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COBRA subsidy raises group insurance rates

Kim Morris | May 1, 2009

Evidence is beginning to accumulate that the COBRA subsidy provisions of the Economic Recovery Act are now raising health insurance costs for employers and their remaining employees. While this inflationary cost increase was expected as a natural economic effect of increased COBRA claims expenses, the increases are coming sooner and are sharper than we expected. Bloomberg News reported comments from a T. Rowe Price Group analyst saying that Cobra is "bad business" for health plans since workers who buy into the program tend to be older, sicker people with higher medical costs. Aetna, for example, reported that it spends significantly more on claims for COBRA members than it collects in premiums. The company president said the claims cost for COBRA members can be twice the amount of the premiums collected. In this case the 65% federal COBRA subsidy would effectively transfer an even greater portion of costs to employers through premium increases.

This simplified example illustrates the economic effect of the federal COBRA subsidy on employer's health insurance costs:

A terminated employee who otherwise would not be willing or able to pay the full cost of her health insurance through COBRA is now enabled to retain this coverage. Assuming the normal COBRA premium cost is $300 per month, the employee now pays $100 and the employer subsidizes the other $200. If medical claims for that member turn out to be $600 per month (twice the premium paid), then the net financial effect in this hypothetical example is that the COBRA member receives $600 in health care services for a cost of $100. The government pays $200 and the insurance company pays the remaining $300. The insurer must raise the premiums for the employer's group by $360 (estimated as 120% of unanticipated claim increase) to cover claims reserves and administrative costs. The $360 premium increase must be passed on though rate increase to all of the company's remaining employees. Employer-paid premiums are actually shared by the employer and the employee through payroll-deducted employee contributions.

It is also easy to see from this example how the COBRA subsidy program is also contributing to inflation of the nation's overall health care spending. The COBRA subsidy program is a blessing for terminated employees, but this blessing comes at a significant cost for those who pay for health insurance. More information on this option is available at COBRAplan.com.

MedSave.com advises that small companies feeling the financial pinch of the COBRA subsidy program might consider switching to individual major medical policies since these are not affected by the group insurance premium increase rules and are therefore not increased by COBRA members' claims.

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