As COBRA Enrollment Increases, Employers Brace for Subsidy Impact

It has been seven months since President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA) into law (see Eyes on Benefits dated February 27, 2009), and the effects are already being felt by employers all over the U.S. – especially in regard to the COBRA subsidy provisions. The 65% subsidy the federal government is providing for all individuals involuntarily terminated between September 1, 2008, and December 31, 2009 is causing a COBRA enrollment boom that could have a significant effect on employers and plan administrators. According to a recent study by Hewitt Associates, COBRA enrollment rates for Americans eligible for the subsidy averaged 38% from March 2009 to June 2009, representing a 19% jump from the period of September 2008 to February 2009. This increase is already causing concern for employers not only because of the additional implementation and administration but the added cost burden related to healthcare expenditures.

Cost Increases Worry Employers
While the increase is not unexpected, several industry experts are suggesting the added COBRA enrollees will impact overall healthcare costs and lead to potentially higher-than-expected employee contribution rates for health care coverage in 2010. In fact, over 40% of recently surveyed employers say they believe the federal subsidy will significantly increase their overall healthcare costs, with about 20% expecting increases of 6-10%.

Those opting for COBRA typically make extensive use of medical services, often resulting in employers paying about $1.50 in claims for every $1 in COBRA premiums collected. But while the COBRA risk pool is likely improving with help from the federal subsidy, premiums collected by employers still are not likely to equal claims.

In addition to higher medical plan costs from utilization and adverse selection, industry experts also suggest that employers are having to bear higher administrative and communication costs. In a recent Mercer survey on how employers are managing their benefits in the wake of recession, 74% of respondents said they are concerned about the degree of administrative complexity involved in managing the subsidy through offsets to payroll taxes. However, when asked whether the benefits of the federal COBRA subsidy for their organization outweigh the additional administrative burden, more respondents tended to agree (42%) rather than disagree (31%).

Alternatives for Employers with Corporate Subsidies
For employers that already subsidize a portion of an employee’s COBRA costs, Frank Palmieri of Employee Benefit News suggests cost-saving alternatives that could help employers bear the added cost of the federal subsidy, generally by extending corporate plan coverage to COBRA-eligible individuals. Since an employer’s existing corporate subsidy period actually reduces the federal subsidy period, Palmieri recommends that these employers should actually provide additional severance benefits and eliminate their own corporate subsidy for COBRA coverage. This would save corporate resources while allowing employees the maximum advantage of the federal subsidy.

For further information and resources, please visit the following links…

COBRA Enrollment Soars, Reports Hewitt

Managing Health Benefits in Challenging Times: A Mercer Survey on Recession and Reform

Many Employers Express Concern Regarding Costs Related to COBRA Subsidies

Summary of Alternatives Regarding the Federal COBRA Subsidy

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Important Notice: Hill, Chesson & Woody does not engage in the practice of law, accounting, or medicine. Therefore, the contents of this communication should not be regarded as a substitute for legal, tax, or medical advice.

September 25, 2009

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