7 Dual labor market theory suggests that there are two noncompeting labor markets: a primary sector that offers relative high premiums, will likely result in increased employer health care costs. Survey data indicate that the primary issue child-bearing age. These data would suggest that allowing employers and insurers to set COBRA premiums based may remain with current employers for a number of reasons. A prospective employer may not offer health insur- Introduction Principal Points wage, stable jobs that include employee benefits, and a secondary sector that tends to be low-wage and unstable. This theory Chart 2 on risk-adjusted factors, such as demographics, would reduce the level of adverse selection. concerning COBRA is its impact on claims experience and administrative costs for active employees, employers, ance. A waiting period may be required before a worker becomes eligible for coverage. The benefits package offered Table 2 Table 1 Sources of Coverage After Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Coverage would indicate that workers with health insurance who change jobs are likely to get another job with health insurance, but Madame Chair and members of the committee, I am pleased to appear before you this afternoon to discuss con- Sources of Income of Persons and Workers Ages 18-64 with 12 Months of COBRA and COBRA beneficiaries. If the cost issues are not addressed with future COBRA expansions, employers may through the prospective employer may be less generous. Char While data on COBRA elections and limited data on the size of the COBRA population are available, acteristics of Persons and Workers Ages 18-64 with 12 Months of Consolida And, the worker (or a dependent) may have a preexisting ted Omnibus Persons and Workers Ages 18–64 Whose COBRA Spell Ended During Survey workers without health insurance tend not to gain health insurance on job change. See P. B. Doeringer and M.J. Piore, Coverage, Less than 12 Months of COBRA Coverage, and 12 Months of Employment-Based Budget Reconciliation Act of 1985 (COBRA) Coverage, Less than 12 Months • tinuation of health insurance coverage under the Consolidated Omnibus Budget Reconciliation The goal of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) was to relieve the hardships Act of 1985 condition that would not be covered under the plan. These scenarios may result in “job-lock,” or in employees virtually no data exist on COBRA beneficiaries themselves. For policy purposes, it is important to understand the consider various alternatives to reduce, shift, or eliminate the impact of this increased cost. Internal Labor Markets and Manpower Analysis (Lexington, MA: DC Health, 1971). Coverage in Own Name, October 1994-September 1995 of COBRA Coverage, and 12 Months of Employment-Based Coverage in Own Name, (COBRA). My name is Paul Fronstin. I am a research associate at the Employee Benefit Research Institute employees and their families experience resulting from the temporary loss of group health insurance by provid- Employer, Own Name forgoing job opportunities that could potentially increase their productivity and income. In other words, workers characteristics of the COBRA population and how this population differs from the rest of the population. In order One alternative is for employers to continue requiring active employees to share in the increased costs 8 October 1994-September 1995 48% Stephen H. Long and M. Susan Marquis, “COBRA Continuation Coverage: Characteristics of Enrollees and Costs in Three Employer, Own Name (EBRI), a private, nonprofit, nonpartisan, public policy research organization based in W ing a period of transition to other coverage. COBRA, as amended in legislation subsequent to its passage in ashington, DC. EBRI has may forgo job opportunities in which a better match between the worker and the employer would enable the to gain a better understanding of the COBRA population, we used data from the 1993 panel of the Survey of through higher employee contributions. Since at least 1987, employers have been increasingly shifting the cost of Persons Ages 18–64 Workers Not EBRI 41% Plans,” in Health Benefits and The Workforce, U.S. Department of Labor, Pension and Benefits Welfare Administration been committed, since its founding in 1978, to the accurate statistical analysis of economic security issues. 