Employers prepare for surge in COBRA enrollees
Employers will have to scramble to comply with federal legislation providing a federal subsidy of COBRA health insurance premiums to laid-off employees.
Employees who were laid off from Sept. 1, 2008, through Dec. 31, 2009, will be eligible for a 65% federal subsidy of their COBRA premiums under provisions in the massive economic stimulus bill.
Beneficiaries would be entitled to the subsidy for up to nine months or until becoming eligible for coverage in another employer’s plan or for Medicare. The subsidy, though, would not be available to individuals with annual incomes exceeding $125,000 or couples with annual incomes exceeding $250,000.
The subsidy, estimated to cost the federal government nearly $25 billion, could help up to 7 million jobless individuals and their families maintain health care coverage, according to an estimate by the Joint Committee on Taxation.
With the subsidy resulting in beneficiaries paying about one-third of the COBRA premium that often has a monthly cost of about $400 for individual coverage and $1,200 for family coverage, employers with lots of laid-off employees should expect a surge in enrollees.
“The takeup rate is going to skyrocket,” said Andy Anderson, of counsel with law firm Morgan, Lewis & Bockius L.L.P. in Chicago.
COBRA often is a big money-loser for employers. Due to the high cost of coverage, those now opting for COBRA typically make extensive use or expect to use medical services. As a result, it is not uncommon for employers to pay out $1.50 in claims for every $1 in COBRA premiums they collect.
With the government picking up nearly two-thirds of the COBRA premium tab, the COBRA risk pool is certain to improve, though premiums collected by employers still are not likely to equal claims, experts say.
“Adverse selection, while perhaps not as great as before, still is going to be a problem,” said Paul Dennett, senior vp with the American Benefits Council in Washington.
A modest improvement in the premium-to-claims ratio is certain to be offset by the flood of new beneficiaries opting for coverage.
“At the end of the day, this is going to be very costly for employers,” said Mark Ugoretz, president of the ERISA Industry Committee in Washington.
The challenge for employers will be complying with the requirements that kick in almost immediately.
Under the legislation, the subsidies will be available starting March 1. That means employers will have to notify eligible beneficiaries of the change in what they have to pay for COBRA and send out new premium statements.
Some beneficiaries, unaware of the change in law, will overpay. Under the legislation, employers will have a choice initially of either providing a refund or a credit to be used against future payments.
Another big challenge for employers will be tracking down former employees laid off since Sept. 1, 2008, who declined COBRA coverage at the time. The legislation requires employers to notify those individuals that they have a new right to opt for subsidized COBRA coverage. The notice also has to spell out that beneficiaries have 60 days in which to opt for coverage.
In addition, employers will have to inform beneficiaries that their right to the subsidy will end when they become eligible for coverage from another employer. That is a change from nonsubsidized COBRA coverage in which COBRA eligibility ends only when beneficiaries actually enroll in a new employer’s health care plan or after 18 months of receiving the coverage.
Under the legislation, beneficiaries collecting subsidies they no longer are eligible for will be required to repay the government 110% of the subsidy they received.
Few, if any, pieces of legislation of this size—the cost of the stimulus package is nearly $800 billion—have moved through Congress so quickly. The legislation was introduced shortly after President Obama took office. President Obama, noting the deepening recession, said quick action was crucial and legislators responded.
While COBRA subsidies were part of earlier bills introduced in the House and Senate, the details changed along the way. The most significant change was congressional conferees dropping a provision—staunchly opposed by business groups—that would have allowed employees who worked 10 years for an employer and employees age 55 and older to retain COBRA until eligible for Medicare at age 65.
In addition, legislators fiddled until the last minute with the size of federal subsidy. In fact, a summary of the final agreement released by House Speaker Nancy Pelosi, D-Calif., said the premium subsidy would be 60%. A few hours later, a summary of the legislation prepared by the House Ways and Means Committee and the Senate Finance Committee said the premium subsidy was 65%, a sign of the 11th-hour tinkering by legislators.