What is COBRA Continuation Health Insurance Coverage – How Does It Work?

One of the biggest fears any of us have about losing a job is the loss of health insurance.

COBRA continuation health insurance was designed to eliminate that fear, but the reality is that relatively few people ever take it.

Why is that?

COBRA seems simple, and on the surface it is.  Details of the provision on the other hand, are anything but.

What is COBRA Continuation Health Insurance Coverage?

COBRA is the abbreviation for the Consolidated Omnibus Reconciliation Act of 1985.  It was enacted by the U.S. government that mandates providing employees with continuing health insurance coverage after separation from their employers.  The Act has been in existence since April, 1986, and covers most employees.

How Does COBRA work?

COBRA covers employees and their dependents under the following circumstances:

1. Death of the employee
2. Separation/termination for any reason except gross misconduct
3. Divorce or legal separation—benefits extended to ex-spouse
4. Continuation of coverage for dependent children who reach the age at which they’re no longer covered

Generally speaking, COBRA benefits are available to a separated employee and his or her dependents for up to 18 months, but there are exceptions.  If you’re determined to be disabled by the Social Security Administration, benefits can continue for up to 29 months.  Coverage may continue for up to 36 months in the event of divorce from- or death of-the covered employee.

Benefits under COBRA must be paid fully by the employee upon separation.

The Advantages of COBRA

There are compelling reasons to take COBRA upon separation from your employer.  This is especially true if you have health conditions.

No shopping for a new plan

If you’ve ever shopped for private health insurance, you know why this is such an advantage.  Private plans come in all shapes and sizes and can be beyond confusing.  The matrix of policy options can leave you perpetually unsure if you’re paying too much or don’t have sufficient coverage.

With COBRA, all you have to do is accept the policy, and your health insurance will continue as it always has.

Continuous coverage

When you switch from one health plan to another, the new insurance company will ask if you’ve had coverage within the previous 60 days.  The reason they ask this is because they can exclude pre-existing conditions if you haven’t.  If you keep your COBRA plan until you’re into a new employer plan you’ll be fully covered as a result.

No gap in coverage

With healthcare being as expensive as it is, you don’t want to be without insurance for even a month or two.  A single medical event without insurance could cost you tens of thousands of dollars.  COBRA eliminates that gap.

No exclusions

If you’re forced to go with a private plan the new insurance company can either impose a waiting period for treatment of pre-existing conditions, or even exclude them from coverage entirely.  Under COBRA, there is no limitation for pre-existing conditions.  (Note: under PPACA, better known as “Obamacare”, exclusions for pre-existing conditions are scheduled to disappear for most insurance plans by 2014.)

Related: Looking for Healthcare? See our Review of eHealthInsurance.

The Disadvantages of COBRA

As good as all of that sounds, COBRA has a darker side that forces most people to decide against it.

Cost

The biggest obstacle with COBRA is cost.

Since employers are required to offer coverage to separated employees—but not to pay for it—the former employee is left to pay the full cost of the monthly premium.  The elimination of a 60% employer subsidy will immediately increase the cost of your monthly insurance contribution from, say $400 to $1,000.

COBRA administrators can also tack on an administrative fee that will increase the payment even more (this could be up to 2% of the plan cost).  As important as health insurance coverage is, most people decline COBRA for this reason.  It’s not hard to see why.

It’s temporary

COBRA is not permanent insurance.

For most people it will terminate after 18 months, and after that you’ll be shopping for a new plan.  If you’re in good health, you’ll be better off getting a new plan rather than waiting out the full 18 months and risking a medical event.  If one comes, the new plan will not only be more expensive, but you could be declined entirely if the health condition is severe.

No flexibility

When we’re covered by an employer subsidized health plan there’s a tendency to load up the coverage.  Low deductibles, wider coverage and generous add-ons are much more affordable when your employer is footing a big chunk of the bill.

But that kind of coverage bites back with COBRA.

When you leave your employer, COBRA coverage will be exactly what it was while you were still employed.  You’ll have premium coverage that now carries the full cost of the plan.  Generally, you will not be able to make changes until your former employer either offers open enrollment or introduces a new plan.  So if you’re thinking you can go on COBRA and cut your coverage to make it more affordable, it won’t be possible.

Strategy tip: If you’re planning to leave your employer and considering COBRA as a health insurance option, raise deductibles and eliminate extra coverage riders (visions, dental, prescription if you aren’t on any ongoing drug therapies) at the last open enrollment period before your date of departure.  That will make your COBRA premiums much lower.

Related: Health Care Open Enrollment Tips You Need to Know.

Finally

With medical costs as they are you don’t want to be stuck in an emergency without health insurance.  COBRA gives those that have separated from their job to continue the same health care coverage.  As great as the option to take COBRA is, it can also be quite expensive, especially if you have just lost your job.

COBRA is a great option to have, but as you can see, it isn’t without its faults.

Have you ever had to take advantage of COBRA?