1985, requires employers with health insurance plans to offer continued access to group health insurance to Determinable worker to perform his or her job more effectively health insurance coverage onto workers. In 1987, 44.2 percent of workers with employee-only coverage had that Income and Program Participation (SIPP). SIPP is a longitudinal study that follows individuals for 36 months. . For employers that want employees to leave or retire and for Persons Ages 18–64 Workers (Washington, DC: U.S. Government Printing Office, 1992). EMPLOYEE Employment-based Not Employment-based 8% Through our research we strive to contribute to the formulation of effective and responsible health and retirement qualified beneficiaries if they lose coverage as a result of a qualifying event. employees who would prefer to change jobs, job-lock can be undesirable. Combining waves 6 through 9 of the 1993 panel allows the observation of individuals over a 12-month period. This coverage fully financed by their employer, compared with 32.5 percent in 1996 (chart 3). In addition, 36.7 percent COBRA COBRA coverage in own name Determin- COBRA COBRA coverage in own name B Employment-based ENEFIT Employment-based 9 policies. Consistent with our mission, we do not lobby or advocate specific policy solutions. I would ask that my full SIPP does not allow researchers to make a distinction between retiree health benefits and COBRA coverage. The health of workers with family coverage had that coverage fully financed by their employer 12-month period, October 1994–September 1995, represents the most recent SIPP data that allow researchers to 12 months 1–11 months 12 months able 12 months 1–11 months , compared with 25.9 percent in 12 months COBRA COBRA coverage in own name COBRA COBRA coverage in own name T-111 RESEARCH insurance question asks respondents to report the source of health insurance coverage, but limits the answers to current 9 9% • statement be placed in the record. COBRA coverage can be considered advantageous for most workers, as it allows continuation of the policy one track the entire sample for 12 months. 1996. As the employee share of health insurance premiums increases, active employees increasingly pay part of 12 months 1–11 months 12 months 12 months 1–11 months 12 months Disadvantages of COBRA Total Income employer, former employer, or other. In order to make the distinction between retiree health benefits and COBRA coverage, INSTITUTE ® had in place at work. Although an employee can be required to pay 102 percent of the premium for COBRA the cost of adverse claims experience under COBRA (above the 102 percent of premium/cost allowed) because Because the COBRA population is examined over a 12-month period, it is impossible to determine the full Less than $10,000 14% 15% 2% 9% 8% 2% data from the September 1994 CPS Population Survey were used to impute COBRA coverage for individuals ages 40–64. All Age Many employers consider COBRA to be a costly mandate for three reasons. First, because of adverse selection, coverage, workers can usually realize significant savings compared with purchasing the equivalent health COBRA duration of each spell. Some spells may have begun before October 1994, while others may have ended after former employees and their families under COBRA are not paying the true cost of the coverage they are receiving. $10,000–$19,999 24 31 21 15 34 21 individuals under age 40 were assumed to have COBRA coverage. SIPP also does not allow researchers to identify spouses and 18–24 1% 11% 6% 2% 13% 6% $20,000–$29,999 15 24 28 17 25 29 premiums collected from COBRA beneficiaries typically do not cover the costs of the health care services rendered. insurance policy in the private market. COBRA premiums will usually be lower than insurance plans pur- September 1995. dependents with COBRA coverage; therefore, the population estimates presented in this paper should be considered a lower 25–34 A second alternative is to reduce or eliminate health care benefits for active employees and/or future As a result, we separate COBRA 5 27 beneficiaries into two groups—those with COBRA 29 7 29 coverage for 29 $30,000–$39,999 15 14 21 17 17 21 COBRA’s goal was to relieve the hardships employees and their families experience resulting from the temporary 35–44 6 23 33 5 24 33 Second, COBRA imposes an additional administrative cost on employers. Not only do employers have to adminis- bound estimate. chased directly from an insurance company due to economies of scale in administering group health insurance the entire 12-month period and those with COBRA coverage for less than 12 months—with the understanding retirees and their families, thereby reducing or eliminating the COBRA continuation coverage. This might be a Employer, $40,000–$49,999 7 8 13 7 8 13 1 45–54 20 19 23 17 18 23 loss of group health insurance by providing a period of transition to other coverage. COBRA, as amended in ter the plan, they must also find and notify COBRADependent eligible individuals. This process could be costly, especially for and the reduced risk of adverse selection. Furthermore, employment-based health insurance typically covers a $50,000 or more 25 8 16 35 9 16 Employer, that the latter group may in fact have had COBRA particularly attractive option for small employers, who are already experiencing high health insurance premiums. coverage for 12 months or longer. Our analysis sample repre- 10 55–64 68 19 9 69 17 9 COBRA benefits will end either because the person has exhausted the benefits or stopped paying for the benefit before the 12% legislation subsequent to its passage in 1985, requires employers with health insurance plans to offer continued Other Dependent Uninsured divorced and separated spouses