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Aug 26

End of Cobra subsidy could mean higher costs

Posted by Jeremy Smerd in health insurancebenefits

Jeremy Smerd

Employers generally do not like the COBRA program that allows laid-off workers to stay on their company's health plan. The problem is that the program is so expensive that only the sickest workers whose health care costs are higher than what they pay in premiums enroll.

The subsidy in the federal stimulus plan, which paid for 65 percent of the cost of a person's premium, was expected to change that by making it affordable for healthy workers. The subsidy can be used by workers who were laid-off before the end of May for up to 15 months.

Initial studies suggested that the subsidy did not make a huge impact on enrollment rates. In June, the Employee Benefit Research Institute wrote that people were not using the subsidy to extend benefits. EBRI said that the percentage of laid-off workers enrolled in COBRA increased slightly to 9 percent in July 2009, several months after the enactment of the stimulus bill.

More recent data contradicts those findings. Hewitt Associates shows that the subsidy indeed enabled laid-off workers to maintain their health coverage: Thanks to the subsidy, enrollment rates in COBRA-the omnibus bill that allows former employees to stay in their health plan-doubled to 38 percent compared to 19 percent in the five months prior to the enactment of the subsidy, which has been extended several times.

(The two studies contradict each other by showing two very different rates of enrollment prior to the subsidy taking effect. One explanation is that the source of their information differs. The Hewitt study surveyed large employers while the EBRI study collected data from employers of various sizes.)

Congressional budget analysts initially estimated that the initial subsidy law would cost the government nearly $25 billion. It is less clear what the cost of having more laid-off workers enrolled in their health plan would be to employers. The subsidy gave workers stability. I've argued that stability has been good for businesses because many who enroll because of the subsidy may be young and healthy. Their premiums are likely to offset the costs of heavy health care users who would have chosen to COBRA anyway because they cannot go without health insurance. But there has been little in the way of data to prove this theory one way or another.

What is clear is that rising health care costs is making COBRA more expensive. A study published this week by AON Consulting says that the cost of COBRA, even with the subsidy, has increased about $30 a year.

While not a lot, AON believes that it could be enough to discourage some workers from taking up their health care after getting laid-off.

With the subsidy's end in sight and newly laid off workers unable to qualify for it, COBRA rates are expected to drop back down to pre-subsidy levels, the Hewitt study predicts. This will mean less administrative hassle for employers but it also means that COBRA, like it or not, will once again become the program for a company's very sickest former-employees.

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