COBRA Subsidy: Cost and Cash Flow

It helps if you have some cash reserve. That’s the conclusion I reached after reading this article on Yahoo!

Confusion a part of health care plan in stimulus

It’s about the COBRA subsidy enacted in the latest stimulus law. The lawmakers gave laid off workers a 65% subsidy on COBRA premiums for nine months. However, it’s easier for them to have a debate and vote than getting the systems and procedures in place at the Treasury Department, the IRS, the employers and the insurance companies. People want to sign up for COBRA, but the employers and the insurance companies don’t know how to charge them the reduced premium or how to get reimbursed from the IRS or from the Treasury Department. If you have a cash reserve, you can pay the full premium now and get reimbursed later. The law is already the law. You know will get the subsidy. It’s a matter of cash flow, not a matter of the cost. You know eventually you will be reimbursed by someone: the employer, the insurance company, or the IRS. Let time sort it out. Get insurance first.

But it gets complicated when you don’t have the cash. You have to wait in limbo until they figure it out how to give you the COBRA subsidy. Doctors, hospitals, and pharmacies won’t take you unless you pay them in cash or give them an insurance card. Telling them you will have COBRA when they figure out the subsidy won’t fly. You won’t have health care until then. It’s painful.

It helps if you have some cash reserve. A cash reserve make it easier to manage the cash flow.

People often confuse the concept of cash flow and cost. A cash outflow which will be reimbursed in the future is not a cost (except for time value). A deal that requires no cash now but more cash later is a cost. When people focus on cash flow instead of on cost, they often end up paying a high cost, as in the “no payments for 12 months” deals. When you are able to take a hit on cash flow, you often get a low cost, as in a lower interest rate on a 15-year mortgage versus a 30-year mortgage.

Speaking of mortgages, let me tell you another story. A few years ago when I inquired about a loan refinance, the loan officer told me the closing cost in their loan is not really a cost to me because I will be able to skip a payment during the refi and I can use the payment I normally would make to pay for the closing cost. No additional immediate cash flow from me, yes. No cost? No. Guess what happens to the skipped payment? Added to the principal balance. After hearing that kind of logic about cost and cash flow, I decided not to do the refi with that company.

Build a cash reserve. Pay more attention to cost than to cash flow.

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Comments

  1. WARNER says

    “Focus on cost instead of cash flow”. That’s the best nugget of wisdom I’ve heard in some time. Well played.

  2. James says

    I am with you on the cash flow vs cost (although I didn’t know them in those terms). When presented with a “deal” I often asked myself “what does it cost me in the long run?” I supposed by asking myself that question, I already focused on the cost part.

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