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Opinions and views from expert CFOZone members.

Jun 15

COBRA subsidy good for employers

Posted by Jeremy Smerd in stimulus billhealth insurancehealth carebenefits

Jeremy Smerd

The Cobra moment has arrived.

The Senate this week is expected to vote on whether or not to extent the Cobra subsidy for newly laid off workers. The House has already rejected the extension, signaling improved confidence in the economy and an unwillingness of legislators to continue the subsidy indefinitely.

Extending the subsidy, which pays for 65 percent of the cost of a person's health insurance premium, would only apply to workers laid off after June 1. The cost of extending it now is estimated to be about $8 billion.

The subsidy is good policy and should be extended. If the economy is as good as politicians say it is, the cost to taxpayers will be minimal. If unemployment is higher than expected, it will save many people from having to choose between health care and other necessities like food and shelter.

Policy wonks generally believe that the cost-to employers and to the government-of not extending is greater than the cost of extending it. That's for many reasons. First, keeping people on their employer's health insurance stabilizes costs for an employer. That's because the cost of COBRA without the subsidy is so expensive only those with the greatest health care needs-and subsequently the highest health care costs-will deem it worthwhile to pay for it. COBRA without the subsidy consumes 75 percent of average unemployment benefits for people in 41 states, according to Families USA. Only the sickest among us will choose to spend such a high proportion on insurance.

Without the subsidy, only the sickest will take their employers insurance while the healthy people who have been laid off will forego it. With fewer healthy people to offset the cost of the sick, employers overall costs go up. Keeping healthy people on an employer's health care roll is good risk-adjustment.

Then of course there is the indirect cost to employers of ending the subsidy. Laid-off and uninsured, people who are sick will get their health care from hospitals-who will pass the cost of such "charity care" onto private payers.

The unemployment rate continues to drop since it peaked at 10.6 percent in January. But job growth remains weak and recovery elusive. 

Anyway you look at it the subsidy is good policy. It may be costly but it keeps the employer system stable, stimulates the economy, provides a safety net for millions of laid-off Americans and is certainly cheaper than bringing people onto Medicaid.

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