COBRA Costs Will Mount as Layoffs Continue

February 2, 2009
Compared with severance costs, litigation worries and other layoff-related stresses, the issues surrounding the extension of health benefits under the federal law known as COBRA have seemed relatively minimal.

"Within the world of the employers I deal with, this is one of the least of their worries and the least of their expenses," says Randall Abbott, a senior consultant for Watson Wyatt Worldwide.

But those headaches and related bills may swell considerably, depending upon layoff trends and the outcome of emerging legislative proposals, according to Abbott and other experts.

Several proposals before Congress are intended to subsidize the cost for laid-off employees of extending employer health care under COBRA (Consolidated Omnibus Budget Reconciliation Act). If the sticker shock of extending employer health coverage is eased, more newly laid-off employees will enroll and remain on COBRA for a longer stretch, says Jon Attwooll, a product manager who oversees COBRA administration at Ceridian Corp., a provider of human resources outsourcing.

"I think the stereotype of the sick employee [choosing COBRA] goes away or is definitely diluted," Attwooll says. "There may be a much larger population of people taking COBRA so they can sleep at night."

One of the more controversial provisions of the bill would create an option for people 55 and older as well as those who have worked for the same employer for 10 years or more to retain health benefits under COBRA, at their own expense, until they become eligible for Medicare at 65 or obtain coverage through another job. Employers have opposed that provision, warning that any measures beyond temporary governmental subsidies would place onerous financial burdens on employers and their employees.

Democrats are hoping to deliver a final economic stimulus bill for President Barack Obama to sign by February 16.
Regardless of what happens on the federal level, employers should prepare for a new breed of COBRA enrollees if layoffs persist, experts say. Even costly coverage may look enticing, when the prospects of immediately landing another job appear dim, they say.

Financial analysts, lawyers and other professionals who have recently joined the ranks of the unemployed may not only be willing to foot the bill, but may be more aggressive about protecting their COBRA-related rights, says Timothy Stanton, an employee benefits attorney at Ogletree Deakins, a national labor and employment law firm. "They are more likely to know the system and be more comfortable pursuing extra phone calls and calling state agencies."

Absorbing the costs
Under the federal law, employers are barred from charging more than 102 percent of the insurance premium, including a 2 percent administrative fee. But that price tag can seem exorbitant to former employees, who have grown accustomed to their employers subsidizing the premium. Nationally, the average monthly premium for family coverage constitutes nearly 84 percent of the average unemployment check, according to an analysis published in January by the consumer health organization Families USA. That is why a key element of the economic stimulus bill is to help subsidize the cost of extending employer coverage.

Subsidies that make it easier for people to stay on an employer's health plan could make employers financially vulnerable. In 2006, medical bills for COBRA employees averaged about 45 percent higher than for active employees—$9,914 annually compared with $6,831—according to the most recent survey by Spencer's Benefits Reports, one of the few ongoing efforts to capture COBRA costs.

As the months accumulate, employers carrying laid-off workers on their group health plans stand to lose more and more money, says Paul Fronstin, a senior research associate at the nonprofit Employee Benefit Research Institute in Washington. Presumably, those enrollees who stay on COBRA the longest tend to require more health services, he says. "Otherwise, why would they stay on longer?"

Subsidizing the COBRA premium, either directly or through a tax deduction, will likely boost enrollment rates, Fronstin predicts. But the current higher medical costs for COBRA enrollees might be offset, to some extent, by encouraging more healthy people to sign up, he says.

Those with existing medical conditions are not the only group to typically ante up, if they can foot the premium, Attwooll says. The other enrollees, he says, simply "want the insurance just because they want to sleep at night."

From November to December 2008, Ceridian tracked a 17 percent increase in the number of people who became COBRA-eligible, Attwooll says. But it's unclear how much of that upward trend can be attributed to mounting layoffs, an increase in Ceridian's total client roster or some other trend, he says.

A COBRA snapshot
Despite the current legislative focus on COBRA, there's surprisingly little known about the population using it, including how many people are enrolled.

More than a decade ago, Fronstin used census data to estimate that roughly 5 million people had used COBRA at some point during a 12-month stretch. But Fronstin couldn't point to any more recent data. Neither could Stephen Huth, managing editor of Spencer's Benefit Reports. It's difficult to "track a moving number," Huth says, given that people are coming on and off COBRA at any given time.

Under COBRA, employees typically can't extend their former employer's coverage for longer than 18 months after they leave the job. The federal law, which applies only to employers with 20 or more workers, offers longer coverage in other circumstances, such as in cases of disability. In reality, the average COBRA stint is far shorter, averaging eight months in 2006, according to Spencer's survey.

But how many people actually sign up? Nearly 27 percent enrolled in 2006, according to Spencer's survey, which involves nearly 442,000 employees. Previous surveys by Spencer's, dating back to the mid-1990s, identified an enrollment rate closer to 20 percent. But two other recent analyses indicate that the election rate may be significantly lower.

Ceridian's own data for 2008 showed a 10 percent enrollment rate, one that remained steady throughout the year. Attwooll says that figure likely represents a more precise snapshot, given Ceridian's access to data involving millions of people. In late January, the Commonwealth Fund published a similar figure, saying an analysis conducted for the private health policy foundation determined that 9 percent of those eligible actually enrolled.

These baseline numbers are relevant as the pros and cons of various legislative proposals are weighed, according to COBRA experts.

Managing the logistics
To ease the daily logistics involved with COBRA, most large companies outsource administration of the federal law, Abbott says. Based on 30-plus years of experience, Abbott estimates that less than 20 percent of large employers handle the legal requirements, paperwork and related employee questions internally.

Even if COBRA administration is outsourced, human resources leaders should still verify that state COBRA requirements are being followed, Stanton says. If the company's health plan isn't self-insured, it must comply with state COBRA requirements that may be more generous than the federal law. Those state details can be challenging to track for companies that operate in many states, Stanton says.

He notes that employers should stay ahead of the curve, particularly given the education and savvy of some of today's laid-off workforce.

"I think as more and more people are out of work and don't have immediate prospects of another job, there are only so many places they can turn to find health coverage," Stanton says. "I think people are more likely to look into their rights as far as they can."