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COBRA and the COBRA Subsidy: What to Do if You’re About to Lose Coverage

UPDATED: October 25, 2011

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In the spring of 2009, over a million Americans lost their jobs. In response to the growing unemployment, Congress passed the American Recovery and Reinvestment Act (ARRA), which allowed most of these people to pay a subsidized premium under COBRA to stay in their employers’ group health insurance plans. While this subsidy was helpful, for many it is expiring soon (it only lasts for 15 months) and you must decide whether to stick with the COBRA plan (and pay the full premium) or move on to another option.

What is COBRA? What is the COBRA Subsidy?

COBRA is the Consolidated Omnibus Budget Reconciliation Act (enacted in 1985). It allows workers and their families, under certain circumstances, to retain health insurance coverage under their former employers’ group plans. The worker is required to pay all costs of the insurance premium (plus up to a 2% administrative fee). Eighteen months following the end of employment (or reduction of hours significant enough to lose eligibility for the group plan) the COBRA insurance expires and the former employee must find new health insurance.

The recent ARRA bill allows you – the former employee – to pay only 35% of the premium on your former employer’s group health insurance plan while the government picks up the tab for the remaining 65%. When it expires after 15 months, you will have to start paying the full COBRA premium, which can be very expensive. At that point, you have to consider your options.

What Should You Do When COBRA Expires?

Your decision will be based on personal circumstances. If you or a member of your family has a preexisting condition that would make it difficult to obtain health insurance elsewhere, it is prudent (and likely cheaper) to stick with the COBRA plan as long as possible, and then weigh your options. When the remaining three months with COBRA is up, you can shop around for individual and family plans, or you may qualify for HIPAA or your state’s Medicaid program.

HIPAA (Health Insurance Portability and Accountability Act) allows qualifying people who have lost their group coverage (even those with preexisting conditions) to purchase a plan. You have 63 days after you lose your coverage to apply for HIPAA insurance. “Group coverage” also applies to COBRA insurance, so you have 63 days from when you lose COBRA to apply. To find a HIPAA plan for yourself or your family, research the plans offered by different carriers (every insurance carrier must offer HIPAA plans).

You may also qualify for Medicaid if you have a very low income (and meet other requirements). Each state has its own Medicaid program (for example, Medi-Cal in California; SoonerCare in Oklahoma), so you will have to research your own state’s Medicaid to find out whether you are eligible. If you meet the income level and other requirements of Medicaid, you cannot be turned down for preexisting conditions, so this is a great option for some.

You can also mix-and-match. If you have a preexisting condition but no one else in your family does, for example, you can stick with COBRA for the last three months and then get a HIPAA plan for yourself, while getting individual plans or a family plan for your spouse and children. Keep in mind that if it is your spouse or your child who has the preexisting condition, for that person to stay covered by COBRA, you will have to also. Your children may also qualify for your state’s CHIP (Children’s Health Insurance Program). CHIP is similar to Medicaid, but for kids, and the income cap is higher for eligibility.

What to Remember about COBRA and Your Options

Shopping for health insurance can be daunting. There are many relatively cheap policies available, but the cheaper you go, the less you get. You have to determine for yourself what you can afford and what you are comfortable with leaving uncovered. Be sure to read the small print and educate yourself about your health insurance plan.

While this may well be an extremely difficult time for you, it is imperative to maintain health insurance coverage. Allowing coverage to lapse could have dire consequences for your family. Be prepared to make a decision when your subsidy expires, and remember that paying the expensive COBRA premium to avoid a gap in coverage is far preferable to having no coverage at all.

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