Thus far, the health care debate has rightfully focused on building a new health infrastructure that can sustainably provide high-quality health care at a reasonable cost to all Americans. While Congress and the Obama administration determine how to turn reform principles into law, employers -- who will be on the front line of any health care delivery system -- also need to be forward-thinking and consider how the law will actually work.
One test case will be the continued health coverage provided under the Consolidated Omnibus Budget Reconciliation Act of 1985, which permits former employees and their families to maintain their employer-sponsored coverage under certain circumstances by paying 102 percent of the premium (the full cost of premiums plus a 2 percent administrative fee). As we described back in April, The American Recovery and Reinvestment Act of 2009, the so-called economic stimulus package, included temporary COBRA subsidies for individuals (under a certain income threshold) who lose their jobs between Sept. 1, 2008, and Dec. 31, 2009. Under the new law, these workers need pay only 35 percent of the premium while the employer pays the remaining 65 percent. The employer can claim its payment as a credit against wage withholding and payroll taxes. The subsidized coverage can last up to nine months, with a maximum of an additional nine months of unsubsidized coverage.
Since the purpose of the provision was to quickly help those who had lost health coverage, the March 1 effective date was almost immediate and employers had virtually no lead time to comply. Fortunately, the Internal Revenue Service and U.S. Department of Labor were responsive throughout the implementation process, providing guidance on such practical matters as eligibility determination, notice requirements, the process for redeeming the payroll tax credit and avenues for individual appeals.
With the challenges of implementation having largely subsided, the question becomes: What impact will the new premium subsidy have on employers, who now occupy both an administrative and financial role in the delivery of these benefits? More to the point, what will be the impact on COBRA take-up rates, duration and costs?
Considering the significant subsidized "discount" on COBRA coverage and the slumping job market, employers should expect increased participation in the program and extended periods of coverage compared with past averages. David Osterndorf, chief actuary of Towers Perrin's Health and Welfare practice, has projected that COBRA take-up rates will jump from around 10 percent or 15 percent to between 50 percent and 80 percent. He also calculates that the average duration for COBRA participants will increase from five months to nearly the full nine months of subsidized coverage.
On the other side of the equation, the influx of new participants in the COBRA program likely will modulate the overall risk pool and lower the average spending costs typically associated with COBRA coverage, which tends to have a higher relative morbidity rate than regular coverage. This should help mitigate the rate at which the costs rise, although overall expenditures -- and certainly administrative costs will necessarily increase -- are largely driven by the expected increases in the number of individuals who elect COBRA coverage and the increase in the time they remain on COBRA as their primary source for health insurance.
What remains unclear at this point is whether the program will be extended beyond the end of the year. It could be very difficult politically to cease the subsidy absent a dramatically improved economy. At the same time, the program is extremely costly to the federal government and finding the offsetting revenue to pay for an extension will not be simple.
Moreover, depending on the course of comprehensive health reform, the gap in coverage for those between ages 55-64 who have lost coverage, but are not yet eligible for Medicare, could remain unresolved. Under the original House-passed stimulus bill, individuals 55 or older or with 10 or more years of service with an employer would have been eligible to maintain COBRA coverage (on an unsubsidized basis) until covered by Medicare or another employer group health plan. So this issue could be revisited soon.
It remains to be seen what role COBRA will play as part of further health legislation this year. Everyone knows that cobras are beautiful -- until they bite you.
James A. Klein can be reached via e-mail at info@abcstaff.org.
