Fixing the Troubled Relationship between Medicare and COBRA

Today we launch our figurative Wall of Shame category of videos. Given the high level of dysfunction in healthcare, we will have many topics to choose from.

First on our list is a problem we would like the federal government to fix: the confusing and often ridiculously punitive relationship between Medicare and COBRA. Medicare is the program primarily for those 65 and over but it also covers younger individuals on disability due to serious illness or injury. COBRA is the temporary extension of group coverage which, under federal law, is offered to those who leave a company that has 20 or more employees.

The relationship between Medicare and COBRA isn’t just confusing, it can cause great harm to people from uncovered medical expenses they didn’t expect and/or gaps in coverage AND lifetime Medicare Part B premium penalties. What is most frustrating is this problem tends to affect people who worked the longest and hence paid payroll taxes for decades to support the very system that bites them.

Some background

COBRA is federal legislation that passed in 1985 because a temporary safety net was needed for workers and their dependents when a worker left a job and lost coverage. COBRA allows workers and their dependents to buy coverage as an appendage to the former group. This was an important protection for those people who, due to pre-existing conditions, were not eligible to purchase coverage in the individual market.

There are two problems with COBRA for people who are 65 and over and, as a result of their age, are Medicare-eligible.

First, coordination of benefit rules deem COBRA coverage secondary to Medicare. Most people don’t know this and many elect COBRA because the group coverage is familiar to them and Medicare is not. But the clever people who work in Recovery and/or Claims Departments for insurance companies know this rule well. We have seen many people 65 or over on COBRA who have come to us confused because the COBRA insurer has paid a very small amount on a claim looking for Medicare to pay first but that individual has not enrolled in Medicare. They are shocked to discover they are financially responsible for the remainder of the bill.

Second, workers who elect COBRA at 65 or later often stay on COBRA for a full 18 months and thereby miss their eight-month window to apply for Medicare Part B through a Special Enrollment Period. As a result, they often have a gap in coverage AND lifetime Medicare Part B premium penalties.

Why aren’t more people outraged by this? It is absolute tyranny to pass federal legislation which provides a benefit to some but can work to the detriment of so many others who do not understand these complex rules. Part B lifetime penalties were intended for reckless, irresponsible people who decided not to enroll in Medicare at 65 because they were healthy and did not want to pay Medicare Part B premiums – they shouldn’t be punishing people who have had group coverage consistently for decades.

The fixes

One possible fix is that COBRA simply isn’t offered to people 65 or older. After all, if you are on COBRA prior to age 65, COBRA is supposed to end when you turn 65 and become eligible for Medicare. And, because you should be on Medicare Part A and Medicare Part B to elect COBRA, electing COBRA as secondary coverage is for most people a terrible financial decision.

Another possible fix is to allow COBRA to be primary as long as one is eligible for it and extend the Special Enrollment Window to coincide with the end of COBRA. This is exactly how Medicare Part D works. I don’t believe there is any acceptable rationale for the government collecting lifetime premium penalties for people who elect COBRA and misunderstand these complex rules. Per the Congressional Research Service, in 2020 about 1.4% of Part B enrollees (about 776,200 people) paid this penalty and premiums were about 25% higher than they would have been without a penalty. Government can’t be perfect but this problem has been around since COBRA was created in the 1980s and is long overdue to be rectified.