Cobra Subsidy Plan Could Bite Business

Ex-worker health aid might bridge coverage, but discourage hiring


One of America’s strengths is its flexible labor market. It’s generally cheap and easy for companies to let go of staff.
   That sounds like a raw deal for workers. But unemployment is much lower here than in Europe because businesses are more willing to hire.
   In 1986 Congress passed the Consolidated Omnibus Budget Reconciliation Act (Cobra), which lets employees who were fired or left a job voluntarily continue getting benefits under their employer-provided health plan.
   Cobra requires employees to pay the full premium plus 2% for administrative costs. Benefits are limited to 18 months.
   But a provision in the proposed stimulus bill would subsidize Cobra premiums and, in some cases, substantially extend the time limit.
   The Senate bill would provide a 65% subsidy of Cobra premiums for nine months for workers laid off between Sept. 1, 2008 and Dec. 31, 2009. The House-passed bill would provide a one-year subsidy. The House bill also lets workers who are 55 and older or have been with an employer for at least 10 years extend their Cobra benefits until they get new employer-provided insurance or are eligible for Medicare.
   “Unemployed workers who have been hit hard by this recession are just one family illness away from bankruptcy,” said Rep. Pete Stark, D-Calif., who heads the health subcommittee on Ways and Means. “This bill extends coverage to those who need it the most, and sets the groundwork for ensuring coverage for all as we pursue comprehensive health reform this year.”
   Backed by numbers from the Congressional Budget Office and Joint Committee on Taxation, Rep. Henry Waxman, D-Calif., and chair of the Energy and Commerce Committee, claimed that the bill “would help 8.2 million people keep health care coverage for themselves and their families.”
   But critics contend the Cobra changes could, long-term, encourage employers to discontinue cov- erage and harm employment.
   “It will make employer-sponsored health care costs go up if you have people staying on a Cobra policy for multiple years,” said one GOP aide. “It’s going to have both an administrative cost and a direct premium cost on current employees, and you may see people drop coverage.”
   From the start, Cobra has hiked health insurance costs for employers via a phenomenon known as “adverse selection.” Since ex-employees must pay the full premium when they accept Cobra benefits, it is typically sicker people with higher health care costs who opt for it. Healthier ones can often find cheaper insurance on the individual market. This makes the pool of people in employer-provided insurance typically sicker than average, leading to higher costs.
   Also, “the administrative burden of trying to keep track of workers and their families even decades after they work for you is huge,” said Greg Scandlen of the conservative Consumers for Health Care Choices at the Heartland Institute. “Employers are not set up to do that.”
   While acknowledging adverse selection is a problem, Kathleen Stoll, deputy executive director at the liberal Families USA, emphasized the importance of extending Cobra for those 55 and older.
   “It’s extremely difficult to find insurance that’s affordable, or even get an offer, on the individual market if you are 55 or older,” Stoll said. “This would allow them to bridge over to Medicare.”

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Rohan Beesla, a health care staff member of the ERISA Industry Committee, a group that advocates on behalf of employer-provided insurance, suggested the Cobra changes would provide a disincentive for employers to keep employees who are near the 10-year mark or to hire new employees age 55 and older.
   But he added, “I don’t know to what extent employers would take Cobra into consideration for an employee with a lengthy term of service who is doing a good job.”
   In the short term, rising unemployment is buoying the prospects for Congress to pass the Cobra subsidy.
   “It’s very clear that at the same time when you lose your source of income to be expected to pick up 100% of the cost of your health insurance is untenable,” said Deborah Weinstein, executive director of the liberal Coalition on Human Needs. “If this (the recession) goes on it could dramatically increase the number of uninsured people.”
   A recent report by Families USA suggested that Cobra premiums would take a hefty chunk out of unemployment benefits. On average, an individual would use 30% of his jobless benefits to cover Cobra premiums while a family would use almost 84%.
   Scandlen, while generally supportive of the subsidy, notes that “in almost all cases the unemployed worker can get individual coverage for half of Cobra.”
   On average, a policy in the individual market would cost about 17% of unemployment benefits and 38% for a family policy, according to data from America’s Health Insurance Plans.
   But even that may not be sufficient for low-wage workers who are struggling.
   “Even a 65% subsidy is not going to be adequate for some people who have little or no income,” said Weinstein.
   She emphasized the importance of the Medicaid expansion in the stimulus bill that would give states the option of offering coverage for those workers below 200% of the poverty line.