Why is COBRA So Expensive?
The last thing an individual wants to worry about when losing their job is losing health insurance. When someone receives their COBRA packet, sometimes it’s easier to turn a blind eye to the high cost and check "yes" than to muddle through the process of selecting a private plan.
So why is COBRA so expensive for individuals? Read on to find out why, and how employers can support employees through the process of signing up for COBRA.
Background: What is COBRA?
The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a set of laws put into place by the Department of Labor (DOL) in order to protect employees from the possibility of losing health insurance coverage.
Under COBRA, employers with a group health plan and 20 or more full-time employees must offer a continuation of group health insurance coverage to qualified beneficiaries for a limited period of time.
What’s Included with COBRA and Why is it So Expensive?
As a quick review, COBRA extends group health insurance to the recently unemployed and their families for a temporary window of time, usually around 18 months.
What most people don’t realize is that the health plan offered to them through COBRA is the exact same plan that was offered to them by their employer. So even though it’s the same plan, it’s so much more expensive because your employer is no longer contributing to the cost.
Prior to healthcare reform, it made sense for people with preexisting conditions to be on COBRA because they would get denied on the individual market. Now, no one has to think about preexisting conditions anymore.
What is an Example of a COBRA Plan?
Let’s walk through an example. Prior to leaving your job, you were paying $192 a pay period, or $384 a month for your family of four to be on the company’s health plan. Your COBRA packet comes in the mail and you are sticker-shocked—the same health plan for your family is now $768 a month. As it turns out, your employer was paying 50% of the cost of your health plan and now that you are now longer employed there, you are responsible for 100% of the premium payment.
Most of us are unaware of just how expensive health insurance plans are because we are only responsible for the portion that is automatically deducted from our paychecks. In reality, employers bear the burden of the majority of employees’ health plans.
In 2013, The Kaiser Family Foundation reported that employers paid an average of $11,786 on premiums for family health coverage, with employees contributing just $4,565 towards this cost. Under COBRA, an individual is now responsible for 100% of this cost (as well as a small administration fee) and for the average American family, this means their health plan is now three times more expensive.
The good news is that with the Affordable Care Act, it is often much cheaper to purchase an individual plan on the Marketplace, rather than to opt into COBRA.
Moreover, employees earning less than $47,000 a year for an individual or $97,000 a year for a family could be eligible for a subsidy. On COBRA, you aren't eligible for a subsidy. Subsidies are only available on the marketplace. The average government subsidy decreases health premiums by 76%, so this option can dramatically reduce your healthcare costs. These huge cost differentials are why it’s important to consider purchasing a plan on the exchange before defaulting to COBRA.
What Should Someone Know When Considering COBRA?
There are several things to consider when deciding between purchasing a plan on the Marketplace or enrolling in COBRA. While we have highlighted the potential savings, there are other factors to take into account.
Besides the total cost of the plan (including premiums, deductibles, and co-insurance), you should consider your access to care, as well as the quality of care offered by your new plan. It would be unfortunate to discover that your preferred doctors and hospitals were no longer in-network after enrolling in a new plan. Making sure that you can still see your usual doctors is a key step that cannot be overlooked before changing insurance plans.
While COBRA seems like the path of least resistance, turning to the individual market may save you a lot of money.
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