Tuesday, September 6, 2011

A Good Idea Spoiled -- COBRA and the HDHP

Many would disagree with him, but Mark Twain, many years ago, said that "Golf is a good walk spoiled." I don't think as many will disagree with me when I say that COBRA is a good idea spoiled by high-deductible health plans or HDHPs. Why?

Suppose we consider a not atypical situation. Fred Stonematch was an employee with Rocky Roads Paving Company (RRPC). Fred was married to Wilma, and they had two children, Pebbles and Bam Bam (BB). As Fred had a good job with good benefits and the two children were young, Wilma chose to take a part-time job that gave her flexibility to be home when the kids got home from school, but her job provided no benefits. Recently, RRPC had changed the health care benefits that it offered to its employees to an HDHP. In April, RRPC lost one of its largest contracts in a bidding war and they felt compelled to lay off many of their employees. As the foreman on that contract, Fred was one of the first to be laid off.

When Fred was given his pink slip, the HR manager explained to him the benefits of COBRA coverage. Fred could still get health care coverage for his family and at group rates (plus a small administrative charge), Fred dutifully enrolled for COBRA coverage and began writing checks for $1400 per month. Fred didn't have a lot of savings, so this was a real hardship, but he did understand that he and his family needed to be covered against a health catastrophe.

In May, Pebbles was out riding her bicycle when she hit a small hole in the road that she hadn't noticed. As Pebbles' arm was scraped severely from the fall, Fred and Wilma took her to the doctor. The $700 charge was covered under the health plan, but they had not yet met their [high] deductible for the year. So, for May, the Stonematch family had health care costs of $2100. Despite paying their COBRA premiums, they received no real benefit for the month of May.

In mid-June, during his first year of Little League, BB got hit in the head by a pitch. Thankfully, he was wearing a helmet. Also, thankfully, the Stonematch family had health insurance that they paid $1400 per month for because withing minutes, BB was feeling woozy and seeing double. Since he had a head injury, the emergency room physician decided that BB needed a CT scan. Ouch! The charge for the scan in the hospital was $1200, but because the Stonematch family was in an HDHP, the insurance paid nothing.

Do you see the problem? Fred did. He knew that there was no way that he could afford not to get COBRA coverage for his family. On the other hand, he couldn't afford to get it. In the first two months of his coverage, he had paid $2800 in premiums, $1900 for medical expenses and received no benefits. Thinking back, he realized that this could be the case, but he still didn't see a way around having health insurance.

When an employee elects an HDHP (or has no other health care choice through their employer), he doesn't anticipate getting laid off during the year. But, if he does, he will often be left no reasonable alternative to paying for COBRA coverage that will likely provide no benefit. It's a triple whammy: 1) no source of income; 2) needing to pay for insurance that he cannot afford; and 3) receiving no actual benefit for the coverage that he pays for.

The system is broken. Some think that the Affordable Care Act was the right answer. Some don't. But I know that COBRA combined with an HDHP is not the right answer. Shame on whoever thought it might be.

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