Friday, January 23, 2009

COBRA Provisions in the Democrat “Stimulus” Bill

Legislative Status: As drafted, the Democrat “stimulus” package would provide a 65% premium subsidy to employers to cover the costs of individuals electing COBRA coverage, provided such election comes as a result of the individual’s involuntarily termination from employment during the period from September 1, 2008 to December 31, 2009.  The subsidy would continue for a maximum of 12 months, but would terminate once the individual becomes eligible for other employer-based coverage or Medicare.

In addition to the federal subsidy, the bill contains a permanent expansion of COBRA in the case of “older or long-term employees.”  Specifically, the bill would permit former employees over age 55, or those with at least 10 years of service with the employer, to remain on COBRA until becoming eligible for Medicare.  These provisions are similar to language inserted by the House Rules Committee into H.R. 3920, the Trade Adjustment Assistance (TAA) Reauthorization Act, which passed the House by a by a 264-157 vote on October 31, 2007, but was never considered by the Senate.

The “stimulus” package also includes an expansion of Medicaid coverage—with the federal government paying the full 100% cost of coverage—to unemployed workers, a new program separate and distinct from the COBRA mandates on businesses otherwise discussed.

Background: In 1985, Congress as part of the Consolidated Omnibus Budget Reconciliation Act (COBRA) imposed continuation coverage mandates on certain employer-based health insurance plans.  Title X of COBRA requires plans with 20 or more employees to provide continuing coverage to workers for 18 months or 36 months in some cases.[1]  Employers may charge a maximum of 102% of monthly plan premiums to COBRA participants, with the 2% surcharge intended to cover administrative and related costs.

Several “qualifying events” trigger eligibility for COBRA coverage, both for workers and immediate family members.  Workers become eligible for coverage upon a reduction of hours of employment or termination of such employment, voluntary or involuntary, so long as the employee was not terminated for “gross misconduct.”  Spouses and dependents participating in the employee’s plan at the time of the “qualifying event” become COBRA eligible upon the employee’s death, the employee’s eligibility for Medicare, divorce or separation from the employee, or the end of a child’s dependency on a parent’s health insurance policy.  Retirees can be considered eligible, if the employer does not provide retiree health coverage, or such health coverage is not comparable to that provided under COBRA.

The time limits for COBRA coverage currently vary.  Terminated employees and their spouses or dependents generally may obtain coverage for up to 18 months.  In the event of the employee’s death, divorce or legal separation, or a child “aging off” a parent’s policy, coverage may continue for up to 36 months.  Retirees losing retiree health benefits under an employer’s Chapter 11 bankruptcy may maintain their COBRA coverage until death, while spouses and dependents may maintain their coverage until 36 months after the retiree’s death.  In addition to the usual 18 month of continuation coverage, disabled individuals remain eligible for an extra 11 months of coverage, to complete the 29-month waiting period for disabled individuals to become eligible for Medicare benefits; however, during the extra 11 months of COBRA coverage, the employer may charge the individual up to 150% of monthly plan premiums.

Impact of the COBRA Mandate: Although enabling displaced workers to keep their employer-based coverage may sound appealing, some Members may be concerned by several potential ramifications of this policy, particularly with regard to extensions of the kind contemplated in the stimulus.  Some of these concerns may include:

Adverse Selection:  A potential concern surrounding COBRA coverage lies in the demographic groups most likely to invoke their right to continue on a former employer’s plan.  Because the statute permits employers to charge the full cost of a group health insurance plan—which in 2008 averaged $392 per month for individuals and $1,057 per month for families, according to the Kaiser Family Foundation—many workers may choose to find more affordable coverage in the individual market or elsewhere.[2]  Some healthy individuals eligible for COBRA may choose to forego coverage entirely rather than pay the full group premium, particularly if the “qualifying event” in question included some type of financial hardship (e.g. layoff, divorce, etc.).  In other words, because COBRA-eligible individuals must perceive the coverage as worth the high monthly premiums, the workers most likely to elect COBRA coverage are those having health needs in excess of the premium cost.

Given the potential for adverse selection inherent in COBRA coverage, it is reasonable to conclude that plan premiums rise for existing employees because the population electing COBRA coverage is sicker than the group population as a whole.  The 2006 employer COBRA survey found that workers electing to continue coverage with their former employers incurred total costs 45% higher than active workers.[3]  Moreover, the Human Resources Policy Association reports that workers aged 55-65—those who would be permanently eligible for up to 10 years of COBRA coverage under the Democrat proposal—incurred costs 85% higher than active workers.  Some Members may be concerned that a requirement that employers maintain former employees incurring $7,000 to $8,000 in annual health costs for up to a decade could raise premiums for existing workers—or cause employers to drop coverage altogether.

Because the current statute states that individuals forfeit their right to COBRA coverage only upon enrolling in (as opposed to becoming eligible for) another group plan, there may be instances where individuals would seek to remain on COBRA rather than accept coverage through a new employer.  Removing the current time limits on continuation coverage may encourage additional attempts to “game” the system, particularly if some employer policies provide easier access to expensive pharmaceuticals or other treatments that cost more than the 102% maximum monthly premium.