and other dependents. While health plans are allowed to charge 102 percent of the larger array of benefits than individually purchased health insurance for an equivalent premium. As a result, Uninsured sents 0.6 million individuals with COBRA coverage for 12 months between October 1994 and September 1995, 4.4 In addition, small employers are not as likely as large employers to absorb cost increases. The reduction in cover- Other 18-month benefit period was reached. Earned Income Private 9% 26% Medicaid CHAMPUS/ access to group health insurance to qualified beneficiaries if they lose coverage as a result of a qualifying event. Gender 26% cost of the health plan, the additional 2 percent may not fully cover these administrative costs. Third, many Private COBRA coverage would be a “better buy” than a plan purchased in the individual market. COBRA coverage can Medicare CHAMPUS/ Statement million individuals with COBRA for less than 12 months, and 59.2 million individuals with employment-based age shifts a greater share of the cost to employees, but elimination of coverage obviously exacerbates the problem a 10% Less than $10,000 54 30 2 39 22 2 0% Medicare CHAMPVA Male 67 a 55 59 70 57 59 11 1% 4 7% COBRA requires continued access for 18 months for covered employees, spouses, and dependent children who lose Medicaid CHAMPVA For workers with a defined benefit plan, job change may result in a loss of potential benefits. Defined benefit plans typically employers view the penalties for noncompliance as excessively large. be considered even more beneficial to older workers, who would get a community rate. COBRA is also seen as $10,000–$19,999 17 29 23 22 31 23 0% health insurance coverage in their own name for the entire 12-month period. of access to health insurance. 1% Female 33 45 41 31 43 41 1% 1% base benefits in part on years of service. As a result, workers who change jobs may not be credited for past service with former coverage when a covered employee terminates employment (for reasons other than gross misconduct) or there is a $20,000–$29,999 8 19 29 13 22 29 advantageous, in general, because it improves health insurance portability and reduces job-lock. As you can see from table 1, the COBRA population is much older than the population of individuals with A third alternative is to reduce the size of the work force eligible for health insurance benefits. Employers employers. In addition, full vesting of pension benefits does not usually occur immediately for plan participants. $30,000–$39,999 11 12 20 12 14 21 reduction in his or her hours of employment. COBRA requires continued access for 29 months for qualified benefi- Marital Status COBRA Expansion and Alternatives to Expansion Persons Ages 18–64 Workers Ages 18–64 employment-based coverage through their current employer could accomplish this by substituting part-time workers for full-time workers or by increasing the hours worked . While we may be capturing a retirement effect, $40,000–$49,999 1 4 12 2 5 12 Before the Married 76 55 62 79 55 62 12 ciaries who are disabled at the time of the qualifying event, or who become disabled within the first 60 days of the 2.9 Million 1.8 Million • Paul Fronstin and Sarah C. Snider Many employers consider COBRA to be a costly mandate for three reasons. First, premiums collected from $50,000 or more , “An Examination of the Decline in Employment-Based Health Insurance Between 1988 9 5 15 13 6 14 meaning older individuals use COBRA as a bridge to Medicare coverage, we find similar results when limiting the by full-time workers. One study found that the increased use of part-time workers as a percentage of the labor Widowed 4 32722 Assuming that individuals electing COBRA coverage are a relatively higher risk population than the general work qualifying event, as clarified in the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA and 1993,” Inquiry 33 (Winter 1996/97): 317–325. 12 COBRA beneficiaries typically do not cover the costs of the health care services rendered because of adverse Divorced 11 14 13 3 12 13 analysis to workers. COBRA beneficiaries are also more likely than individuals with coverage through a current force accounted for 7 percent of the decline in employment-based health insurance between 1988 and 1993. a Source: Emplo Asset Income yee Benefit Research Institute estimates from the 1993 panel of Survey of Income and Program Participation, Waves 6–9. Committee on Ways and Means force, any expansion in the current law that affects either the size of the firm covered under COBRA or the length Separated 4 33243 also clarified that the 11-month extension for the disabled applies to all qualified beneficiaries, not just to the selection. The Clinton administration has recognized this in its FY 1999 budget proposal. Second, COBRA a 13 employer to be male, married, white, have no children under age 18, and to have a graduate school education. Furthermore, another study found that hours of work increased for workers with health insurance by 0.06–0.10 Civilian Health and