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Is COBRA the Best Option for People Between Jobs?

It’s a question many unemployed Wisconsin residents ask themselves each year: Should I continue paying for health insurance through my former employer’s group health plan (COBRA or state continuation), or should I buy an individual health plan from a private insurance company?

COBRA, the Consolidated Omnibus Budget Reconciliation Act of 1986, is a federal law that allows most employees, spouses, and their dependents who lose their health coverage under an employer’s group health plan to continue coverage, at their own expense, for a period of time (generally, 18 months).

The law applies to insured health plans and self-funded employer plans in the private sector that have 20 or more employees, as well as plans sponsored by state and local governments. Many states, including Wisconsin, have laws similar to COBRA. (For more information about Wisconsin’s continuation law, call the Office of the Commissioner of Insurance at 1-800-236-8517 and request the "Fact Sheet on Continuation and Conversion in Health Insurance Policies" that describes both state and federal law.)

For most people, the major downside to COBRA is cost. While COBRA grants former employees and qualified dependents access to all of the same health benefits they enjoyed on the employer’s plan, the employer no longer pays anything toward the coverage. Instead, individuals are responsible for the full group premium plus an administrative fee of up to 2%. In addition, they still must pay any coinsurance, deductibles, and co-payments that the plan normally requires.

Individual health plans, meanwhile, can often provide similar coverage for less.

Consider: According to the Kaiser Family Foundation, the average monthly premium for a single Wisconsin employee enrolled in an employer-based health plan in 2010 was $448. Add the 2% administrative fee for COBRA and that becomes $457. In comparison, the average monthly premium for an individual health plan in Wisconsin was $201.

The difference is even greater for families. In 2010, the average monthly family premium for employer-based health plans was just over $1,200. However, a family plan purchased through a private insurance company may be closer to $700.

What should you do?

COBRA or state continuation may be right for you if:

• You have a pre-existing condition. COBRA allows you to continue your existing coverage regardless of any pre-existing conditions. Individual health plans, in contrast, require applicants to undergo a process called underwriting in which the applicant must complete a health questionnaire or medical exam prior to receiving coverage. If you have health problems, a private health insurer may decline you for coverage or attach exclusions to your policy.
• If you have certain medical needs. Your employer-sponsored plan may provide coverage for conditions not covered by an individual plan, such as maternity, mental health, and specialized prescription drugs.
• You have satisfied your deductible and maximum out-of-pocket costs for the calendar year. If you plan to be unemployed for a short time (one or two months), you may be able to save money compared to a new individual plan for which you would have to start your deductible from scratch.

An individual health insurance plan may be right for you if:

• An individual plan would be less expensive than continuing your coverage with COBRA. This is often the case; shop around to compare prices and coverage.
• You are relatively healthy. If your expected medical costs are low, you can reduce your monthly premiums significantly by choosing a high-deductible plan.
• You had an employee-only plan with rich benefits and high monthly premiums. Because individual health plans offer many options, you could likely save money by choosing a plan that offers the balance of premium, coverage, and deductible that’s right for you.

Other considerations

Another reason to consider an individual health plan over COBRA is that coverage with COBRA is temporary. In general, COBRA extends a former employee’s coverage for up to 18 months. If you are injured or you develop a health condition while on COBRA, you may find it difficult to purchase an individual plan from a private insurance company when your coverage expires. Once you’ve developed a condition, many companies are likely to turn down your application or charge you a higher rate for coverage.

Also keep in mind that once you elect COBRA coverage, you may have to pay health premiums retroactively. That’s because COBRA coverage begins on the date that your employer-funded health care coverage ended—not the date on which you elected to participate in COBRA. So your first premium would cover the entire time since your last day of employment.

 It’s important to remember that COBRA is not a health plan; it is simply the law that allows former employees and their dependents to continue their existing health coverage through a former employer’s plan. This is an important distinction because if an employer discontinues its health plan or the business shuts its doors, COBRA can’t help. If there is no health plan, there is no coverage.

Here’s something else many people don’t realize: Under COBRA, each member of your family has individual election rights. This means that as the former employee, you can choose COBRA coverage for yourself and put your spouse or other dependent on an individual health plan. Or you can buy an individual plan for yourself and cover your dependents through COBRA. The choice is yours.

In addition, COBRA allows individual family members to make their own coverage elections. If your former employer’s health plan offers optional vision or dental insurance, you can opt for this coverage for all members of your family, or just for one member. You could take the vision coverage and not the dental. You can even choose one of the optional benefits and not participate in the employer’s main health plan.

Whatever you do, don’t let your coverage lapse

Regardless of which option you choose—COBRA or an individual plan—it is important that you do not allow your coverage to lapse. Without the protection afforded by some form of health insurance, you leave yourself and your family open to potentially huge medical bills if you should suffer a serious injury or illness.

And if you do choose COBRA, make sure to apply for an individual plan long before your COBRA coverage expires. Doing so will ensure that you have adequate time to find a plan that fits your needs and budget, and also allows time to complete the required underwriting process.

Learn more

For more information about COBRA, check out the Department of Labor’s dedicated webpage at www.dol.gov/dol/topic/health-plans/cobra.htm or download the booklet, An Employee’s Guide to Health Benefits Under COBRA.