How COBRA premium subsidies can protect employer-sponsored coverage
To understand why COBRA premium subsidies are so essential, one need only look at the projected decline in employer-sponsored coverage.
As political leaders remain unable to reach a deal on a new pandemic relief bill, millions of Americans are on the precipice of financial ruin. Enhanced unemployment benefits have run out, eviction moratoriums are expiring, and a resurgent COVID-19 continues to wreak havoc on the economy. Employers, particularly those in the retail and hospitality industries, have laid off millions of workers and many expect significantly more job cuts in the fall.
For the 159 million Americans with employer-sponsored health insurance coverage, losing a job means losing health insurance for themselves and often for their family members. One proposal, contained within the HEROES Act (which passed the House of Representatives back in May), could protect the employer-sponsored coverage market and ensure that millions of people maintain their health insurance coverage during this once-in-a-century public health crisis.
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The Consolidated Omnibus Budget Reconciliation Act (“COBRA”) was meant to provide a stopgap for employees who lost their employer-sponsored coverage for up to 18 months after a qualifying event such as a job loss, a layoff, or a furlough. As a federal law, COBRA applies to all private employers who employ at least 20 workers and maintain an active health insurance plan. Currently, COBRA is very expensive for employees because it requires them to pay the cost of the entire insurance premium, including the employer’s portion, plus a 2% administration fee. For a typical COBRA enrollee, premiums can exceed $500 a month per covered individual, up to half of a monthly rent payment in many major cities across the country.
Due to the cost, many employees turn down offers of COBRA continuation coverage, opting instead to pursue individual coverage options or remain uninsured. To offset the oppressive cost, the HEROES Act includes a 100% COBRA premium subsidy for those that cannot afford to pay, lasting through January 31, 2021. It also includes alternative premium assistance for employees that still want to pay. In all cases, the bill ensures that plan administrators receive premium payments for at least 9 months. The Senate, controlled by Republicans, has not taken up the HEROES Act, opting instead to begin new negotiations with the Democratic-controlled House of Representatives. Nevertheless, the idea of a COBRA subsidy has bipartisan support.
To understand why COBRA premium subsidies are so essential to the employer-sponsored coverage market, one need only look at the projected decline in employer-sponsored coverage and remember how the majority of employer-sponsored health plans are funded.
According to a study by Health Management Associates (“HMA”), between 12 and 35 million Americans could lose their employer-sponsored coverage throughout the duration of the pandemic. Their figures are based on three scenarios, each representing a higher unemployment rate: 10%, 17.5%, and 25%, respectively. As employer-sponsored health plan enrollment declines, the study asserts that Medicaid enrollment would spike by roughly equal numbers.
Approximately 60% of employers that offer health insurance coverage are self-funded, meaning they assume the risk for paying health claims from their own funds. As with any typical insurance risk pool, risk is mitigated by spreading it out among many contributors. A healthy employer plan will have very many plan participants, each paying their monthly contribution to the employer.
For those employers that are smaller or who are particularly risk-averse, they may purchase stop-loss insurance from an insurance carrier (indeed, many self-funded plans rely on stop-loss insurance to exist in the first place). This insurance product, which can protect against catastrophic losses, itself relies on healthy plan enrollment because the insurance carrier is paid premium on a per employee per month (“PEPM”) basis. In fact, many companies who service self-funded plans are paid in this way: everyone from pharmacy benefit managers (“PBMs”) and cost-containment consultants to claim negotiation specialists and networks.
In one sense, the self-funded industry is a complex mosaic made up of different vendors, all working together to provide health insurance coverage to employees and their dependents. Seen in a different light, though, the industry more resembles a house of cards which, in the face of plummeting plan enrollment numbers, could collapse entirely. Once an employer begins laying off massive numbers of employees, and those employees are unable to afford COBRA continuation coverage, the employer’s risk pool begins to shrink drastically, causing a cascade effect. The employer collects much less money with which to pay health claims for other enrollees.
In turn, the employer reports fewer enrolled employees to its plan’s service providers and vendors. Many vendors begin to receive significantly reduced payments under the PEPM model. Those vendors which have contractual provisions requiring minimum payments may not receive those amounts as the employer struggles to remain financially afloat. Some vendors may cancel their contracts with the employer, and in the case of a stop-loss carrier, that could be devastating for the underlying health plan.
When considering the potential loss of 35 million plan enrollees as outlined in the HMA study, the impact to this insurance market could be catastrophic. By funding a 100% COBRA subsidy, Congress could protect the employer-sponsored coverage market by helping to preserve the employer’s risk pool and supporting the PEPM payment model which acts as the grease to the wheels of the self-funded industry. If employees knew that the federal government would pay for the entire cost of their COBRA coverage, far more of them would take them up on the offer.
Congress has an earlier example to look to as evidence for why the full cost of COBRA coverage must be subsidized. In 2009, as part of the American Recovery and Reinvestment Act, Congress provided a 65% subsidy of COBRA premiums. A 2015 study by Mathematica Policy Research concluded that enrollment increased by only 15%, with the vast majority of employees stating that COBRA coverage was still too expensive. This time, Congress should fund the entire cost of COBRA and should advertise this benefit to the public as part of the solution to the health care crisis this pandemic has brought upon us.
Many have criticized the plan for a COBRA subsidy as inefficient, inequitable, poorly targeted, and a giveaway to the insurance companies. It is true that those in higher-income brackets, with jobs that provide health insurance to begin with, will gain more than those without insurance at all. Also, this proposal does nothing to address the cost of health care, and in effect, it does call for the government to subsidize that cost. Despite these critiques, this proposal is temporary, and it only represents one piece of the puzzle, one which enjoys rare bipartisan support and has a real chance to become law. Congress has an obligation to provide for those with the most need, and it can do so through existing platforms such as Medicaid.
The fact remains that 159 million Americans receive health insurance through their employer. Of those many millions, many are dependents who themselves represent those with the “most need.” Tens of millions could lose their employer-sponsored coverage in the coming weeks or months if they are unwilling or unable to shoulder the burden of COBRA premiums.
With Congress stuck at an impasse over a seemingly endless number of issues, from unemployment insurance and funding for states and local governments to funding for the Postal Service, it would be smart to grab at the low-hanging fruit, especially if that fruit represents health insurance during a massive public health crisis. A temporary COBRA subsidy would provide some immediate protection now for Americans as we enter the next phase of the pandemic.
Brady Bizarro, Esq., is the director of legal compliance & regulatory affairs for The Phia Group. He specializes in regulatory, transactional, and compliance matters related to healthcare and employee benefits law. He provides general consulting services to clients, including employers, third-party administrators, brokers, and vendors associated with health benefit plans on matters related to the health insurance industry, including ERISA, ACA, and HIPAA compliance.
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