Health insurance for startup founders (and anyone else leaving their job for the unknown)
T = week 6
Disclaimer: I am not a healthcare expert, medical expert, insurance expert, policy expert, or financial advisor. The below thoughts merely reflect how I navigated the process of choosing my own health insurance plan.
TLDR
Healthcare is complicated! And for entrepreneurs, healthcare costs can be a significant component of the “runway” that determines how long they can work without revenue/funding.
So, plenty of people have asked me: what I am doing for my health insurance? Today, I’ll answer that question.
Bottom line: I declined COBRA and took an Affordable Care Act (ACA) exchange plan through Oscar health. I made the decision based on (a) network coverage and (b) my own financial model of the outcomes.
Overview of options
Most entrepreneurs will see 2 clear options for their health insurance: COBRA and ACA exchange plans. Here is a quick primer on them.
COBRA is Ronald Regan’s pithily-titled “Consolidated Omnibus Budget Reconciliation Act of 1985/1986”. Any law that legislators are openly admitting is an “omnibus” is certain to contain some funny things. COBRA is no exception. Page 2 of this famous healthcare law provides price protections for tobacco companies, and by page 67, Congress is allocating “receipts from the leasing of mineral resources of the outer Continental Shelf.”
But COBRA is important because it effectively mandates that employers (with 20+ full-time employees) provide health plans that continue coverage after an employee departs. COBRA is not as powerful as its snake-based acronym suggests though: non-compliant companies simply lose their healthcare tax deduction. So, technically, not all employers provide COBRA-compliant plans. Additionally, the law doesn’t apply to federally sponsored or church-sponsored health plans.
There are a lot of details in terms of who pays and for how long. I recommend the Department of Labor’s COBRA resources for learning all the real nuts and bolts.
But generally: you should think about COBRA as being 18 months of health insurance coverage in which you pay the premium that your employer used to pay on your behalf.
When you leave your job, you’ll get a “COBRA Qualifying Event Notice” that looks like this and outlines costs and timing. Read it!
So COBRA is an option.
The Affordable Care Act (ACA) exchange is another option. Buying an ACA plan involves purchasing insurance on healthcare.gov. The platform bakes in subsidies based on your expected income, and all the plans meet the minimum coverage requirements set by the government, so you don’t have to worry as much about predatory insurers.
For readers under 10 years of age, the ACA was President Obama’s attempt that increased healthcare coverage by increasing transparency and competitiveness of private health insurers. Between 2014 and 2016, the law cut the number of uninsured Americans by 40-45%.
As a small digression: this year, ACA healthcare exchanges are booming. Many states are seeing 20-40% increases in participation, driven by expanded premium subsidies provided by the American Rescue Plan Act (ARPA), and the Biden administration’s increased outreach efforts (open enrollment period expanded by 30 days, number of healthcare navigators quadrupled).
For our purposes, the only important thing to know is that the ACA provides a platform specifically designed to help you compare adequate health insurance plans.
Beyond COBRA and ACA, 4 other options exist:
Parents’ health insurance: for kiddos (under 26 years old), this is a great option. Talk with your parents about it.
Spouse medical insurance: If you go down this route, chop chop: you only have a 30-day window from termination of prior coverage to request a “special election” in another group plan.
Medicaid: Each state runs a Medicaid program to provide health insurance to those with low incomes. Technically, as a pre-revenue entrepreneur, you might qualify for this. For example, in Ohio (it differs by state), you can get Medicaid as a single person if you make ~$17k or less pre-tax. There are “asset resource limits” but they contain some glaring loopholes - for example, up to $636k in home equity does not count against this resource limit, and neither do retirement accounts for young people. But, again, this is a public resource designed for the needy. I did not explore this option myself.
Short-term transition insurance: The payday loans of health insurance, transition insurance plans are typically not ACA-approved. Being outside the ACA exchange, these plans can deny coverage for pre-existing conditions, cap their policy coverage (ex. stop paying for care after $250k-2m of total costs), and stipulate massive out-of-pocket maximums (ex. $30,000 - which you can rack up in an average 3-day hospital stay). I didn’t consider this option and don’t recommend it. If you want to learn more about the scariness of short-term transition insurance, look no further than the Kaiser Family Foundation’s explainers from 2018 and 2019.
For the rest of this post, I’m going to assume the choice is between ACA and COBRA.
Timing
Insurance plans end in 2 different ways. Some plans end on the day your employment ends. Some plans end on the last day of the month in which you ended employment. Pay attention to this because it determines the timing for ACA and COBRA enrollment windows.
