The House passed the HEROES Act, a $3 trillion dollar relief bill. One of the components is a nine month program to fully subsidize COBRA, as VOX explains:
COBRA subsidies: The bill funds approximately nine months of full premium subsidies for the existing health insurance program COBRA, which allows laid-off or furloughed employees to stay on their health insurance plans. COBRA is typically prohibitively expensive, but this bill would make it more affordable for millions of workers losing their health insurance along with lost jobs.
I think this is effectively a cash flow injection for businesses that have laid off a lot of folks but still remain a going concern.
To get there, I think we need to talk about mechanics first. I will primarily be thinking about group insurance through an Administrative Services Only/Third Party Administrator arrangement where the insurer merely does the back-end administration and the employer takes on the full cost of paying actual incurred claims.
COBRA allows for people who lose qualified employer sponsored coverage from entities that are still a going concern to buy back into the group coverage for 102% of premium or premium equivalent. Group insurance provided by an employer has pure community rating so a 21 year old with no medical history pays the same premium or premium equivalent as a 64 year old whose medical chart makes War and Piece seem like a light read. COBRA also allows for carry-over of out of pocket spending so if you have paid $1,000 to your $1,500 deductible while on the employer sponsored plan, your COBRA plan variant still only has $500 left to spend on your deductible. COBRA is also guaranteed issue.
These characteristics of COBRA make COBRA very attractive to older, sicker and more expensive employees. People sign up for COBRA when the price of the coverage is less than the expected benefit. 102% of community rate premium is what an employer collects, but the expected claims outflow can be significantly above the individual premium. A COBRA beneficiary is likely to cost the employer more money than incoming premium.
This has been true since COBRA started. It is especially true now as the ACA gives low income and healthy workers who just lost coverage access to insurance that is extremely likely to be far less costly to the worker than an unsubsidized 102% of premium even if the worker does not qualify for a subsidy. Under current configuration, COBRA is very attractive as an option to an 63 year old individual with an ongoing cancer treatment who makes well over 400% Federal Poverty Level(FPL). COBRA is a cruel and expensive joke to 35 year old who earned 250% FPL.
So with this set of mechanics, COBRA right now is a loss center for employers. More cash goes out the door than comes in as the COBRA selecting population is significantly adversely selected.
However, this dynamic changes if there is 100% federally funded COBRA. All of a sudden, COBRA looks extremely attractive to young, healthy and likely to be low cost individuals compared to the alternatives of being unemployed, ACA coverage where deductibles reset and learning costs would be incurred on navigating a new network and potentially a new employer, or paying premiums for short term underwritten plans. COBRA also beats other alternatives in that it is simpler with fewer administrative frictions. There are fewer chances for paperwork to create cracks to fall through compared to any other alternative.
100% COBRA subsidies moves a lot of people from the Exchanges, Medicaid or uninsured back to the employer sponsored group books. These people are likely to have below community rated average costs so the net difference between COBRA spending and COBRA revenue will shrink as the expensive people who would always have been on COBRA are balanced out by a healthier and cheaper risk pool. Total COBRA claims will increase far slower than COBRA revenue. For employers that offer self-insured health benefits that are COBRA eligible, most of the subsidy incidence falls on their bottom line as a significant net cost reducer and thus improves short term cash flow.
Brad F
David
A self-insured large employer using a TPA will bear the costs of the comorbid 63 yo out of a job whether the 35 yo’s join their COBRA pool or not. Why not let the feds pick up the costs of the healthy individuals–even if their costs are low–and get them off their books.
Brad
David Anderson
Precisely what I am saying — getting the cheap person back on the group books shrinks the cost/revenue gap which is quite valuable right now. It is a back door employer subsidy.
Kent
It is a huge subsidy for the health insurance industry, that’s for sure. Especially HMOs.
My wife works for a bit west coast HMO (you can guess which one). Here in the Portland metro area they are estimating a loss of between 12,000 and 40,000 enrolled customers due to job layoffs as people drop off their employer insurance. If the average annual premiums are $10,000 (just a wild round number on my part) that means annual revenue losses of $120-400 million for just this metro area. They are looking at salary cuts and layoffs while at the same time canceling all vacations for the summer months because they expect a massive wave of deferred care once the restrictions start to lift.
So they can’t really increase revenue by taking paying customers on other insurance plans as they expect to be operating at above full capacity. The only thing they can really do is hope for more revenue by keeping more customers.
Pelosi’s district is really close to Kaiser’s HQ. I wonder if that has anything to do with this.
Adam Lang
War and Piece, huh?
David Anderson
@Kent: most of the money goes back out the door through claims. For a fully insured plan (ie Kaiser or Aetna or UnitedHealthcare or UPMC Health Plan pays all the claims out of premium revenue and eats all the bad luck), 100% COBRA subsidy is a cash flow boost, but most of COBRA is for self-insured groups.
Kent
@David Anderson: I guess I don’t understand how COBRA works.
Say you are a big Portland-area employer with thousands of employees and your employee-provided health plan is through Kaiser.
If you lay off 2,000 employees during the pandemic and those 2,000 employees drop off of the Kaiser health plan because they are unemployed, isn’t that a direct hit to Kaiser’s bottom line? And doesn’t COBRA prevent that from happening
As for paying claims? Isn’t Kaiser essentially paying claims to itself? The money is just sloshing around inside the Kaiser system, moving from one set of books to the other. The only actual new money coming in is through new policies.