Administrative Costs:  The current COBRA statute permits employers to collect 102% of monthly plan premiums from eligible individuals electing continuation coverage.  However, nothing in the statute ensures that administrative costs—to notify all plan participants of their rights under COBRA, administer continuation coverage to separated individuals electing this option, and provide coverage to a re-located beneficiary if possible under the plan—may not exceed the 2% threshold permitted by law.  Thus, any additional costs above the 2% threshold can be viewed as an unfunded federal mandate on businesses with as few as 20 workers.

A 2006 survey of 122 companies providing COBRA coverage to over 13,000 former employees and their dependents found that while administrative costs varied, the average cost to administer COBRA coverage amounted to $406 per worker, or 4% of average claims costs—or double the 2% which employers are permitted to charge former employees under the statute.[4]  Thus, many businesses likely suffer from increased costs that they must absorb to comply with the unfunded federal COBRA mandate.  Lengthening the eligibility period for COBRA coverage may well increase the potential (and actual) administrative costs for group plans—especially those that prove attractive to particular sets of workers, as discussed above—thus raising the cost associated with the unfunded mandate.

Overall Effect on Group Coverage:  With respect to proposed extensions of COBRA coverage, the combination of higher administrative costs and further distortions due to adverse selection could have a significant impact on employer-sponsored insurance coverage.  Removing the time limit entirely could encourage shopping among chronically-ill individuals seeking to maintain coverage with the former employer that provides the richest health benefits.  Such behavior would likely raise premiums for existing employees in that group pool, potentially leading healthier individuals to re-assess the cost-benefit analysis of paying higher premiums to stay within the group.  Alternatively, employers may decide to absolve themselves of rapid rises in health costs and administrative overhead by abandoning group insurance altogether, eliminating any COBRA requirements as a result of such termination.

Cost: According to the Joint Committee on Taxation (JCT), creating a federal entitlement to COBRA subsidies through the end of 2009 would cost $28.7 billion over five years.  It should be noted that entitlements currently consume over 60% of all federal spending and represent one of the largest obstacles to controlling federal spending, the growth of which is unsustainable.  According to the General Accountability Office (GAO), the federal government has accumulated $52.7 trillion in unfunded liabilities that must be met by future generations—amounting to over $450,000 in debt for every American family.  In 2040, the federal government will either have to double taxes or witness three federal programs—Social Security, Medicare, and Medicaid—crowd out every last federal priority.

JCT also estimates that 7 million individuals would receive COBRA subsidies during calendar year 2009 as a result of the Democrat proposals.  Some Members may be concerned that an entitlement expanding government-paid health coverage to so many individuals will not be anything near as “temporary” as its advocates currently claim—because Congress is unlikely to terminate coverage subsidies for 7 million individuals at a single stroke.  Therefore, some Members may further be concerned that given the long-term fiscal outlook, particular caution must be given to the larger budgetary implications of establishing such a new entitlement beyond the stated cost of the “temporary” measure.

Conclusion: Some Members may find the concept of extending COBRA coverage more appealing in theory than in its practical applications, whereby health insurance costs grow along with employers’ incentives to drop coverage for broader groups.  Moreover, to the extent that the federal government subsidizes COBRA premiums—no matter how “temporary”—some Members may be concerned that such subsidies would first tie separated workers to health insurance plans that may not meet individuals’ health needs and therefore not be as cost-effective (for the worker or the government) as other options, and second increase unfunded mandates on business due to the administrative costs associated with the COBRA statute.

Rather than extending eligibility for COBRA benefits, Members may support other reforms to increase portability while minimizing adverse selection in health insurance.  Equalizing the current tax treatment of health insurance—which gives large tax subsidies to employer-provided health insurance, but no subsidies to most other insurance policies not tied to a particular job—would encourage individuals to buy the most cost-effective plan that meets their personal health care needs.  Amending the current COBRA language to link termination of benefits to eligibility for (as opposed to enrollment in) alternative group coverage would reduce any adverse selection incentives for sick individuals.  Strengthening the current system of state-based high-risk pools for those with chronic or other costly illnesses would ensure continued access for COBRA-eligible individuals seeking to maintain coverage without imposing undue burdens on employers.  Members may believe that these reforms would maximize health insurance coverage while obviating the need for a new federal unfunded mandate in the form of expanded COBRA requirements on businesses.


[1] The relevant statutory language for employers is part of the Employee Retirement Income Security Act (ERISA), beginning at 29 U.S.C. 1161.  State and local governments are governed under similar requirements located in the Public Health Service Act, beginning at 42 U.S.C. 300bb-1.

[2] Kaiser Family Foundation, “Employer Health Benefits: 2008 Annual Survey,” available online at (accessed October 24, 2008), p. 17.

[3] Spencer’s Benefits Reports, “2006 COBRA Survey.”

[4] Spencer’s Benefits Reports, “2006 COBRA Survey,” summary available online at (accessed January 7, 2009).