. Add Afford Anything. But I love your Twitter account and enjoy seeing what you post. Thank you so much. Yeah. I love when you're on there. I'm always like, oh, yay, Paula's around right now. But thanks so much for having me. This was really good. And I appreciate you making space for this important conversation. Thank you so much for joining us, Tanya. That's our show for today. You are listening to PSA Thursday, a weekly-ish bonus segment of the Afford Anything podcast where we talk about issues related to the year 2020.

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Thanks for tuning in. This is Paula Pat. You're listening to the Afford Anything podcast and I will catch you in the next episode. In the next episode. In the next episode. In the next episode.