COBRA stands for Consolidated Omnibus Budget Reconciliation Act of 1985. An important part of that law requires most employer group health plans to provide a temporary continuation of group health coverage under certain circumstances, such as when a person leaves employment due to retirement.
People often think of COBRA coverage as being the same coverage that they had while employed. But for those who are already eligible for Medicare when they go on COBRA, a couple of big, costly differences are often misunderstood. We are seeing more and more cases in this difficult situation as more individuals stay in the workforce beyond 65.
The two major problems for Medicare-eligible individuals who go on COBRA are:
• With rare exceptions, COBRA coverage is secondary to Medicare Parts A and B. That means that Medicare Parts A and B cover 80% of costs, leaving 20% for COBRA. That is due to the Medicare as a Secondary Payor and Coordination of Benefit rules. The result is that when Medicare-eligible individuals do not have Medicare Parts A or B, they are left to pay 80% of their costs out of their own pocket.
• Adding insult to injury is the fact that Medicare has a window of opportunity to enroll in Medicare Parts A and B that lasts eight months after leaving employment. That special enrollment period (SEP) allows a person to enroll in Medicare without penalty and start coverage right away. After that SEP ends, people will have to wait an extended period of time to enroll in Medicare and pay lifelong fines. Given that COBRA coverage lasts at least 18 months, many people do not realize they should have enrolled in Medicare until it's too late.
Here's a typical example of what happens when someone doesn't realize they need to have Medicare along with COBRA. A retiree and spouse who are over 65 years old go on COBRA in November 2012 and go off COBRA 18 months later in April 2014. They apply for Medicare at that time and are informed that their Medicare SEP expired in June 2013. Now the couple needs to wait until the next Medicare general enrollment period, Jan. 1, 2015, through March 31, 2015, to enroll in Medicare A and B coverage that will start on July 1, 2015. The couple will pay a 10% Medicare B premium penalty in perpetuity for each year without Medicare B coverage. This is not a one-time penalty.
In this example, that adds up to a 20% Medicare B premium penalty each year for the rest of their lives. The table after the jump shows the financial impact of those penalties in a year. The figures are annualized for illustration purposes. It is important to note that for most folks, these costs are in after-tax dollars, making them even more costly.
In addition to these penalties, the biggest price people pay and stress they face is covering the full cost of health care while they have no coverage. In our example, there is a 15-month time frame when the couple has no coverage. That can easily add up to hundreds of thousands of dollars.
Also, while most COBRA plans are “creditable” for Medicare Part D for prescription drug coverage — meaning that they are an acceptable substitute — not all COBRA plans are. In that case, the couple would also pay a 1% per month premium penalty for Medicare D for every month they were without creditable coverage.
The bottom line is that Medicare-eligible individuals must have Medicare A and B in order to have full coverage while on COBRA and protect their retirement nest egg. After paying Medicare B premiums, folks should look to determine if they will be better served by getting a Medicare supplement plan and Medicare Part D plan or stay on COBRA while they can.
In the case of a spouse who is under 65 or coverage is needed for a dependent child, COBRA or an alternative marketplace plan might work just as well.
When your clients are transitioning to COBRA and they are over 65 years old, they will be glad that you advise them about the need to enroll in Medicare Parts A and B on a timely basis. As is often the case, these matters are complicated and worthy of some upfront planning that can save your clients many thousands of dollars and lots of sleepless nights.
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Katy Votava, Ph.D., RN, is president of Goodcare.com, a consulting service that works with financial advisers and consumers concerning health care coverage.