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How to replace group health insurance with individual coverage

A step-by-step guide when changing jobs

by Tony Novak, CPA, MBA, MT
revised 4/4/2014

Changing health insurance coverage can often be one of the more perplexing aspects of changing jobs. While federal law in this area is relatively straightforward, the topic is complicated by various interpretations under each of the state' s insurance laws and the operating practices of specific insurance companies. These instructions simplify the task. This article assumes that the previous health insurance was employer-sponsored group health insurance and that eventually a new employer-sponsored or government-type health insurance will be available. The comments in this article do not apply if the prior coverage was individual type insurance or if the new coverage is a welfare type plan.

Step 1: Determine the last day of coverage under the group insurance plan. Usually this is the last day of the month of termination. For example, if your last day of work was June 1, group health insurance coverage usually extends through June 30. If you leave your job December 31, then coverage ends the same day, December 31.

There are two exceptions to this general rule: 1) health plans for union members may end immediately on the last day of employment. 2) small business employers, in an effort to cut costs, may terminate on the last day of the month prior to termination of employment. Usually this is not appropriate or legal but it does happen anyway.

Be wary of an offer from a generous employer who offers to extend coverage beyond the normal termination date. Sometimes small business owners think they are doing a favor to a departing employee by continuing to offer group insurance coverage but they create a legal liability instead. The employer does not have the contractual authority to extend coverage in this situation. The coverage can be retroactively cancelled if the insurer happens do its annual employee audit during that period.

Also be aware that since employers typically pay for their group health insurance in the middle of each month, some companies may be tempted to save money by dropping coverage for an employee who terminated in the first week of the month. While this is not a legal practice, it is still a common complaint of employees.

Step 2: Estimate your medical expenses during the "gap" from known medical issues.

The better your estimate of upcoming medical expenses, the better your decision over which health insurance option offers the best value.

If your known medical expenses are expected to be more than about $1000 over the next three months, or if you have significant medical condition with a high risk of recurrence or medical treatment needed during the gap, then skip this step and go on to Step 3.

This estimate may involve some guesswork but in most cases routine medical costs like high blood pressure or cholesterol medicine are minimal and easy to quantify. It is important to distinguish between known expenses (like maintenance drugs and routine exams) and unknown (like an accident or illness). Of course, the "unknown" bills can be much larger that the "known" be expenses and that is the fundamental reason for using insurance. For this step, use only the known expenses and your best estimate of the time between group health plans. If you expect new group insurance to be available in 3 months and you have a doctor' s visit and a prescription refill in the meanwhile, you might expect your medical expenses, for example, to be $120 for the doctor and $70 for the prescription.

Step 3. If you have family coverage, repeat the "Step 2" estimation for each family member to get a total estimate for the policy. The important thing is that each family member should be evaluated individually, rather than the family unit as a whole, in order to find the most efficient insurance coverage.

If your known expenses are less than $1000 for each person, then skip Step 4 and 5 and look for low cost coverage in Step 6.

Step 4. Determine whether you are eligible for COBRA coverage.

COBRA coverage is typically the best and perhaps the only temporary coverage option available to individuals with significant ongoing medical issues. It is usually also the most expensive option.

This is largely a function of the number of employees in your company. Generally a company with less than 25 employees is subject to COBRA law. Employees of smaller companies do not have access to COBRA coverage, but are offered other alternatives. Also keep in mind that if you are eligible for COBRA coverage, then the options listed in "Step 5" and "Step 6" are not available.

If you are eligible for COBRA, then you need to do nothing at this time. The employer must notify you of the next procedures. This process may take up to three months. Unfortunately, in the meanwhile, your insurance might be reported as terminated and cause claims to be denied during the transition. The insurance is then retroactively reinstated at a later date. This can cause difficulties getting prescriptions refilled and may require doctors and hospitals to resubmit claims after the COBRA conversion is completed. Unfortunately there is usually little that you can do to speed up the process.

Be aware that COBRA coverage is the most expensive type of health insurance and that the plan administrator may require your payment of up to three months within 30 days of their written notice. This could mean that the initial premium bill could be up $1,400 or more for single coverage and up to $4,500 for family coverage.

