The No. 1 reason group health insurance is evil is because it is temporary. This is the biggest problem with group health insurance—it only covers you when you or a loved one is healthy enough for you to remain at work. Sadly, most people don't realize this until they become too ill to come to work and get terminated, or they can't come to work because they are needed full-time to take care of a sick child or spouse.
Each year between 1 million and 2 million American families file personal bankruptcy. Until recently, the causes of these bankruptcies were unknown, and most people assumed credit card spending, divorce, and loss of employment to be among the major reasons. In February 2005, Harvard University released the results of its study, "Illness and Injury as Contributors to Bankruptcy."
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The study interviewed Americans in bankruptcy courts and determined that about half were "medically bankrupt"—driven to bankruptcy by medical bills not covered by health insurance. Equally surprising, the study concluded:
- Three-fourths of the medically bankrupt had health insurance at the beginning of their illness.
- The majority of the medically bankrupt owned their own homes and had attended college.
- Many people filing medical bankruptcy were middle-class workers with health insurance who were unable to pay their copayments, deductibles, and exclusions in the group health insurance plan.
Few employees with group health plans are aware that their health insurance terminates when they lose their job, and that COBRA, if it is offered, only covers them for up to 18 months at an exorbitant cost.
Here's what really happens when you lose your group health insurance:
Once you lose your job, you lose your group health insurance unless you elect to go on COBRA. COBRA, which stands for Consolidated Omnibus Budget Reconciliation Act of 1985, is the acronym for the name of the 1985 legislation that requires most employers with 20 or more employees to offer former employees the short-term opportunity to remain on the company's group health insurance plan at the employee's own cost.
COBRA allows you to continue your group health insurance for up to 18 months as long as you pay 100 percent of the cost of your former employer's plan plus a 2 percent administration fee (102 percent total).
If you can afford COBRA, and it is offered by your employer, it's only good for up to 18 months of coverage for you (the employee) and up to 36 months for dependents.
If you cannot afford COBRA, or if your illness requires treatment for more than the 18 to 36 months that COBRA is available, you will be forced to switch health plans. If you are in the middle of a health issue, this could be devastating because:
- When you switch plans midyear, your deductibles and out-of-pocket maximums will be reset. Depending on your new plan, this could expose you to up to $12,000 in additional healthcare costs per year.
- Your new plan may not cover your current doctor and hospitals, forcing you to transfer to new medical providers or pay out-of-network for your current providers—which could be almost the same in cost as having no health insurance.
- Transferring to new medical providers who are not familiar with your recent medical history could be dangerous to your health or the health of a loved one.
The good news is that COBRA will be going away for most people because most ex-employees can now get individual coverage for a small fraction of the cost of COBRA. Generally, only people who cannot find an individual health insurance policy covering a critically-needed medical provider should consider staying on COBRA.
What's the solution?
You should switch to individual health insurance because it's portable independent of employment. With an individual plan, you keep your health insurance if you or your loved one gets too sick to come to work.
(Look for our profile of Rick Lindquist in coming months and please join us at Benefits Selling Expo from May 19-21 in Scottsdale, Arizona, where Lindquist – among many others – will be presenting.)
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