Except when termination results from the failure to pay any required premiums, medical expense contracts usually contain (and are often required to contain) a conversion provision, whereby most covered persons whose group coverage terminates are allowed to purchase individual medical expense coverage without evidence of insurability and without any limitation of benefits for preexisting conditions. Covered persons commonly have 31 days from the date of termination of the group coverage to exercise this conversion privilege, and coverage is then effective retroactively to the date of termination.
This conversion privilege is typically given to any employee who has been insured under the group contract (or under any group contract it replaced) for at least three months, and it permits the employee to convert his or her own coverage as well as any dependent coverage. In addition, a spouse or child whose dependent coverage ceases for any other reason may also be eligible for conversion (for example, a spouse who divorces or separates, and children who reach age 19).
A person who is eligible for both the conversion privilege and the right to continue the group insurance coverage under COBRA has two choices when eligibility for coverage terminates. He or she can either elect to convert under the provisions of the policy or elect to continue the group coverage. If the latter choice is made, the COBRA rules specify that the person must again be eligible to convert to an individual policy within the usual conversion period (31 days) after the maximum continuation-of-coverage period ceases. Policy provisions may also make the conversion privilege available to persons whose coverage terminates prior to the end of the maximum continuation period.
The provider of the medical expense coverage has the right to refuse the issue of a "conversion" policy to anyone (1) who is covered by Medicare or (2) whose benefits under the converted policy, together with similar benefits from other sources, would result in overinsurance according to the insurance company's standards. These similar benefits may be found in other coverages that the individual has (either group or individual coverage) or for which the individual is eligible under any group arrangement.
The use of the word conversion is often a misnomer. In actuality, a person whose coverage terminates is given only the right to purchase a contract on an individual basis at individual rates. Most Blue Cross—Blue Shield plans and some HMO plans offer a conversion policy that is similar or identical to the terminated group coverage. However, most insurance companies offer a conversion policy (or a choice of policies) that contains a lower level of benefits than existed under the group coverage. Traditionally, the conversion policy contained only basic hospital and surgical coverages, even if major medical coverage was provided under the group contract. Now many insurance companies provide (and are required to provide in many states) a conversion policy that includes major medical benefits, which do not necessarily have to be as broad as those under the former group coverage.
Some plans offer a conversion policy that is written by another entity. For example, an HMO might enter into a contractual arrangement with an insurance company. In some cases, the HMO and insurance company are commonly owned or have a parent-subsidiary relationship.
Self-funded plans, which are exempt from state laws that mandate a conversion policy, may still provide such a benefit. Rather than providing coverage directly to the terminated employee, an agreement is usually made with an insurance company to make a policy available. This agreement is typically part of a broader contract with the insurer to also provide administrative services and/or stop-loss protection. Because the availability of a conversion policy results in a charge (such as $.65 per employee per month), most self-funded plans do not provide any continuation of coverage beyond what is required by COBRA.
