Why is COBRA so expensive?

Topher Reynoso
January 21, 2024

COBRA, or the Consolidated Omnibus Budget Reconciliation Act, is often a lifeline for individuals transitioning between jobs, providing a continuation of the same health insurance coverage they had while employed. However, the sticker shock of COBRA premiums may leave you wondering why they offer it at all.

Contrary to popular belief, COBRA isn't a different or enhanced insurance plan. People commonly get confused about COBRA, thinking that it’s a government insurance program or an alternative health plan of some sort. In fact, COBRA is just a law that requires employers to offer the same insurance that folks had when they were employed. In other words, the insurance you had while you worked there is the exact same insurance you’d get if you signed up for COBRA through that employer. However, the key distinction lies in who foots the bill. 

Some important history

When you work for an employer and get an offering of health insurance from them, they’ll usually pick up some or all of the bill for you. This is a common employee incentive in the United States. Great companies are usually expected to provide insurance for their employees and to make it relatively affordable. Doing so will usually make it easier to attract and retain talent. But what happens when you leave an employer who offered those benefits? Well, you lose the health insurance plan. The government stepped in back in the 80s to tell employers that they were required to keep offering their employees insurance for 18 months (longer in some situations) after employees leave.

Back at that time the Affordable Care Act (ACA) hadn’t been passed yet so insurers could exclude pre-existing conditions. That just means that insurers could tell you that they wouldn’t pay for health conditions that you had before you became insured. But you can imagine how complicated that could get when you’re in a system where people commonly lose insurance when they change jobs. This made it so that it could be scary for someone to change jobs and scary when someone gets too ill to continue working, now they lose their job and the insurance that was helping them pay for their health issues. COBRA was a big win in that regard when it passed.

The majority of the price increase

Fast forward to today though and we’re living in a very different world where insurers aren’t allowed to exclude pre-existing conditions any longer. So even though it may have been worth it back in the 80s for someone with an illness to pay for their continued coverage, with all of the other options that folks have now, the price tag is often no longer justified.

The truth is that your COBRA option comes with the same price tag that your health insurance always had while you were working for your employer. The only difference is that your employer is no longer paying for any portion of it. They’re making you responsible for paying the entire premium all on your own now. So the biggest factor contributing to the perceived expense of COBRA is the full assumption of premium payments by the individual.

Administrative fees contribute to the price increase

There are administrative costs associated with maintaining COBRA coverage. Employers need to manage the process of providing continued coverage, including processing premium payments and ensuring compliance with COBRA regulations. These administrative tasks contribute to the overall cost of offering COBRA to employees. The law restricts employers (or vendors they hire to manage COBRA for them) to just 2% administrative fees. So If your COBRA premium is $408 a month, the employer or administrator is likely to charge you $8 of administrative fees in that premium. While it’s not huge, it’s another reason why you’re seeing an increased cost for the COBRA option.

Alternatives and considerations: exploring options

Understanding the factors contributing to COBRA's cost can help you make a more informed decision. Exploring alternatives, such as marketplace plans or Medicaid, may present more cost-effective options depending on one's circumstances. Additionally, consulting with insurance professionals can provide insights into tailored solutions that balance coverage needs with financial considerations.

COBRA, while often perceived as expensive, is a continuation of the same insurance coverage individuals had while employed. The higher costs arise from the full assumption of premium payments and associated administrative fees. Recognizing their insurance utilization patterns and considering alternatives empowers individuals to make informed decisions about their health coverage during transitional periods.

At Kept, we’re working hard to build tools and provide resources to help you recognize all of your insurance options when you leave an employer. Let us help you determine the best option for you and your family.

Topher Reynoso
January 21, 2024
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