Update 2/20/09: The policy I purchased, after the long analysis below, turns out to not satisfy the minimum requirements of Massachusetts law. It fails to provide insurance adequate for an individual to avoid paying the penalties Massachusetts imposes on individuals who fail to purchase health insurance. If you are willing to pay those penalties, you might still elect to purchase such a plan.

I have canceled the policy. I am pursuing MSP still but may end up opting out of COBRA now so I can opt-in again in March when the Federal benefit kicks in.

Update 2/19/09: It now appears the benefits provided under the stimulus bill ARE NOT retroactive. This means if you start COBRA coverage on 3/1/09, no problem, you should only have to pay 35%. But if you already paid the full rate for January and February, you are stuck. If you were laid off on 12/31/08, your option to sign up for COBRA expires on 3/1/09, but this bill is supposed to extend your eligibility period. However, the big question is whether, if I elect coverage on 3/1/09, I will pay 35% of March or if I will also be on the hook for $2600 for January and February. It would seem ridiculous to have to pay for coverage I did not use.

Update 2/16/09: The Economic Stimulus Package signed by President Obama includes provisions for the Federal Government to pay 65% of COBRA. This benefit is available for individuals who make up to $125,000/year and families at $250,000. That means, for most unemployed persons with higher base incomes, if they are not eligible for Massachusetts' 80% coverage, they will be eligible for the Federal subsidy which is better than any private insurance option.

The discussion below remains relevant for the self-employed, but if you can get COBRA under these terms, you are probably better off doing so.

Text of original post follows...

The most disturbing aspect of being laid off is losing health insurance. I found a solution for my family, and while it is not necessarily for everyone, I wanted to describe it here and help educate others facing similar choices.

Federal law allows you to continue participation in the group coverage you had while employed through COBRA, but:

• It's expensive. Like ridiculously expensive. Do you realize what health insurance is costing your employer? Well, prepare for a rude awakening when you find that to continue the economy/value plan your employer was purchasing to keep costs down will cost over $1300/month to insure your family.
• If your company goes under, COBRA stops. Yes. If your layoff is a prelude to the company being dissolved, you should realize that when that does happen, you will lose your health insurance.

When you are laid off, you have some breathing room because you have 60 days to elect COBRA, then another 45 days to make the first payment. But this is not helpful, because you will spend those 60 days in an uninsured mindset, especially if you have a family.

Follow up:

The baby has a fever. Is it an ear infection? Do we have any amoxicillin left over from the last time? Let's try that first. Looks like his eye is getting infected--conjunctivitis again. OK, we have a couple of different types of eyedrops left over; we'll try the erithromyacin ointment first, then the ciprofloxacin drops. It would be nice to take the baby to the doctor but that $25 visit is going to cost $1325 because once we do it, we will have to elect COBRA. Fortunately, the fever passed and the eyes cleared up. (note: see comment below; I am not recommending this as a course of treatment, just relating my own personal experience.)

Now the kids are vomiting and have diarrhea. Me too. Crap. Well, put them on the BRAT (Banana, Rice, Applesauce, Toast) diet, stock up on Pedialyte, and hope for the best.

Experience has taught us that these situation are not emergencies and even if you go to the doctor, they will just tell you to continue what you are already doing. But when it starts, you don't know that for sure. And of course, if things did get bad, we'd go to the doctor and be glad we had COBRA. But the uncertainty is maddening.

I wanted to get out of this cycle quickly, so I investigated my options.

Massachusetts Medical Security Program

If your are receiving unemployment, you can apply for the Medical Security Program and, if approved, receive 80% reimbursement for COBRA premiums paid. In my case, this means my expense would become about $260--a pretty good deal, right? OK, but...

Eligibility is based on an annualization of the past 6 months income plus projected income (your unemployment benefits). If you are at the 400% Federal Poverty Guidelines level, you qualify. Most people will qualify, but if you had a six-figure income or did not have a big family of dependents, it could be close. For a family of 5, the maximum income is 99,200. So, you'd have to be making 200K to be completely ineligible.

But am I eligible or not? I spent 30 minutes on hold today waiting for a person to answer the phone and had to give up because someone was calling me about potential work. I think I qualify, but if I don't, I'm out $1000 or more each month.

How does my freelance income affect my eligibility? I did a project last week that blew away my eligibility for unemployment benefits, but this week, I am probably eligible again. Does my freelance income go into a recalculation of eligibility? I am not comfortable with this level of uncertainty--I suspect I will end up ineligible, but I have to elect COBRA and put $1300 on the table each month, then hope I get reimbursed.

