COBRA health insurance

Understand the strengths and weaknesses of this federal safety net

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As the nation continues its economic recovery, millions of Americans still find themselves in a frightening health care crunch.

Unemployment in the United States has hit record levels in recent years, fueled by layoffs as companies tighten their belts. And those laid off have found themselves faced with the challenge of finding a way to replace the insurance coverage they may have enjoyed in an employer-sponsored health plan.

For many of those newly unemployed, an obvious option will be COBRA, a federal law that allows laid-off workers to continue to purchase the health coverage from their employer-sponsored plans for a defined period – typically 18 to 36 months – after they leave their employers.

COBRA – the Congressional Omnibus Budget Reconciliation Act of 1985 – will seem an obvious option because employers are mandated to provide information about COBRA to those who have been laid off. They explain that COBRA was designed as a safety net, allowing them to extend the coverage they had with their employer while they seek new insurance coverage through such options as a new employer-sponsored plan, a spouse’s employer-sponsored plan, plans from the private market, and state-sponsored plans.

COBRA generally requires that group health plans sponsored by employers with 20 or more employees in the prior year offer employees and their families the opportunity for a temporary extension of health coverage (called continuation coverage) in certain instances where coverage under the plan would otherwise end.

But while COBRA’s safety net may seem an obvious choice at first glance, it may not be the right option for everyone. In fact, a recent estimate revealed that less than 10 percent of eligible workers were opting to continue their employer-sponsored coverage through COBRA.

Many individuals find COBRA too expensive

And COBRA coverage is more expensive than when the employer was sponsoring the same coverage. That’s because when the employee accepts the COBRA health insurance option, he or she assumes the portion of the premium that the employer had been paying.

During the height of the recent economic recession, Congress took a huge step toward cutting the cost of COBRA coverage as part of the economic stimulus package signed into law by President Obama. The package provided a nine-month subsidy that covered 65 percent of COBRA premiums for employees who’ve been laid off.

The subsidies applied to people who were involuntarily terminated between September 1, 2008 and December 31, 2009. They did not apply to individuals with an adjusted gross income of or $125,000 or more or to married couples filing jointly with an adjusted gross income of $250,000.

But even with the subsidies, COBRA STILL wasn’t necessarily the best option by default.

Depending on providers in individual states, there may be less expensive coverage available on the private market. These insurance options may include short-term major medical insurance
policies – plans designed to provide coverage for consumers who need one to six months of coverage. Short-term major medical plans may be particularly attractive because – at least with healthy individuals – the plans can be activated immediately and offer savings of up to 35 percent over other private plans.

And sadly, sometimes COBRA isn’t even an option

Workers should be aware that the federal COBRA law does not apply to individuals when a company decides to save money by dropping its group health coverage OR when the coverage stops because the company is filing for bankruptcy. In these situations, individuals will again need to consider options that include plans from the private market and state-sponsored plans.

One piece of advice individuals should always remember is that it pays to do research before it’s time to consider the COBRA option. That means consumers should find out as much as possible about insurance options in your state and research the actual costs of policies by getting a quote online.

Regardless of what path you choose, it’s critical that individuals make sure that they are continuously covered – and that there is not a break in their health coverage that could invalidate an individual’s federal right to portability of coverage.