In most cases, you have 1-1.5 months to make the ACA vs COBRA decision. The ACA “special enrollment period” is 60-65 days from the date you lose group insurance coverage. COBRA’s enrollment window is 90 days. This means that if you wait to day ~60, you basically have to take COBRA in order to be insured. And if you wait until day 90, you won’t be insured at all.
A few key esoteric details to remember in terms of timing:
One: You don’t need to select anything out of the gate. If you decide to take ACA coverage, you get the period between your termination and the start of your ACA coverage basically for free. If you elect immediately, you start paying immediately. But COBRA can retroactively catch you for that period. As I wrote in “T=0, A Checklist for leaving your job”: Let's say you don’t elect any coverage initially, and then have open-heart surgery 10 days after leaving your job. You’re ok! On day 11, you can enroll in COBRA and be covered for days 1-10 as well. Weird loophole, but that’s the law (“COBRA coverage is retroactive if elected and paid for by the qualified beneficiary” —CMS.gov).
Two: Map the COBRA offramps. When you enroll in COBRA, you can leave at any point but you can’t jump to an ACA plan except in certain circumstances:
Three: If you take ACA, you can’t return to COBRA after the 90-day enrollment window closes. One-way street.
Four: You can change your COBRA plan at certain points. When your employer plan naturally turns over (typically at the turn of the fiscal year), you have the same optionality as other employees: so you can downgrade or change your plan at that point (e.g. go from Cigna Platinum to Cigna Bronze). Keep this in mind as you balance risk and cost.
Decision-making steps
One: start out by estimating a few things to help guide your priorities:
How much do you anticipate spending on healthcare monthly?
What is your larger life plan over the coming 18 months? How much physical risk are you taking? How long will you be relying on the health insurance you choose now?
Are you going to be moving around or staying in a single place?
Two: Get ACA options. Log on to healthcare.gov. Do it now! It takes a few days for the ACA to approve your special enrollment window application, so don’t wait on this. The application takes 10 minutes.
Three: Evaluate COBRA vs ACA plans. When you start looking at plans, I would consider 2 main things: network definition and coverage terms.
Network definition: Start here. If something bad happens, where do you want to be treated? For me, the answer was simple: The Cleveland Clinic. My dad works there. I spend the plurality of my time in Cleveland. It’s a great hospital if something goes awry. When I was considering ACA plans, networks with The Cleveland Clinic was my first filter.
Note: HMO vs PPO’s: HMOs are generally cheaper than PPOs, but they have more restricted network coverage (ex. sometimes zero out of network coverage except for emergencies). I decided I was comfortable with this setup. If I had chronic conditions requiring ongoing care across multiple hospitals, I would have prioritized a PPO. Most ACA exchange plans are PPOs.
Coverage terms. Coverage terms are the dollars and cents of care. All insurance plans have coverage documents that look like this:
It’s easy to compare coverage across healthcare products. For example, let’s say I anticipated spending on mental health services over the coming 18 months. Here are the relevant coverage sections for my Cigna plan vs the Oscar Gold Elite I eventually took:
You should do this with all the plans you are considering, and pay special attention to the areas you are most likely to need coverage in, as well as whether pre-authorization is required for care.
Where do you find documents about network definition and coverage? For COBRA documents, you may need to email your old HR team. On healthcare.gov, click on plan details:
And then scroll to plan documents:
As you can see, there is easy access to the summary of benefits, as well as a provider directory.
Four: Model it out. Here is the model I made for myself. Feel free to download it, and modify assumptions in yellow cells to customize for your situation. It’s not perfect but hopefully, it’s helpful.
Over a 12 month period, I estimate the Oscar Gold Elite Plan should save me ~$10k in total healthcare costs compared to my employer COBRA offering.
I assumed ~$400 in-network spending per month and ~$100 out of network. Here are the rest of my assumptions:
In terms of cash flow:
You’ll notice it’s a little lumpy. That’s because plans renew at different times, so deductibles go back to 0 at different times. And you pay a higher percentage of your healthcare costs when you haven’t spent your deductible.
Because COBRA only lasts 18 months, there is a dropoff in the data in spring 2023. When you lose COBRA, you can select an ACA plan (i.e. a special enrollment period opens up for you). That second-order ACA coverage is excluded from my model.
The charts above might encourage you to say “hey, the ACA plan you are looking at is obviously better than your COBRA plan.” But that’s not always true. All healthcare plans are different, so you just have to input your unique situation.
Five: Buy the plan! Whichever is best, get enrolled.
Am I forgetting anything? Let me know and I’ll send an update. As I began by saying: healthcare is complicated!