COBRA from another angle

I tend to take COBRA news personally. What emerges from the final stimulus package may well affect me personally but I appreciate what all this news means to employers, too.

For the great majority of employers, COBRA health insurance has been the very short bridge (technically up to 18 months but typically just a few months) offered to a limited number of ex-employees (some reports say less than 10% of ex-workers and other reports say less than 20%) at some percentage of the actual premium (often up to 102%).

That doesn't sound so bad except that employers regularly see the claims from these ex-workers go up, so that the "loss ratio" is around 150%. Put bluntly, the premiums collected from the ex-employees won't necessarily cover the medical costs billed.

The reasoning behind those figures is that the kind of people who purchase COBRA insurance (remember, just a fraction of the ex-employees who are eligible for it) are the kind of people who either (a) do not dare live without coverage because they have health issues, or (b) cannot find affordable insurance on their own because they have health issues. Especially aging ex-employees with pre-existing conditions are likely to purchase COBRA even if the premiums are high.

As employers observe (some with rancor), ex-employees on COBRA may use the bridge time to tend to a myriad of medical needs. Perhaps the ex-employees are uncertain about future medical coverage and therefore want to take advantage of the COBRA insurance while they have it. Or perhaps they simply have a lot of time to devote to doctor's visits.

COBRA was tolerated because not too many people used it. And those who did use it rarely needed the full allotment of 18 months. And for larger employers making intermittent lay-offs, COBRA was an attractive element of a severance package. For example, an employer might offer the laid-off employee "free" COBRA coverage for 6 or 9 or 12 months, after which the ex-employee would pick up the full premium (up to 102%).

Right now, that same employer is worried about the impact of COBRA in a Mini Depression. Record lay-offs immediately translate into more COBRA elections than ever experienced before. (Paperwork and processing costs go up, too, because everyone has to be notified repeatedly of the COBRA option.)

A likely product from Congress will be a federal subsidy to assist newly laid-off workers in purchasing COBRA insurance. That will probably be limited to lay-offs that started in late 2008 and 2009, and to a limited number of months. That subsidy will encourage many more ex-employees to elect to purchase COBRA on the basis of new affordability—and also because they will not feel confident about finding new employment any time soon.

Employers fear the impact of another possible element of the stimulus package: the requirement to offer COBRA coverage to ex-employees who are 55 or older, and younger ex-employees who were employed for 10 or more years with the company. The provision would allow these ex-employees to utilize the COBRA election (without any federal subsidy) until they reach Medicare age.

Employers are looking at their budgets closely to plan for what will surely be a costly event, regardless of what is eventually passed by Congress. One moderating factor is the likelihood that with larger numbers of COBRA participants, the loss ratio will drop. But analysts cannot say how much that drop may be.

© 2009 Mary Bold, PhD, CFLE. The content of this blog or related web sites created by Mary Bold (www.marybold.com, www.boldproductions.com, College Intern Blog) is not under any circumstances to be regarded as professional, legal, financial, or medical advice. Or education advice. Or marital advice. Or even a tip.