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Extension Likely for COBRA Subsidy

February 8, 2010
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Experts say employers should brace for another extension of the federal subsidy of COBRA health insurance premiums for involuntarily terminated employees, with President Barack Obama and top Senate Democrats adding their support to the plan.

The Obama administration included the extension in its proposed fiscal 2011 budget, which it sent to lawmakers February 1.

In Congress, key lawmakers also are backing an extension. Senate Majority Leader Harry Reid, D-Nevada, and Finance Committee Chairman Max Baucus, D-Montana, and several other top Senate Democrats have distributed a description of a soon-to-be-introduced jobs bill that would include extending the COBRA subsidy, but provided no specific details. One proposal under discussion, sources say, would extend the subsidy an additional three months so employees laid off in March, April and May would be eligible.

Under the extension proposed by the administration, employees laid off from March 1 through December 31, 2010, would be eligible for the 65 percent subsidy for up to 12 months.

Previous subsidies affected employees laid off from September 1, 2008, through February 28, 2010. Those individuals, who are eligible for 15 months of premium subsidies, would not be affected by the extension proposed by the White House.

Driven by administration and congressional support, along with the nation’s continuing high unemployment rate, another COBRA subsidy extension is almost certain, Washington observers say.

“All signals say to me that employers should prepare for another extension,” said Frank McArdle, a consultant in the Washington office of Hewitt Associates Inc.

“There is huge public pressure on legislators” to pass another extension, said Kathryn Wilber, senior counsel-health policy with the American Benefits Council in Washington.

Congress included COBRA premium subsidies as part of a broad economic stimulus package it approved and Obama signed into law in February 2009. The American Recovery and Reinvestment Act of 2009 included a 65 percent COBRA subsidy up to nine months for employees laid off from September 1, 2008, through December 31, 2009.

Congressional researchers estimated the subsidy would benefit about 7 million former employees and their families and cost about $25 billion.

Then in December, Congress approved and Obama signed into law a Defense Department spending bill with a provision extending the subsidy to a total of 15 months for employees laid off from September 1, 2008, through February 28, 2010.

The 65 percent subsidy has been a boon for millions of laid-off employees and their families who, in many cases, would have been hard-pressed to pay the entire monthly premium, which typically is about $400 for individual coverage and $1,200 for family coverage.

The availability of the subsidy has sent COBRA opt-in rates soaring. In a survey of 200 large employers, Hewitt found that the percentage of laid-off employees opting for COBRA more than doubled to 39 percent from March 1, 2009, when the subsidy generally first became available, through November 30, 2009. In contrast, from September 1, 2008, through February 28, 2009, an average of 19 percent of involuntarily terminated employees opted for COBRA.

The original COBRA subsidy law, which went into effect almost immediately after passage, put enormous pressure on employers to locate and inform former employees who initially declined COBRA of their new right to obtain subsidized coverage.

“Initially, there was huge turmoil,” recalled Gretchen Young, vice president of health policy with the ERISA Industry Committee in Washington.

Over time, though, administrative and other problems eased as employers and their consultants put systems in place and as federal regulators provided guidance that resolved many questions, not the least of which was defining situations that qualified laid-off employees for the subsidy.

“Within about six weeks to two months, problems eased,” said Scott Keyes, a senior consultant with Towers Watson in Stamford, Connecticut.

In December, when the initial nine-month subsidy started to run out, employers and administrators had another period of uncertainty, not knowing whether Congress would extend the assistance. Many employers, uncertain of whether the subsidy would be extended, charged the full premium for beneficiaries whose nine-month subsidy eligibility had run out.

In mid-December, Congress extended the subsidy, requiring employers to again notify beneficiaries of the change. For those who were overbilled because they paid the entire premium for December, beneficiaries typically received a credit applied to the next COBRA premium payments along with an explanation of the adjustment, said Jennifer Henrickson, a legal consultant with Hewitt in Lincolnshire, Illinois.

Depending on when and how Congress extends the subsidy, employers and administrators could again face some of those same issues.

Aside from administrative issues, experts say the subsidies have boosted employers’ costs, though definitive statistics are not yet available.

That is because those opting for COBRA typically are above-average users of medical services. While the risk pool has almost certainly improved because of the subsidy, premiums certainly are not covering the cost of claims, says the ERISA Industry Committee’s Gretchen Young.

The cost can be significant, especially for employers who have laid off large numbers of employees, Young said.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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