COBRA is an acronym for Consolidated Omnibus Budget Reconciliation Act of 1985. It provides that employers with 20 or more employees make available temporary access to medical coverage under the employer’s group plan for their employees who lose coverage (CRS. Summary). I have been a payroll accountant for the past six and half years and I am familiar with the compliance issues surrounding the provisions of COBRA. With the steadily rising cost of healthcare, this portion of the Stimulus Package will offer employees the option of retaining their coverage for a substantially less amount. Prior to the adoption of the stimulus package, the employee’s cost of continuation coverage was 102% of the premium. The additional 2% is for administrative fees and is a provision of the COBRA act. Under the recently adopted American Recovery and Reinvestment Act of 2009, sixty-five percent of the cost of COBRA premiums will be subsidized by the Federal Government. The cost of this subsidy is estimated at $24.7 billion (Senate Finance et al. 16). Unfortunately, subsidizing COBRA continuation coverage will not help the economy because it only benefits insurance companies.
A government subsidy of 65% sounds great until you read the fine print. I received an e-mail from my company’s payroll software vendor which stated that “the new law requires employers to advance the 65 percent premium subsidy on behalf of the government” (Ceridian.com). What this means to employers is that they have to be able to pay 65% of the health insurance premium each month that coverage is elected for involuntarily dismissed personnel. The money will then be credited back via quarterly tax payments. This will be a substantial burden to employers because they will have to carry the financial load for three months before seeing a return in the form of a reduction in their taxes. Some employers cannot afford to do that, especially if they lay off employees due to financial reasons. Unemployment is currently 5.8 percent in our country, and all four regions (West, South, Midwest and Northeast) reported significant increases in unemployment in 2008. Oregon reported 6.4 percent unemployment, which is up from 5.1 percent in 2007. Michigan has the highest unemployment rate in the country at 8.4 percent, and Utah has the lowest at 3.4; however, both states reported increases in 2008.
The cost of health insurance is so high that even a subsidy of 65% will not help people living on unemployment. Unemployment does not pay you 100% of your lost wages every month; your benefits are based on your prior base wages. “As of December, 2008, OR benefits ranged from $108 to $463” per week (Salary.com). How can individuals pay for health insurance, even at a reduced rate, when they have lost a significant portion of their monthly income? A survey performed by Charles D. Spencer and Associate in 2006 showed that of the individuals eligible for COBRA, only 27% elected coverage. That figure is up only slightly from 20% reported in 2004 (CRS. 7). The subsidy will make healthcare affordable for only a few more but there will still be a significant number of people without healthcare because they can’t afford it.
The clear winners of the government subsidy will be the insurance companies. Not only are they exempt from carrying any of the cost of the subsidy, their profit will be increased by the individuals that are able to elect COBRA coverage due to the subsidy. “Pharmaceutical manufacturers made up the second most profitable U.S. industry in 2006, with profits of 19.6 percent, compared with 6.3 percent for all Fortune 500 companies” (AFL-CIO). Other shocking statistics include the annual multi-million dollar salaries of pharmaceutical and insurance company CEOs, uninsured Americans number forty-seven million, and private insurance companies spend fifteen percent of their money on administrative costs annual while Medicare spends three percent (AFL-CIO). I will soon be laid of from my job. The cost of my health insurance under COBRA will be approximately $350 per month. I’m not sure how we will afford this, but I know we can’t afford to be without health insurance.
The average annual cost of treating the uninsured and under-insured is approximately $100 billion. Of that figure, hospitals are uncompensated for about $34 billion worth of services annually (NCHC 4). It could be argued that the COBRA subsidy will reduce that cost, however, the number of individuals reported to have elected COBRA in 2006 is barely over three million (CRS 8). As I mentioned earlier, there are currently forty-seven million people that are uninsured. Based on the disparity of these numbers, it is probably that a conclusion can be made that this subsidy will not help our economy.
While some individuals may benefit from finally being able to afford COBRA health care coverage, the employers bear the entire burden of the subsidy up front. With the staggering number of people uninsured and the rising number of unemployed the numbers just don’t add up. Insurance companies have no additional administrative costs or liability associated with the subsidy which proves that they will benefit more than any one else from the government subsidy of COBRA. It is also likely this portion of the stimulus package will have unforeseen costs and consequences.