Medical Program of the Uniformed Services/Civilian Health and Medical Program of the Veterans Administration. Less than $10,000 97 98 99 97 99 99 David M. Cutler and Brigitte C. Madrian, “Labor Market Responses to Rising Health Insurance Costs: Evidence on Hours Never married 6 26 21 9 27 21 of time that former workers are eligible for continuous coverage would almost certainly increase employer costs for U.S. House of Representatives policyholder. COBRA requires continued access for 36 months for spouses and dependent children who lose $10,000–$19,999 1 2 1 13 4 1 1 imposes an additional administrative cost on employers. Not only do employers have to administer the plan, They are also less likely to be working. W hours per week, compared with workers without health insurance. orked,” unpublished paper, October 1997. The study also found that hours of work health insurance. In addition, subsidies for COBRA coverage, as previously proposed by the Clinton administra- $20,000–$29,999 2 1 0 0 1 0 coverage as a result of a covered employee’s death, divorce, or legal separation. In addition, spouses and dependent Race they must also find and notify COBRA eligible individuals. This process could be costly, especially for divorced increased more rapidly in industries with relatively high health insurance costs. With respect to income, 12-month COBRA beneficiaries have higher personal income than the population tion, would increase the percentage of eligible workers electing COBRA coverage. While this might reduce the White 94 82 81 94 82 80 children qualify for continued access for 36 months if a covered employee becomes eligible for the Medicare b and separated spouses and other dependents. While health plans are allowed to charge 102 percent of the cost with insurance coverage through their current employer (table 2). This difference is almost entirely due to differ Finally Other Income , where possible, the employer may pass additional costs along to workers or consumers. Workers- Black 5 7948 10 degree of adverse selection if individuals previously at the margin because of low expected health care costs program. Less than $10,000 29 85 98 26 87 98 of the health plan, the additional 2 percent may not fully cover these administrative costs. Third, many employ- Hearing on ences in other personal income, which includes retirement income. This would suggest that retirees are using could be affected if wage increases are not as large as they would have been if COBRA costs were not an issue. Hispanic 1 87277 $10,000–$19,999 40 9 1 38 5 1 accepted COBRA coverage, it would still drive up the overall claim costs for employers, especially self-insured Prior to the enactment of the Omnibus Budget Reconciliation Act of 1989 (OBRA ’89), coverage could be Other race 0 33033 ers view the penalties for noncompliance as excessively large. COBRA Consumers would be affected if employers raised product prices, creating additional inflationary pressure in the as a bridge to Medicare. However, workers are also more likely to be using other personal income for $20,000–$29,999 17 5 0 21 6 0 employers. One alternative to mitigate higher health care costs would be to allow workers to choose from plans terminated prior to the end of the maximum period if the qualified beneficiary became covered under another $30,000–$39,999 9 1 0 10 1 0 COBRA coverage. In both cases, the total population and workers had higher average asset income than persons economy. Oversight of Tax Law Related Number of Own Children that are similar to the current plan, such as plans with a high deductible. It should be noted, however, that group health plan. However, OBRA ’89 provides that COBRA need not terminate before the maximum period if the $40,000–$49,999 5 1 0 3 0 0 • Assuming that individuals electing COBRA coverage are a relatively higher risk population than the general Under Age 18 with employment-based coverage through their current employer The survey data and the alternatives available to employers to deal with increased medical plan costs . to Health Insurance $50,000 or more 1 0 0 2 1 0 previous research indicates that access to continuation of coverage is not likely to have a major effect on the level qualified beneficiary becomes covered under another group health plan that excludes or limits a preexisting None 93 67 58 89 65 58 work force, any expansion in the current law that affects either the size of the firm covered under COBRA or suggest that some changes to COBRA Previous research has been unable to determine what happens to COBRA beneficiaries after COBRA may be necessary. An increase in the percentage of the premiums allowed to 5 2 One 5 14 17 9 14 17 of the uninsured. However, there is evidence that the availability of continuation of coverage increases the condition. 