What is COBRA?
People have often heard of COBRA health insurance coverage but aren’t really sure what it is or how it works. The term COBRA actually stands for Consolidated Omnibus Budget Reconciliation Act. It’s a title often applied to giant budget bills passed by Congress, generally appended by the appropriate year.
But when most of us use the phrase COBRA benefits we’re referring to a law passed in 1986 that gives employees and their dependents the right to continue their health insurance when they lose coverage under an employer-sponsored plan. People already recognized back in the 1980s that there are significant gaps in our health insurance system, and this law was an attempt to address one part of the problem.
The Department of Labor (DOL) regulates COBRA, setting the rules under which employers must administer COBRA health insurance coverage.
There’s two parts to figuring out if you can take advantage of the COBRA legislation. Is your (former) employer subject to the law, and have you or your dependents experienced a qualifying event?
Small employers do not have to offer COBRA health insurance plans. Only employers that have 20 or more employees for more than 50 percent of the prior calendar year are subject to the rules. The DOL has good explanations of how to figure out if an employer is subject to COBRA on its web site.
The reasoning behind this exception is that people who elect COBRA tend to be heavier users of medical services than average. Small business health insurance premiums are more sensitive to large claims because they have a smaller pool available to absorb losses.
There’s a whole list of situations that make you eligible to elect COBRA. By far the most common reason is that you left your job, either voluntarily or not. Generally, an employer would have to show you were fired for gross misconduct to deny you COBRA benefits. A layoff – or reduction in force – is a qualifying event.
Other events that would qualify you and/or your dependents for COBRA health insurance coverage include
- Divorce. Your ex-spouse would be eligible.
- Overage dependent. Your child reaches age 26 and can no longer stay on your plan.
- Reduction in hours. You are no longer eligible for the employer-sponsored benefit plan.
- Your death. Any dependents (spouse, children) covered under your insurance plan would be eligible.
There are several variations on each of the above categories, but these are the biggies.
The base period for which you can get COBRA coverage is 18 months. In some situations, such as death, the covered beneficiaries are eligible for up to 36 months.
Your employer is required to notify you and any covered dependents of your right to elect COBRA within 30 days of the triggering event – 44 days total if there is a third-party administrator involved. You have an obligation to notify your employer or plan administrator of a divorce, legal separation, or child ceasing to be covered under the plan within 60 days of the event.
You are entitled to 60 days to elect COBRA coverage. Your first premium payment is due within 45 days of making your election.
One of the main complaints about and drawbacks to COBRA health insurance is the cost.
Your employer – or former employer – can charge you 102% of their premium cost for the plan coverage (the extra 2% is an administrative fee). Since most employers who sponsor health benefits cover at least part of the cost for active, eligible employees, the full price can give you sticker shock.
The cost structure might work something like this:
|Coverage||Total Premium||Employer Subsidy||Employee Cost||COBRA Cost|
Note that there’s no federal rules currently about what percentage of the health insurance premium an employer must subsidize for employees. I just picked the above numbers because they worked out neatly!
What Coverage Will I Get?
By law, health insurance coverage under COBRA must be the same as what the other plan participants (e.g., the active employees) get. You will be subject to any changes to the plan design, such as increases to co-pays, but you will also be able to change your election during Open Enrollment.
You can’t, however, add any dependents (except newborns) to your plan while on COBRA if they weren’t already covered when you lost coverage. Additionally, if the employer completely terminates the plan, you will lose your coverage the same as the active employees.
Why Should I Elect COBRA?
The obvious reason to pay the high cost of COBRA is that medical bills can be exponentially greater. If you or a dependent have a serious medical condition, the decision can be a no-brainer.
But a less obvious reason to elect COBRA is the issue of pre-existing condition clauses. While the Affordable Care Act (aka Healthcare Reform) has started to address this problem – insurance companies can no longer apply them to children under the age of 19, for example – they will not be fully eliminated until 2014.
If you get a new job and the employer’s insurance plan has a pre-existing condition clause, you will not be able to get insurance coverage for a medical condition if you sought treatment for that condition within the past few months prior to coming on the plan. You will be subject to a waiting period before your new insurance will pay anything related to any such pre-existing conditions.
One way around these clauses is if you have not had a break in your medical coverage of more than 63 days. Under a provision of the Health Insurance Portability and Accountability Act (HIPAA), you can get credit for your prior medical coverage that can potentially eliminate any waiting period in your new policy.
COBRA coverage counts under HIPAA in reducing or eliminating any waiting periods for pre-existing conditions. So electing COBRA can make strategic sense if you have a medical condition for which you must seek treatment before you are covered by a new plan.
Of course, so many of the factors involved can be unpredictable. And, often, you simply cannot afford the COBRA premiums.
Alternatives to COBRA Health Insurance
There are some sources for help out there, particularly for children, although they can be difficult to track down and resources are stretched. Most states have relatively cheap health insurance coverage for children through CHIP or Medicaid with information on their web sites. Adults may be eligible for assistance for certain conditions in some states.
See if you can go on your spouse/partner’s plan. If you notify their employer within 30 days, your losing coverage must be treated as a qualifying event that permits election changes.
The federal government has also established a portal at Healthcare.gov that has information about changes being introduced by healthcare reform as well as links to help you find alternative health insurance. You might be able to find a catastrophic plan that has more affordable premiums. These plans are designed to cover truly serious conditions, leaving you to pay more in out-of-pocket costs. But the premiums will likely be significantly lower than you will pay under COBRA health insurance coverage.