RE: COBRA

[Rip Verkerke <ripv@virginia.edu>]

A student asked:

        Just a quick question which I couldn't catch
you after class to ask.  Why would a sophisticated
employee choose to drop the coverage they have through
their spouse's employer, which is presumably
indefinite in duration and at least subsidized if not
fully funded by the employer, in order to elect COBRA
coverage, which they can likely only keep for 18
months during which they will be paying 102% of
typical premiums?  Not really substantive, just
wondering how we came to the conclusion that denying
dual coverage would result in a split between the
sophisticated and unsophisticated.


I responded:

That's a good question.  I should perhaps have been more clear.

In general, COBRA coverage is expensive and so mostly those former employees
with unusually large expected medical expenses will elect coverage.  If
dependent coverage under a spouse's plan limits coverage for a particular
medical service or condition (e.g., no rehabilitative services, low lifetime
maximum benefit for AIDS coverage), then it could well be advantageous to
drop coverage under the spouse's plan and then elect (and pay for) COBRA
coverage.  As Andrea suggested in class, those circumstances are probably
pretty unusual, but cases on the issue suggest that it can happen.  Of
course only sophisticated employees would know to drop spousal coverage
before election in order to evade the "draconian alternative."