The New Federal COBRA Subsidy Worries Employers

Some fear health-care costs will rise if more unemployed workers keep insurance. Others hope healthier workers opt in, balancing the risk

By Tom Murphy, Associated Press

A new government subsidy that helps the unemployed keep their health insurance has left recession-weary employers nervous about the financial hit they may take if more people stay covered under their plans.

Although the subsidy covers most of the premium, many employers remain worried that they'll be left holding the bag on costs, according to a new survey. Especially concerned are self-insured employers, which pay medical claims themselves.

Many businesses also are shuffling through administrative hassles while they figure out who to notify and how to follow the new guidelines.

Under the new plan—part of the stimulus package passed earlier this year—people who lose their jobs, but qualify to keep coverage under federal law commonly known as COBRA, may be eligible for a subsidy that pays 65% of their premium for a few months. The worker pays 35%. Then the employer covers the rest and receives reimbursement from the government through a payroll tax credit. The help can be a welcome relief for laid-off workers.

Businesses worry about higher costs

COBRA normally requires people to pay their entire premium, plus an administrative fee. That leads to a monthly bill that can top $1,000 for family coverage, often too steep for someone who has just lost a job. Studies have shown that before the subsidy, only 20% of workers who became eligible actually paid for the coverage.

But many businesses are anxious about the price they'll pay for this relief. Chicago-based Aon Consulting surveyed companies that participated in some Web seminars explaining the subsidy. More than 40% of the 374 that responded said they expect their health care costs to rise because of the new requirement.

Insurers or businesses that pay for their own workers' claims generally pay more than $1.50 in claims for every $1 they collect in premiums from people covered under COBRA plans. That's because former workers willing to pay the hefty premiums often do so because they're sick and need the coverage.

Adding more COBRA cases could bump up claim totals. But it also could encourage healthier people to enroll and balance out the risk. "We're assuming the bottom-line impact will not be significant one way or the other," said Ken Goulet, president and chief executive of Indianapolis-based WellPoint's commercial business unit. WellPoint is the largest health insurer, based on membership.

The Indianapolis Symphony Orchestra pays all employee medical claims because it is self-insured. (The symphony has about 263 employees and cut eight administrative positions in February.) Human Resources Director Shawna Lake said the nonprofit worries about whether the subsidy will expose it to big bills in the future if a former employee has a big claim. "Some of them would have not elected COBRA, and then our liability would have gone away," she said.

a claims uptick in May and June?

Lake said the symphony paid more than $1.5 million in claims during its last fiscal year, which ended in August, and says reducing medical costs is a big priority. "We have a lot of exposure anyway," she said. "High claims is something we've struggled with over the last couple of years, at least."

The first sign of claims increases may not appear until May or June because of the time it takes to process health claims, according to Ken Ambos, senior managing director of the San Francisco-based benefits consulting firm Equity Risk Partners. He also said enrollment might not rise that much. "Even 35% of high family premiums may be beyond the reach of the typical person who's getting laid off," he said.

Meanwhile the new subsidy has been giving some businesses administrative headaches. Employers have been hung up over such things as the definition of the word 'involuntary.' (The subsidy applies only to involuntary job loss.) Companies have wondered whether that includes workers who lost their benefits because an employer cut their hours to part-time.

The IRS recently confirmed that a mere reduction in hours won't trigger the subsidy. But if a worker quits because his hours have been reduced and he needs full-time pay, that could qualify. "I think employers have been scrambling to figure out what this program is about and what their obligations are," said Kelly Traw, a principal with the human resources consulting firm Mercer.

The subsidy generally started for premiums paid Mar. 1 and offers help only on payments going forward. But employees laid off as far back as Sept. 1 must be notified that they could be eligible. Ex-workers who didn't elect COBRA coverage before the subsidy can also reconsider. Employers have until Apr. 18 to notify them.