The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act and the proposed Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act have provisions that make it more appealing for unemployed workers to claim Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) benefits, which can be a benefit to the newly unemployed and their families to the extent it helps them maintain the health insurance coverage they received through their erstwhile employer.
However, there exists a significant potential for adverse selection; since COBRA benefits are relatively expensive (beneficiaries must pay the full cost of the employee and employer contributions toward health insurance), and since those eligible normally have 60 days to formally elect benefits, perhaps only those who stand to face large medical expenditures will choose to take up COBRA benefits.
However, the extent to which COBRA beneficiaries use more health care services than their full-time-employed counterparts has not been adequately examined to this point.
EBRI’s analysis examines the extent to which people covered by COBRA are higher health care spenders than full-time employees and their dependents. Our analysis indicates that COBRA beneficiaries are systematically different from those who receive health insurance through a full-time employee. The key findings are:
The average COBRA beneficiary is older and less healthy than their counterpart. For example, among those with individual coverage, COBRA beneficiaries are on average 50 years old, while full-time employees are 42.6 years old on average.
COBRA beneficiaries are more likely than those receiving coverage through a full-time employee to have certain health conditions, such as COPD, diabetes, cancer, high blood pressure, high cholesterol, mental health disorders, and musculoskeletal disorders, and they are more likely to have spent more days in a hospital than those receiving coverage through a full-time employee.
The average COBRA beneficiary uses more health care services and spends significantly more than the average person covered by insurance via a full-time employee. In 2018, among those with employee-only coverage, full-time employees used an average of $6,724 in health care services. COBRA beneficiaries used an average of $18,752, a nearly 300 percent difference.
Subsidies can help reduce adverse selection against COBRA plans. By making COBRA plans more attractive relative to alternatives, healthier people will choose to enroll in COBRA, which can help improve an employer’s risk pool. However, the ratio of spending by COBRA beneficiaries to spending by those covered by insurance via a full-time worker has decreased since the implementation of the Patient Protection and Affordable Care Act (ACA) health insurance exchanges, suggesting that the ACA exchanges have slightly mitigated adverse selection.
With the availability of subsidized health insurance for people with income under 400 percent of the federal poverty level for those purchasing health coverage in ACA exchanges, it is debatable as to whether subsidies for COBRA coverage are necessary in a post-ACA world.
