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.