The Purpose of Coordination of Benefits (COB)
In the world of health insurance, it is possible for an individual to be covered under more than one health insurance plan. For example, a person might have coverage through their own employer and also be covered as a dependent under a spouse’s plan. To prevent over-insurance—where a claimant might actually profit from an illness or injury by collecting from two different companies for the same loss—the insurance industry uses the Coordination of Benefits (COB) provision.
The COB provision is a standard set of rules established by the National Association of Insurance Commissioners (NAIC). Its primary objective is to ensure that the total amount paid by all plans does not exceed 100% of the allowable medical expenses. For those preparing for the complete Health Insurance exam guide, understanding the hierarchy of these payments is essential for passing the licensing exam.
Primary vs. Secondary Plan Responsibilities
| Feature | Primary Plan | Secondary Plan |
|---|---|---|
| Order of Payment | Pays first, as if no other coverage exists. | Pays after the primary plan has processed the claim. |
| Payment Amount | Pays up to the policy limits or the full allowable amount. | Pays the remaining balance, but never more than the total expense. |
| Deductibles | Must be met by the insured before the primary plan pays. | Often covers the primary plan's deductible or coinsurance. |
| Liability Limit | Full policy liability. | Excess liability (only what is left over). |
Determining the Order of Benefits
When a claim is filed, the insurers must determine which plan is Primary and which is Secondary. The following rules are applied in a specific sequence to establish this order:
- Non-Dependent vs. Dependent: The plan that covers the individual as an employee, member, or subscriber (the policyholder) is primary. The plan that covers the individual as a dependent (spouse or child) is secondary.
- The Birthday Rule: This applies when a child is covered by both parents' plans. The plan of the parent whose birthday falls earlier in the calendar year (month and day only) is primary. If both parents have the same birthday, the plan that has been in effect the longest is primary.
- Active vs. Inactive Employee: A plan covering a person as an active employee is primary over a plan covering that same person as a retired or laid-off employee (or their dependent).
- COBRA vs. Active Plan: If an individual has coverage through COBRA and another group plan, the group plan is primary and COBRA is secondary.
Mastering these rules is a common requirement when tackling practice Health Insurance questions.
Exam Tip: The Birthday Rule
On the health insurance exam, watch out for distractors regarding the Birthday Rule. It is based solely on the month and day, not the year of birth. The older parent is not necessarily the primary provider; it is the parent whose birthday occurs first in the calendar year.
Special Circumstances: Divorce and Custody
When the parents of a dependent child are divorced or separated, the Birthday Rule is usually superseded by a specific court decree. If no court decree exists, the order of benefits is generally as follows:
- The plan of the custodial parent (primary).
- The plan of the spouse of the custodial parent (stepparent).
- The plan of the non-custodial parent.
- The plan of the spouse of the non-custodial parent.
If there is a court order stating that one parent is responsible for the child's health care expenses, that parent's plan is always primary, provided the insurer has been notified of those terms.
COB Financial Impact
Frequently Asked Questions
No. The Coordination of Benefits provision prevents an individual from collecting more than 100% of the allowable expenses. This upholds the principle of indemnity, which states that insurance should restore the insured to their prior financial state, not provide a profit.
In rare cases where a plan does not have a COB provision, that plan is automatically considered primary, as it has no mechanism to coordinate with other insurers.
Medicare is generally secondary to employer-sponsored group health plans for active employees at companies with 20 or more employees. However, if the individual is retired, Medicare typically becomes the primary payer.
If the month and day of birth are identical for both parents, the plan that has covered a parent for the longest continuous period of time is the primary plan.