Massachusetts Health Connector

The Massachusetts Health Connector has a website that helps residents find health insurance. If you are poor and not eligible for unemployment, you may be able to take advantage of the Commonwealth Care program (see the Connector website--I could not link to it directly). If you are not eligible for Commonwealth Care, you can use the web-based tool to generate a list of private insurance options.

Most of those options will be less expensive than unsubsidized COBRA, with costs for family coverage ranging from $775 to $1800/month. But at this point you must educate yourself on how health insurance plans work and why the premiums vary so widely.

Why we buy insurance

We buy insurance to manage risk. Risk, in a financial context, is all about timing. For healthy people, it is typically about insuring against catastrophic risk and then managing the timing of unpredictability. But for many insurance products, if the risks are low, what you are essentially doing is "pre-paying" your medical services.

Each month, you pay a premium and co-pays for when you utilize health care. So, for a healthy adult like me, I would pay the premium all year, then a $25 copay for my annual checkup. So that annual checkup really costs many thousand dollars. For the kids, there are more doctor visits, vaccines, well-baby and sick-baby visits, etc. but the bottom line is that for 2009, electing COBRA, I am guaranteed to pay over $15,000. That's some pretty expensive doctor visits.

Of course there is the chance of catastrophe. That's what we are really paying for. What if someone has cancer? What if I had a heart attack or stroke? That's why you CAN'T go naked with no health coverage at all.

The other reason we buy insurance is to get into a negotiated fee network. If you do not have health insurance, doctors and hospitals will charge you many times the rate they charge people with insurance. For those outside the US, perhaps all of this is bizarre, but that's how it works here. People without insurance who have catastrophic medical problems quickly amass huge medical bills, then make partial payments until they lose their homes to foreclosure and declare bankruptcy.

Deductibles

I was prompted to think about insurance differently because of my review of plans with high deductibles. At first, I thought this was a bad idea...you have to pay out of pocket up to a certain amount. But you are already doing this when you pay that high monthly premium. A component of the premium is really your prepay of a deductible.

I met with Stevn Gubb, an insurance agent from the National Association for the Self-Employed who showed me a plan with a $10,000 deductible and monthly premium under $500. I had some reservations...and found some websites calling such deals scams...but most of the complaints I could find were by people who did not understand how this works or for whom the product was not really appropriate.

If you and your family are healthy--you do not routinely use health care except for scheduled doctor visits--then it does not make sense to pay a high premium to keep your copays low. Why pay $800 a month to save $100? You can absorb a deductible fairly quickly from the savings in premium payments. Another way to think about it, if you are risk averse, is to put aside the difference between a high deductible plan and a no-deductible plan in savings so that when expenses do come up, you have savings to cover it. If the expenses do not materialize, you bank the extra money.

Plans like this give you the two things you need most:

• protection against catastrophe, and
• negotiated fee structure

Now I am not ready to fully recommend this plan because I have not actually used it yet. I don't know what the actual doctor visits are going to cost when we have to pay for various tests and things that we never saw on the bill before. But I am willing to take the money risk of more expensive doctor visits over the potential failure of the state to pay my COBRA benefits.

Caveats

This type of plan is primarily for the self-employed. In the future, if I take a full-time job with benefits, then I will happily go back to paying $200-300/month for a no-deductible plan. But as I develop my business, I'm seeing many things with a different perspective and I hope I can make this work.

There is no prescription drug benefit. We get a discount card, and I don't really know exactly what the costs will be, but we are not big drug consumers. I did some price checks on the drugs we have in the house, and it was not bad.

This plan is not for people who have chronic conditions or at risk for developing such conditions. I've seen my doctor fewer than 10 times in the past 7 years. I went without health insurance when I was single. Having kids changes things, but they are healthy and do not have any conditions that require monitoring or treatment.

Other Options

Internet Insurance Brokers. When I first started looking, I went to a friend's website and followed a link to http://www.online-health-insurance.com/ But this is just a marketing vehicle for agents. What happens is you submit your information then random agents start calling you. No thanks.

MSP Direct Coverage. Ari Herzog commented on my post about unemployment with his solution--he was able to demonstrate sufficient need to get direct coverage from the Medical Security Program.

Final Thoughts

This is a big topic and all I can really write about is my experience. I think it was helpful to meet with Steve, a person I knew personally and developed some trust with, before purchasing his plan. Time will tell whether the plan gives us what we need, but it is our best effort to manage these risks and control costs.