Even before President Obama signed the American Recovery and Reinvestment Act in February, some benefit professionals and industry watchers were wary of a provision in the law that subsidized COBRA premiums for laid-off workers.
Now that the $787 economic recovery package is being rolled out, some benefits analysts are making concerns more specific — explaining that, although the government and employees are footing the bill for COBRA premiums, claims incurred by terminated individuals and/or dependents could have a negative effect on the group's premium rates down the road.
This is because terminated employees who are facing serious medical conditions are more likely to elect COBRA coverage, since they cannot afford to lose health care coverage, explains Lenny Sanicola, practice leader for benefits in the professional development department of the HR trade association WorldatWork.
"Healthier employees might say, 'My family and I are healthy, and we are going to ride out the hard times, given that we can't afford to pay for COBRA,'" he says.
The HR Policy Association, a Washington, D.C.-based trade group, reports that COBRA enrollees cost on average 145% as much to cover as active employees, and the COBRA costs for older workers, aged 55 to 64, tend to be even higher, averaging about 185% of premiums paid.
"Most employers are not heartless, in that they would like to have a system that supports the continuation of health care coverage for unemployed workers, but the means that we currently have do not seem to be the most efficient or cost-effective," remarks Carl Mowery, director of the compensation and benefits practice at SMART, an HR consulting firm based in Devon, Pa.
Some employers argue that the incentive to enroll a large population of COBRA members via a government subsidy will channel a significant amount of premium revenue on a diverse risk pool to the insurers, says Robert Nuzzi, senior vice president of employee benefits at Cook, Hall & Hyde, a New York-based employee benefits and risk-management services firm.
"In exchange for this windfall, some employers would like to remove all cobra- member claims from the employer plans, thus establishing a new pool representative of this risk only and ultimately be able to set rates and benefits based on the experience of the pool," Nuzzi adds.
Advice to employers
• Employers should review their severance arrangements and health plan documents to determine how these plans and programs will be affected by the new law.
• It is not clear whether the subsidy will be available if the employer provides free post-termination coverage or the employee pays less than 35% of the COBRA premium (as may be the case if the former employee pays active-employee rates) because a literal reading of the law requires the eligible individual to pay 35% of the premium. Therefore, employers should consider whether it is more beneficial to pay for continued coverage as part of a severance arrangement or to only offer employee-pay-all COBRA.
• Employers or plan administrators should update their COBRA forms and notices and/or contact their third-party administrator to ensure compliance with the new law.
• Employers or plan administrators should inform their payroll personnel and vendors as to the premium reimbursements that will be treated as payroll tax credits and make the appropriate application.
• Employers should also take steps to determine which involuntarily terminated employees are eligible individuals, as notice of the special election period, described above, must be provided within 60 days after the enactment of the law.
Source: Seyfarth Shaw LLP. (Editor's note: See our report for more research analysis and advice from Seyfarth Shaw about guarding against class-action lawsuits.)
Subsidy stats
The American Recovery and Reinvestment Act includes $25.1 billion for COBRA-eligible workers laid off between September 2008 and December 2009 to receive a 65% government subsidy toward their COBRA premiums for nine months.
The Treasury Department would pay the subsidy and allow employers that administer COBRA benefits to receive a credit on payroll taxes. Individuals with annual incomes over $125,000 (for singles) or $250,000 (for couples) would not be eligible for the COBRA subsidy. The subsidy applies to premiums paid for COBRA coverage beginning on or after Feb. 17.
About 80 million individuals would be eligible for COBRA, according to the Employee Benefits Research Institute. However, The Commonwealth Fund, a health policy group, finds that only 9% of unemployed adults bought health insurance under COBRA in 2006.
