The dark side of COBRA: Unraveling its flaws, relevance, and alternatives

In the realm of employer-sponsored health insurance, COBRA (Consolidated Omnibus Budget Reconciliation Act) has been a topic of both discussion and controversy. Since becoming a federal law in 1986, it has offered a safety net for individuals who have lost their jobs or experienced certain life events. However, since the ACA (Affordable Care Act) went into effect in 2010, the flaws and limitations of COBRA have become increasingly apparent. Let’s delve into the dark side of COBRA and shed light on its flaws, relevance, and alternatives that make it a less than ideal solution for employees and employers.

High cost to individuals:

COBRA coverage is notorious for its exorbitant cost. While employed, individuals often benefit from subsidized health insurance premiums from their employer. On average, employers contributed 78% toward individual plans and 67% toward family plans, per BLS 2022 data. However, once individuals switch to COBRA, they are expected to shoulder the full premium cost, including the portion that was previously covered by the employer and an additional 2% administration fee. According to the 2022 KFF study, the average annual premium for individual coverage was $7,911 per year and $22,463 per year for family coverage, and “for most people, particularly following job loss, the cost of COBRA continuation coverage is prohibitively expensive,” per KFF.

Limited coverage duration:

One of the significant drawbacks of COBRA is its limited coverage duration. Typically, COBRA allows individuals to retain their employer-provided health insurance for up to 18 months after leaving their job or experiencing a qualifying event. However, this period may not be sufficient for individuals facing long-term unemployment or serious health conditions. Once the COBRA coverage ends, individuals are left without affordable options, forcing them to navigate a complex and often unaffordable individual insurance market.

Increased risk to employers:

The high cost not only impacts individuals, but also affects employers. 2024 is going to see the biggest jump in health care costs in over a decade. The high cost of COBRA invites adverse selection. Per EBRI, COBRA participants’ insurance coverage is 300% more expensive than those of active employees. Self-insured employers are left covering the cost of these high claims for individuals who are no longer employed. Fully insured companies feel the impact with dramatic increases in their annual renewal rates. In addition, the continued pattern of layoffs and high utilization of COBRA continuation coverage has likely played a role in the spike of health care costs for employers.

Relevance:

COBRA was created to address the issue of health care coverage for individuals who experience certain qualifying events that would otherwise result in the loss of their health insurance, such as termination of employment, divorce and eligibility for Medicare. Overall, COBRA was created to provide a safety net for individuals and families with pre-existing conditions who may be denied coverage, and could result in significant health care and financial consequences.

The ACA was launched in 2010 and introduced significant protections and changes related to pre-existing conditions in the United States health care system. These provisions addressed issues related to individuals with pre-existing medical conditions being denied health insurance coverage or charged significantly higher premiums.

This raises the question: how relevant is COBRA to workers and employers, considering the ACA changes? There are no longer restrictions due to pre-existing conditions, and workers leaving a company can find alternative plans on the Marketplace. For employers, does subsidizing COBRA during an involuntary termination still make sense, or is it better to cover the costs of an accessible individual plan?

Alternatives:

The ACA’s handling of pre-existing conditions and its Marketplace plans solved the core problems that COBRA was meant to safeguard. Per KFF, unsubsidized COBRA is generally the most expensive coverage option for the newly unemployed person while ACA Marketplace plans offer a variety of deductibles and provide far greater cost sharing with subsidies available for those who meet income requirements.

Read more: The importance of COBRA in a time of layoffs

One of the top complaints of the ACA, its Marketplace, and state-based exchanges is the complexity of the shopping experience. Additional sites focused on improving the shopping experience during open enrollment that aggregate ACA and private health insurance plans include eHealth and Health Markets.

While COBRA serves as a temporary solution for maintaining health insurance coverage during transitional periods, its flaws and limitations for employees and employers cannot be ignored. The limited duration, high cost to individuals, and financial burden to employers make COBRA an often insufficient choice. It is crucial to explore alternative solutions that address the shortcomings of COBRA and strive towards a post-employment health care solution that truly meets the needs of employees and employers in America.

Andy Hamilton is CEO and Co-Founder of When Insurance.