Many individuals dream of early retirement, envisioning days of leisure, travel, and pursuing long-held passions. However, one key part of early retirement is covering the health care costs until you qualify for Medicare at age 65.
If you’ve been relying on your employer’s group health insurance, your coverage will likely end, leaving you responsible for the full cost of your premiums. Fortunately, early retirees have several health care insurance options that can help bridge the gap before traditional Medicare eligibility begins. Understanding the link between Medicare and COBRA (Consolidated Omnibus Budget Reconciliation Act) for early retirement is important. It helps protect your health and your retirement income.
Understanding Medicare
Medicare is a federal health insurance program primarily designed for individuals aged 65 and older. It also covers certain younger individuals with qualifying disabilities or health conditions such as End-Stage Renal Disease (ESRD) or Amyotrophic Lateral Sclerosis (ALS).
As of 2026, more than 68 million Americans are enrolled in Medicare, making it one of the largest health insurance programs in the country.1 Medicare consists of several coverage options, commonly referred to as “parts.” After enrolling in Original Medicare (Parts A and B), many retirees choose supplemental coverage to help reduce out-of-pocket costs.
In fact, most beneficiaries enroll in some form of supplemental coverage — whether through Medicare Advantage (Part C), Medigap, or Part D prescription drug coverage — because Original Medicare alone does not cap out-of-pocket expenses.
Original Medicare (Parts A and B)
- Part A
- Helps pay for hospitalization, skilled nursing, hospice, and some home health services
- Approximately 99% of beneficiaries do not pay a Part A premium because they have sufficient Medicare-covered work history2
- In 2026, the Part A inpatient hospital deductible is $1,736 per benefit period2
- You can choose your own doctors
- Part B
- Covers inpatient care such as doctor visits, preventive screenings, and medical services
- Requires a monthly premium
- The standard Medicare Part B premium for 2026 is now $202.90 per month, with an annual deductible of $283, up from $185 and $257 in 2025. Higher-income retirees may also pay IRMAA surcharges.2
Medicare Advantage (Part C)
- These Medicare-approved plans are offered by private insurance companies as an alternative to Original Medicare.
- Similar to an HMO or PPO structure:
- Provider networks are often limited
- Prescription drug coverage is frequently included
- Prior authorization requirements may delay or complicate care access
- While these plans may offer lower upfront premiums, retirees should carefully evaluate provider access, referral requirements, and total out-of-pocket exposure
Important: You cannot enroll in both Part C and a Medigap plan – it must be one or the other.
Medigap
- Medigap, also known as Medicare Supplement insurance, is purchased from a private insurer and helps cover expenses that Original Medicare does not pay, such as deductibles, coinsurance, and copayments.
- For many retirees comparing COBRA vs. Medicare, a Medigap plan paired with Original Medicare and a standalone Part D plan can be significantly more cost-effective than staying on COBRA.
Prescription Drug Coverage (Part D)
- Part D plans are Medicare-approved private plans that provide prescription drug coverage for people enrolled in Parts A and/or B.
- Beginning in 2026, Medicare Part D will follow the Inflation Reduction Act’s new structure, including a $2,100 annual out-of-pocket cap on covered prescription drugs, helping retirees better manage prescription costs.3
- If you choose Medigap, you may also want a standalone Part D plan to avoid a Part D late enrollment penalty.
Health insurance options for early retirees
COBRA
COBRA allows individuals and their families to continue employer-sponsored health insurance for a limited period after employment ends. However, COBRA is designed to be secondary to Medicare, and someone who is Medicare-eligible must enroll in Medicare, even if they would like to keep their COBRA coverage.
If you choose COBRA and are eligible for Medicare, Medicare must pay first by law. This is true even if you haven’t enrolled yet. Because Medicare is considered the primary payer, COBRA only pays after Medicare — and may reduce or deny benefits assuming Medicare should have covered part of the cost. Delaying Medicare enrollment can also trigger permanent late-enrollment penalties. In some cases, if COBRA pays benefits it shouldn’t have, the insurer may ask you to repay those amounts.
If someone is paying the cost of their COBRA insurance and is eligible for Medicare, then it would certainly be worth comparing the cost of their COBRA (premiums and benefits) to what they would receive if they were to cancel their COBRA and purchase a Medigap plan and a standalone Part D prescription drug plan. Often, the premiums for the Medigap and standalone Part D prescription drug plan are much lower than the cost of COBRA, and it’s an opportunity to unlock significant healthcare savings.
COBRA generally offers an 18-month continuation of coverage after the end of employment. In certain circumstances, like disability, coverage can extend up to 36 months. While expensive, COBRA ensures you have the same level of health coverage you had under your employer’s plan, and it may be particularly beneficial if you have ongoing medical needs or are concerned about changing doctors.
Before you elect COBRA, it’s important to compare benefits and costs (premiums, deductibles, copayments, and out-of-pocket maximums) with other coverage options.
Other early retirement health insurance options
Exchange-based plans (ACA Marketplace): Under the Affordable Care Act (ACA), people who need coverage may be able to purchase insurance from a federal or state insurance exchange. Compare the costs and coverage of exchange-based insurance with your other options. Depending on your retirement income, you may qualify for subsidies. This can be a cost-effective option, especially compared to COBRA.
Health Savings Account (HSA): If you’ve contributed to an HSA while employed, these funds can be used tax-free for qualifying medical expenses. Using funds from your HSA account can offset costs before Medicare kicks in. However, once you are eligible for Medicare and enroll, you can no longer contribute to an HSA, although you can withdraw your HSA funds to pay certain Medicare premiums and out-of-pocket medical expenses.
Short-term health insurance: These temporary plans offer coverage for a limited period, often less than a year. They’re generally less expensive but come with limited benefits. Coverage varies greatly depending on the plan and the insurance company you choose. These plans typically provide some level of coverage for preventive care, doctor visits, urgent care, and emergency care. Keep in mind that these plans are designed to fill short-term gaps in coverage and usually do not offer coverage for pre-existing conditions.
Spouse’s employer coverage: If you are married and your spouse still works, you may join their employer plan. It may be the most cost-effective and seamless option. This can help delay the need for COBRA while preserving comprehensive benefits.
Early retirement requires meticulous planning, especially concerning health care. While Medicare provides a safety net for those 65 and older, the interim period demands careful consideration. Between Exchange-based plans, HSAs, and other strategies, you have options to ensure you’re covered. With the proper preparation, you can embark on your early retirement journey with confidence, knowing your health needs are in good hands.
For Medicare questions, Mercer Advisors has partnered with Chapter. Chapter provides personalized Medicare recommendations based on your health and financial needs. The service is free for our clients; talk to your advisor to learn more.
