May 11, 2011

Why is COBRA So Expensive?

If you've ever paid for COBRA or heard of a COBRA premium then you may know that the costs of coverage under COBRA can be very expensive.   Its not at all unusual for monthly COBRA premiums  to be $1000 to $1500.   This is a very high cost.    Why is COBRA so expensive?

No, not that kind of Cobra.
Let me quickly step back and explain that COBRA is a way that you can extend the health insurance you receive at your place of employment after you work.  It is temporary in nature and can normally only be used 18 months.  COBRA enrollment is available but optional.

The Dept. of Labor's FAQ on COBRA explains that "Qualified beneficiaries must be offered coverage identical to that available to similarly situated beneficiaries" and "The premium cannot exceed 102 percent of the cost to the plan for similarly situated individuals who have not incurred a qualifying event, including both the portion paid by employees and any portion paid by the employer before the qualifying event, plus 2 percent for administrative costs"    In other words COBRA coverage is identical to what you got when you were employed and the cost of COBRA is 102% of what the actual insurance costs.    The cost of COBRA is no different than what the insurance costs for employed workers.

Let me put it another way.   Simply put : COBRA is expensive because the insurance policy is expensive.   When you are working for a company the employees generally pay a portion of the cost of the health insurance and the employer pays the bulk of the insurance.   That is how most employers have the health insurance benefits setup.   According to Kaiser Foundation, in 2010 the average health insurance premium costs paid by workers for family coverage was $3,997 in 2010.    However unknown to many employees their employer is still paying the large majority of the costs.   Costs to employers averaged $9,773.    The combined average cost of family coverage for health insurance premiums was $3,997 paid by the worker + $9,773 from the employer for $13,770 total.   For this average policy cost the COBRA rate at 102% would be $14,045.    As an average worker you may go from paying about $4,000 for your insurance to seeing a COBRA bill of $14,000.   Thats a lot more than you paid so you could easily get sticker shock at the high cost.  

You may shop around and find an individual health insurance policy that is much cheaper.   Individual policies may be cheaper than a group policy via an employer for many reasons.   First of all group policies cover everyone regardless of existing conditions, age, or other factors.   If you are young and healthy then you would be relatively cheap to insure so you may be able to get individual coverage for a fairly low price.  Employers paying for group policies have to pay for all their employees which can include older people or people with existing illnesses.   Another reason group policy offered by an employer could be more expensive is if it is simply better insurance.   Often times you'll see cheap individual health insurance that cuts many cost corners.  A cheap individual plan my offer lower prescription drug coverage, negligible out of network coverage, low limits on mental health, no maternity care, high out of pocket maximums, high co-insurance, etc.   Unless you really do a close examination of what is offered you may think a policy is similar but be missing many ways it is not equivalent.   Whether or not you should pay for COBRA is a different topic.

While we're eon the topic of COBRA, I would like to point out that it is one of the things you can use Health Savings Account (HSA) to pay for.   Thats another reason I really like HSAs.

Bottom Line:  COBRA is expensive because that is what the insurance costs.  Group coverage may be more expensive than some individual plans.

Photo By RussBowling

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