United States: New Guidance On COBRA And ACA Marketplace Coverage: The Gap In Coverage Is (Not Quite) Filled

There has been much confusion and concern about the interplay between the COBRA continuation coverage rules and the new Health Insurance Marketplace established under the Affordable Care Act (the "Marketplace"). One important question has been how individuals could transition from COBRA continuation coverage to (often cheaper) Marketplace coverage. Also, many individuals are confused about whether they should continue their available COBRA continuation coverage or separately opt for coverage through the Marketplace. To help clarify the rules, the government agencies have issued some important new guidance.

Background. COBRA continuation coverage is available to eligible individuals (qualified beneficiaries) who lose group health plan coverage due to certain qualifying events (such as job loss, divorce, employee death, and cessation of dependent child status). COBRA coverage is typically expensive (up to 102% of the full cost of group health plan coverage) and lasts for limited periods (e.g., 18 months after a termination of employment and 36 months for other qualifying events). By contrast, qualified health plans available in the Marketplace are generally cheaper and continue for as long as an individual wishes to pay for coverage. A problem arises where someone elects COBRA coverage and continues that coverage outside of an annual open annual enrollment period for Marketplace coverage (the first of which ended on March 31, 2014).

The Problem. As explained in a Frequently Asked Question issued by the Centers for Medicare and Medicaid Services (CMS) dated April 21, 2014, once someone elects COBRA coverage, he or she cannot simply drop COBRA coverage and enroll in a qualified health plan through the Marketplace outside of an annual enrollment period. The person may voluntarily drop COBRA coverage, but will have to wait until the next annual open enrollment period (or an otherwise available special enrollment period) to take cheaper Marketplace coverage. Or, if the person wants continuous coverage, he or she must continue to pay for COBRA coverage until that next available enrollment period for the Marketplace.

The government agencies were concerned that this understanding of the interplay between COBRA coverage and Marketplace coverage was not widely understood and may have left people forced to pay for COBRA coverage when they might prefer to pay less for the Marketplace coverage.

The Solution. To solve that problem, two pieces of new guidance were issued.

First, on May 2, 2014, CMS issued a bulletin describing, among other things, Marketplace special enrollment periods for COBRA qualified beneficiaries. Citing concerns that individuals may not have understood these rules and may have inadvertently locked themselves into COBRA coverage, CMS established a limited special enrollment period, beginning on May 2, 2014 and ending on July 1, 2014, during which any individual currently receiving COBRA coverage benefits may voluntarily drop COBRA coverage and enroll in a qualified health plan through the Federal Marketplace (if the individual is otherwise eligible for coverage through the Federally-facilitated Marketplace).

Second, also on May 2, 2014, the U.S. Department of Labor ("DOL") released proposed regulations related to its model COBRA general notice and its model COBRA election notice. The proposed regulations explain that the model notices have been revised to reflect that the Marketplace is now open and to explain the Marketplace special enrollment rules in more detail. The revised notices are available at http://www.dol.gov/ebsa/cobra.html. Until final regulations are issued, use of the new model notices will be considered good faith compliance with the COBRA notice requirements.

Problem Solved? Not Exactly. The new guidance responds to the immediate confusion by providing affected individuals with a limited window, until July 1, 2014, to opt out of COBRA coverage and opt in to a qualified health plan through the Marketplace. One drawback to this relief is that the new special enrollment period is only directly applicable for the Federally-facilitated Marketplaces. CMS encouraged state-based exchanges to adopt similar opportunities; however, that decision is up to each state-based exchange.

Another limitation on this guidance is that it does not really solve the problem that these issues are still quite confusing for many COBRA qualified beneficiaries and could raise a serious problem for many people trying to choose between COBRA and Marketplace coverage. Here's why. When a COBRA qualifying event occurs, coverage could be lost either immediately or, in many cases, at the end of the month in which the event occurs. Notice of COBRA rights (which will now explain Marketplace rules) is not provided for weeks and, sometimes, a couple months after the qualifying event. At that point, there is a gap between the loss of coverage and someone's actual choice of COBRA or Marketplace coverage.

During that gap, individuals could incur significant claims. The hallmark of COBRA coverage is that it is retroactive to the date of the loss of coverage – it is designed to fill that gap. Marketplace coverage, by contrast, applies prospectively only. Therefore, individuals will be faced with a choice: (a) elect the more expensive COBRA coverage retroactively to make sure claims are paid but then be forced to continue that coverage until the next annual enrollment period (or a special enrollment period if earlier); or (b) take the cheaper Marketplace coverage but suffer the gap in coverage and be forced to pay for the claims incurred without coverage. That conundrum is not explained in the new model COBRA notices. Perhaps future guidance will solve this problem by simply allowing individuals the choice to opt out of COBRA coverage and into Marketplace coverage on more frequent intervals.

Plan sponsors and administrators should review this new guidance closely and consider how to modify the model notices to address their specific factual situations.

New Guidance On COBRA And ACA Marketplace Coverage: The Gap In Coverage Is (Not Quite) Filled

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