Also be aware that if you are eligible for COBRA but do not exercise the option or are cancelled for non-payment, then alternatives in Step 5 or Step 6 are still not available for the 18 months that COBRA would have otherwise been available. (This provision is interpreted differently by differently by different states and insurance companies). This is one of the biggest "loopholes" in our nation' s legislative efforts to provide universal access to health insurance and catches thousands of people unaware.

If the employer does not notify you in writing, then your enrollment period simply extends for a longer time. This is both good and bad. If you enroll in COBRA at a later date then all retroactive premiums must be paid at once batch to the date of termination. On the other hand, if you are eligible for COBRA, the employer never provides written notice and you have no significant medical claims, then you received the "purchase option" of medical coverage for free. By not exercising the option and having few medical bills, you saved money. Note the limitation in Step below.

Step 5. Determine eligibility for "individual conversion". Contact the insurance company directly by telephoning the member service number listed on your insurance ID card. This information is usually not available on Web-based member support systems. When you call, it is important to use the correct terminology. Many health plan members receive incomplete or incorrect information from telephone support departments primarily because the service representative did not fully understand the insured' s question. After identifying yourself, state that your group insurance is terminating and that you want to exercise an "individual conversion". Basically this means that you switch to any individual health insurance plan that the company offers without the need to go through medical underwriting. A complete written application may be needed and the application may include questions on medical history. Acceptance is guaranteed. Pre-existing medical conditions that were covered under the old insurance are covered under the new plan.

If the insurer offers no individual conversion, this is probably because they have no individual insurance plan available in your area. (If you happen to know that individual insurance is available and the company says this option is not offered, then be persistent with your questioning. We hear about a significant number of cases where health plan members are incorrectly told that there is no individual conversion option. Insurance companies do not promote or encourage this option and/or inexperienced customer service representatives may not be aware of the option).

We expect that as a business practice, and not as a matter of law, that individual conversion options will disappear from the market by the end of 2014.

Step 6. Determine eligibility for coverage through the Health Insurance Marketplace

During the months of October, November and December most individuals without health insurance can enroll into a plan to begin on January 1 through the Health Insurance Marketplace operated by the state or federal government (depending on where you live). Additionally, individuals who lose coverage at other times of the year may be eligible to enroll. This article does not cover details of the Health Insurance Marketplace. See HealthCare.gov, FreedomBenefits.net and OnlineNavigator.org for more information.

These qualified health plans offer more coverage and should be distinguished from the "mini-med" plans like Core Health Insurance that are commercially available at affordable rates but do not provide the same level of immediate protection for pre-existing conditions.

Step 7. Find low cost temporary insurance. If you do not have significant pre-existing medical conditions of ongoing medical treatment, look for a policy that specifically says "short term medical insurance" or "STM" in the title. These policies are substantially less expensive than regular major medical insurance yet offer coverage for catastrophic risks. Be aware that STM policies are exempt from many of the coverage provision of the Affordable Care Act. Don't assume that coverage follows the same familiar standards. A state-by-state listing of high quality short term medical insurance plans can be found by clicking the "Get a Quote" link at Freedom Benefits.

Affordability

If the option listed in Step 4, Step 5 or Step 6 is unaffordable, then consider a supplemental insurance or mini-med insurance plan. Realize that you are taking a financial risk, but having some insurance in the form of a supplemental plan or "mini-med" coverage is far better than having no insurance at all. The financial savings available through in-network pricing, even for out-of-pocket medical expenses justifies the price of a limited benefit plan. See Core Health Insurance or Freedom Benefits for more information.

Other Tips

It rarely pays to buy individual dental insurance as a short term coverage. Plan to have your dental work done before losing group coverage, if possible, and defer new dental work, if possible, until covered under a new group coverage.

You should consider replacing or "converting" group life insurance to an individual life insurance policy at this time.

Also consider the importance of maintaining disability income insurance to replace your salary in the event of an extended injury or illness. This important coverage should be part of your financial protection regardless of whether offered through an employer benefit plan or purchased separately on your own. Quotes and secure online enrollment are available at Freedom Benefits.

OnlineAdviser offers free personal professional assistance with any of these issues upon request.

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