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Employers Beware: If you extend COBRA benefits, you may be denied stop-loss coverage

cobra benefitsA recent case highlights why a plan sponsor must use caution when agreeing to provide COBRA coverage that extends beyond the maximum COBRA coverage period.  The court in Bekaert Corporation v. Standard Security Life Insurance Company of New York, 2011 WL 3568028 (N.D. Ohio) recently held that an employer who offered extended COBRA coverage pursuant to a separation agreement with a particular employee was not entitled to stop-loss coverage.  In Bekaert,a retiree received extended COBRA continuation health coverage pursuant to a separation agreement with the employer.  The retiree's medical claims were paid under the employer's self-funded health plan and then were submitted for reimbursement under the employer's stop-loss policy as excess loss claims.  The stop-loss carrier denied the claims, stating the retiree was not a covered person under the stop-loss policy.

The employer argued that as the plan administrator, it was entitled to interpret who was eligible for COBRA coverage under its plan and that the stop-loss carrier was bound to cover claims for those eligible individuals.  The stop-loss carrier responded that (1) the retiree was not eligible for coverage under the plan because he received COBRA coverage in excess of the maximum period stated in the health plan; and (2) that the stop-loss policy excluded payment for COBRA coverage that was not offered according to the COBRA regulations. 

The court noted that a plan sponsor is not prohibited from offering COBRA coverage as part of its health plan for a period that is longer than the statutory requirements.  However, the employer could not interpret the health plan as extending COBRA coverage beyond the actual time limits stated in the health plan itself.  The health plan at issue provided for COBRA coverage of only eighteen months, but the retiree's separation agreement allowed for a longer period of coverage.  Since the separation agreement was not a part of the stop-loss policy, the stop-loss carrier was not bound by its terms and was not obligated reimburse the employer for the retiree's medical claims.

Moreover, the court recognized that the stop-loss policy expressly excluded coverage for any COBRA retiree whose continuation coverage was not offered according to the COBRA regulations.  The court reasoned that "according to" meant that COBRA benefits must be offered in a way that is dependent upon the COBRA regulations.  Since the coverage determination of the retiree's medical claims were made pursuant to the separation agreement (and not COBRA), health coverage for the retiree was excluded under the stop-loss policy.   

This case is particularly important for health care providers, who generally recognize the importance of continued health care coverage for departing employees.  They should remain cautious when extending benefits for a term longer than those provided by COBRA regulations.  Before doing so, they should seek advice from their attorneys and insurance carriers about the potential effects on stop-loss coverage.  The attorneys at Foster Swift would be pleased to answers any questions you have in this regard.

Categories: Employee Benefits, Employment, Hospitals, Insurance, Physicians

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