How Does COBRA Health Insurance Work?

Many people rely on their employer for health insurance coverage. So if you find yourself with a break in employment, you may find yourself looking for short-term options for coverage. For this, many people use COBRA benefits.

COBRA medical insurance, also sometimes referred to as “continuation coverage,” is an option through your former employer to continue paying for insurance coverage for a short period of time. It can be especially helpful in unexpected changes in employment—like losing your job—because it allows you to continue coverage in the short term while you look for your next job.

We’ll share the basics of how COBRA works so you can be prepared in the event you ever need to use it.

What is COBRA health insurance?

COBRA insurance, short for Consolidated Omnibus Budget Reconciliation Act, is available thanks to a federal law passed in 1985 and signed into law by Ronald Reagan in 1986. It allows you to continue receiving health insurance coverage through an employer even after your employment with them has ended.

The premiums you pay will probably increase, but everything else about your coverage stays the same. This simplifies and streamlines things for you and anyone else who had the coverage through you. Most people compare it to other plans available to them before deciding whether to use COBRA for short-term coverage.

How does the COBRA system work?

When employees or their family members go through a “qualifying event,” they have the option to sign paperwork and pay to continue coverage. In some cases, the cost of continued coverage may be more than the employees were paying previously, since they will have to pay for all of the insurance. In some cases, they may also have to pay an administrative fee.

COBRA qualifying events can include:

• Termination of the covered employee’s employment (for any reason other than gross misconduct)
• Reduction in the covered employee’s hours of employment
• Covered employee becomes entitled to Medicare
• Death of the covered employee
• Divorce or legal separation that terminates the ex-spouse’s eligibility for benefits
• Dependent child “ages out” of family coverage

Both private-sector and government employees are covered as long as their employer is large enough. (Churches and related organizations are not obligated to provide COBRA insurance coverage.)

What are the rules for COBRA coverage?

COBRA insurance coverage—which is federal-level legislation—is available from employers with more than 20 employees.

In most states, people who were employed by smaller organizations will still be able to continue their coverage because of various state laws sometimes called “mini-COBRA” laws. If your employer is small, check into whether your state has a mini-COBRA law—most do.

COBRA does not apply if the employer stops offering the health insurance to current employees. And if the employer goes out of business, all bets are off.

Who qualifies for COBRA coverage?

If your employer qualifies, you and your dependents could be eligible for COBRA insurance if you lose eligibility for a group health insurance plan—because of either a termination in employment or changes to your coverage. As long as you meet all the criteria, you can also qualify for COBRA coverage if you leave your job voluntarily (unlike other unemployment benefits, like unemployment insurance).

Under COBRA, the continuation coverage must be offered to covered employees, former employees, spouses, former spouses and dependent children.

Once your employment ends, you have 60 days to elect COBRA coverage with your former employer. Some people all this the “60 day loophole for COBRA.” COBRA is retroactive, which means that it begins the day after your employer coverage ends. You’ll need to pay your premiums retroactively for the whole period (even if you didn’t make any doctor visits). 

COBRA coverage can last for 18 months (and longer for an individual who qualifies as disabled by the Social Security Administration or whose spouse died or was separated by divorce). COBRA coverage ends automatically when you:

• Reach the end of your coverage period.
• Stop paying premiums.
• Become eligible for Medicare.

You can also cancel COBRA coverage at any time, like when you find a new job and become eligible for coverage with your new employer.

What does COBRA insurance cover?

Once it’s in place, COBRA insurance covers everything the employer’s health insurance covered. That’s because you are still a member of the group plan.

The group health insurance is fairly broad and usually covers inpatient and outpatient hospital care, physician care, surgery and other major medical benefits, prescription drugs, and dental and vision care. Plans that provide only life insurance or disability benefits are excluded from COBRA coverage because they are not considered medical care. (If you want to continue life insurance coverage or disability benefits during a gap in employment, you’ll need to pursue them on your own.)

How much does COBRA coverage cost?

It’s important to comparison shop. On one hand, COBRA coverage may actually cost you less than what you’ll pay on the open market due to your former employer’s group discount. A generous employer may even choose to help subsidize (or fully cover) the cost of COBRA insurance as part of an exit package.

On the other hand, remember that you’re picking up your portion of the cost plus any part your employer was contributing. The cost can be so high that typically only a small portion of the people eligible for coverage take advantage of it. For some people, the coverage available through the Affordable Care Act (sometimes called “Obamacare”) may be a cheaper option than COBRA coverage.

When you comparison shop, you may also think about the insurance offered by your spouse’s employer. A job loss qualifies as a “life event” that allows a spouse to add coverage at any time of year, so you may be added to the plan without waiting for the open enrollment period.

What are the pros and cons of COBRA?

COBRA isn’t the only health care option available to you, so it’s important to weigh its pros and cons. Here are a few to consider:

What are the advantages of COBRA insurance?    

• It gives you much-needed health insurance coverage. Health insurance professionals typically discourage individuals from electing to go uninsured entirely, as the possibility of severe downsides is high—especially during an uncertain time.
• It minimizes disruption in your life. Using COBRA coverage is an easy way to continue with the same network and providers you’re already using. You maintain your coverage for preexisting conditions and any regular prescription drugs.
• It’s flexible. While you’re covered by COBRA insurance, you can change your plan during your former employer’s annual open enrollment period. Some people use this time to switch to a less expensive plan. You can also discontinue coverage at any time, allowing you to make changes as your situation changes.

What are the disadvantages of COBRA insurance?             

• It’s expensive. Your premiums will probably go up since your employer isn’t contributing. This can be really tough when you’re between jobs.
• You’re subject to your employer’s plan offerings. You might lose COBRA coverage if the employer changes its plan or goes out of business.

Is it worth paying for COBRA?

Each person’s situation is unique, so you’ll have to answer whether paying for COBRA coverage is worthwhile. Health insurance may also not be the only variable to cover when you’re between jobs. Life insurance, disability insurance, and other benefits available to your employer may be other options to look into as well—and the cost of these may also weigh into your decision.

Keep in mind that you may also be able use a health savings account (HSA) to pay for your COBRA premiums. An HSA is a tax-advantaged account that allows you to save for medical expenses. Normally, you can’t use these funds to pay insurance premiums, but COBRA coverage can be an exception.

This is one reason a financial advisor can be a really important partner as you navigate the time between jobs. A Northwestern Mutual financial advisor can help you look at your financial plan as a whole and identify gaps you may want to cover in both the short and long terms.