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Wednesday, January 28, 2009

COBRA Health Insurance: Strategies and the Stimulus Package

COBRA is another one of those things that sound much cooler than it really is. It's 1986 piece of legislation that allows you to continue coverage on your employer's health insurance for up to 18 months after leaving that employer. However, you pay the full premium. COBRA stands for Consolidated Omnibus Budget Reconciliation Act as it was actually a budget bill. The employer health insurance extension was just a small piece that has been named for the entire budget bill.

COBRA has made the news recently as part of the Obama administration economic stimulus package. First, let me digress by commenting does anyone else have to refrain from giggling whenever they see broadcasters talking about a "stimulus package" with a very serious tone? Whoever thought that all this talk about stimulating packages referred to economic policy and not a by the hour hotel rooms?

The article describes how the stimulus package (giggle giggle) would pay 65% of the employer premiums for people who are on COBRA for 9-12 months. The article mentions that only 9% of people who are eligible for COBRA sign up since it can be expensive. Subsidizing health insurance helps break the cycle of people losing their insurance when they lose their job and can make a government program work better.

At face value, it looks like a gift to the insurance companies and crowding out private options. However, when you look at the economics, it makes more sense as it is priced to benefit those who need it the most. Employer insurance policies are fairly comprehensive plans and average $600/month and the 35% that someone would pay is $210. My company's individual insurance premiums average around $195 so an individual option is still cheaper for someone who wants to pursue that option. The price of individual plans varies by age so a younger person can easily get a plan for under a $100.
Therefore, someone who would pay $210 when there are cheaper options available would probably 1) not qualify for the individual plan since they wouldn't pass the health screen or 2) really need the more comprehensive coverage. The 65% subsidy makes the plan affordable for those who need it and don't have other options in our dysfunctional individual insurance market.

There is the question of what an insurance subsidy is doing in a stimulus package. Health care is being framed as an economic issue and on a basic level, if someone has to spend all their money on health care, they are not spending in other areas or saving money. For those who argue that this is yet another step towards government taking over health care, I'll point out that the government is already involved in at least 20% of the health insurance industry with Medicaid and Medicare. Employers are looking to get out of the business of offering health care so the government's role will increase.

For those who don't need a comprehensive insurance plan, COBRA is a free 3.5 month option to buy the comprehensive insurance when you need it. United Health care offered a $40 per month option to buy insurance when you needed it. For someone who would be without insurance for a summer in between graduation and starting work and doesn't plan to go to the doctor or have regular prescriptions that are usually covered, they can hold on to this option to buy whenever they need it. Here's how it works.

You have 60 days to tell your employer (or whoever administers their COBRA) that you want COBRA or not. Once you tell the employer that you want COBRA, you have 45 days to pay the first premium. So you can wait 59 days, tell the employer you want COBRA and than wait 45 days to pay for it. That's the 104 day or 3.5 month option. You can also activate your COBRA at anytime. If you haven't notified your employer within the first 60 days but get trampled by a herd of yaks on day 30, you can notify the COBRA administrator while you're in the hospital and get coverage. But once you start using COBRA you have to pay the premiums or then you can look for a cheaper plan.

Anyone who just needs an emergency option for insurance can do that with COBRA. This works best for folks who are leaving work and taking a few months off before starting school.


jb32 said...

So Roll Away, does this new mandate apply to those who leave work voluntarily? I'm thinking about utilizing this option when I leave my job to start school this fall over the health insurance offered through my MBA program. With the 65% federal payment, I could save almost $60 a month!!

Deadhedge said...

People who leave voluntarily qualify for COBRA so I don't see how they could not prevent you from losing it. But I am a product development manager with a blog and have no employer benefit administration background nor have I really read the bill. I don't know but hopefully it will get passed and work out for you.

One thing that I do know is that you can only be on COBRA for 18 months so it won't last your for a 2 year MBA program if that makes a difference.

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