How to Keep Your Insurance for Free: The COBRA Loophole

Let's say you just lost your job, like the 3.3 million people in the last week, due to the COVID-19 pandemic. You are one of the lucky people that has health insurance through your company. By law, your company must give you the option to continue your insurance. However, there is a catch: your employer will not pay any of your premiums, and as such if you want to continue your insurance, you will have to pay the entire premium every month. If your company covered a significant amount of your insurance, this might be completely unfeasible if you just lost your job. However, the good news here is that there is a loophole in the law that you can use to your advantage in this situation.

First Things First: The Affordable Care Act

Under the ACA, losing your job is a Qualifying Life Event (QLE) under the Affordable Care Act, which means you are eligible for an ACA healthcare plan. You should check with your state exchange to see if there is any assistance available to you. This can potentially be cheaper and provide better coverage.

COBRA is Retroactive

When you receive your COBRA letter, you have 60 days to submit the paperwork with your insurance company. However, no matter when you submit the paperwork during this time, you are covered retroactively from day 1. The catch: you will also be responsible for all premiums from day 1. This can easily be up to thousands of dollars you don't have. If you don't have coverage and need to go to the hospital, however, the lack of coverage could easily bankrupt you. Luckily, this combination of rules allows you to pull an interesting trick, and take advantage of the rules to get free coverage with the following two steps:

1. Fill out the COBRA form, sign it. Give it to someone you trust in case you are incapacitated and cannot file it yourself
2. If you need care that would be more expensive than the premium paid, file COBRA. Your insurance company cannot deny you coverage and you will be covered from day 1. You have 45 days to pay your COBRA premiums (which will be 2 months worth).

For example, let's suppose you were laid off on March 1st. You will have 60 days, or until April 30th to submit your COBRA forms. Your insurance was $150 per month, with 80% paid by your employer. This means your employer paid $600 per month. Your total COBRA premium will be slightly more than $750 per month.

You fill out your COBRA forms and keep them. Let us describe two scenarios:

1. You don't need any care. After 60 days, you don't submit COBRA. You don't pay anything.
2. You go to the hospital on April 20th. The average hospital visit costs $15,734 and your insurance has a $3,000 out of pocket maximum. You submit COBRA and pay 2 months of premium and the out of pocket maximum.

Without insurance, you would be responsible for the full $15,734. With COBRA, you would need to pay the 2 months of premiums at $750 per month and the $3,000 out of pocket maximum, which is $4,500, $11,234 less.

You save $1,500 if you don't need care, and $11,234 if you do. You have effectively paid nothing for 2 months of health insurance.

Taking it One Step Further: Payment Grace Loophole

When you submit your COBRA application, you do not have to pay the premiums immediately. You also have an additional 45 days to submit payment, known as the payment grace period. While technically submitting your COBRA means you are committing to buy health insurance and thus owe the premiums, if you have not secured coverage by day 60, it might be a good idea to roll the dice on this loophole. The way it works is that you will submit the COBRA forms on day 60, regardless of whether you need care or not. Then you will either pay the premiums or not based on whether you need care in the next 45 days. Usually, when the member does not pay, the insurance company will not go after you for premiums unpaid and simply not cover you.

Thus let us extend the example above. On April 30th, you submit the COBRA paperwork, but do not pay your premiums. You now have until June 15th to pay your premiums if you want coverage. Two possible situations again happen:

1. You do not need care. You let 45 days pass and do not pay your premiums.
2. You go the hospital on May 20th. The same costs above apply. You need to pay 3 months of premiums plus the $3,000 out of pocket. This comes to $5,250 compared to $15,734. This is $10,484 less.

Using this strategy, you can get up to 105 days of free coverage if you don't need care, and still have coverage in case of medical events. Do note that this second strategy means you technically owe the insurance company premiums even if you don't need care. However, I don't know of a situation where an insurer pursued a subscriber for premiums. In most cases, they simply act as if you never submitted COBRA.

I am not an attorney. The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information.