10 Chart 3 the length of time that former workers are eligible for continuous coverage would almost certainly increase Total Family Income benefits end. be charged to COBRA beneficiaries may be in order to accommodate the higher level of claims costs associated Using SIPP, we can determine the health insurance status of COBRA beneficiaries after they leave Two 1 13 17 0 14 17 6 by duration of unemployment, suggesting that it allows individuals to spend more time in “productive” job searches. Percentage of Persons with Employment-Based Health HIPAA Less th includes additional COBRA an $10,000 4 clarifications affecting beneficiaries, newborns, and adopted children. 4 0 4 2 0 employer costs for health insurance. In addition, subsidies for COBRA coverage would increase the percentage Three or more 1 68277 COBRA. with COBRA beneficiaries. The Clinton administration has recognized this idea in its FY 1999 budget proposal. According to chart 2, 41 percent of persons ages 18–64 received coverage in their own name from their $10,000–$19,999 Insurance in O 11 wn Name Whose Emplo 14 8 yer Full 7 y Financed 16 8 Some of this effect may be due to state-mandated continuation-of-coverage laws and the existence of dual labor First, newborns and adopted children will be allowed to enroll immediately under a qualified beneficiary’s COBRA of eligible workers electing COBRA coverage. While this might reduce the degree of adverse selection, it would own employer after leaving COBRA. One provision of the proposal would define another COBRA qualifying event as occurring for current retirees when An additional 12 percent received employment-based coverage as a depen- $20,000–$29,999 20 18 14 12 16 14 Health Insurance, 1987–1996 7 Education markets. coverage, without being required to wait until the next open enrollment period. Second, COBRA coverage may be Paul Fronstin, Ph.D. still drive up the overall claim costs for employers. One alternative to mitigate higher health care costs would $30,000–$39,999 17 19 16 16 20 17 dent. T an employer drops retiree health benefits. This provision would allow retirees to elect COBRA coverage, but en percent purchased private coverage on their own. Twenty-six percent became uninsured. The same Some school 12 10 9788 Another alternative would be to guarantee access to health insurance coverage either in the individual 50 terminated as soon as any preexisting condition limitation in the new plan has been satisfied. $40,000–$49,999 8 13 16 7 15 16 Senior Research Associate be to allow workers to choose from plans that are similar to the current plan, such as plans with a high deduct- High school 36 29 34 33 28 32 general pattern can be seen for workers leaving COBRA coverage, with 48 percent returning to employment-based employers would be allowed to charge 120 percent to 125 percent of the premium. Any such increase should $50,000 or more 40 32 46 53 31 45 market or through state-sponsored high-risk insurance pools. HIPAA included provisions for group-to-individual College The coverage offered must be identical to that available prior to the change in the workers’ employment 32 46 43 37 48 44 ible. It should be noted, however and Director , that previous research indicates that access to continuation of coverage is not , Health Security and Quality Program coverage in their own name, 9 percent gaining coverage as a dependent, 7 percent purchasing private coverage on consider both the current impact COBRA claims are having on employers and COBRA beneficiaries’ ability to Graduate school 19 15 15 22 15 16 portability for workers who have exhausted COBRA coverage. Under this provision, workers have an incentive to 45 status. The qualifying employee or dependent may be required to pay up to 102 percent of the premium (disabled likely to have a major effect on the level of the uninsured, although there is evidence that the availability of Source: Employee Benefit Research Institute estimates from the 1993 panel of Survey of Income and Program Participation, Waves 6–9. their own, and 26 percent becoming uninsured. continue the coverage if the premium becomes too high. Another alternative would be to reduce the length of time a continue COBRA Asset income includes interest from savings accounts, mone coverage in order to qualify for coverage in the individual market. y market funds, securities, and bonds; stock dividends received and r Chart 1 As mentioned above, this is einvested; net qualified beneficiaries may be required to pay up to 150 percent of the premium for months 19 through 29). continuation of coverage increases the duration of unemployment, suggesting that it allows individuals to Household Type coverage is required to be offered. A shortened rather than lengthened COBRA coverage continuation period could Employee Benefit Research Institute Seven rental income Years of Ad , mortgage interest, and ro verse Selection: A yalties or other investment income verage Consolida . ted Omnibus Budget Reconciliation Act costly to employers and workers. In order to reduce costs to employers and workers, COBRA could be repealed if Married couple 40 76 61 66 79 62 67 Group health plans for public and private employers with fewer than 20 employees are excluded from these spend more time in “productive” job searches. Some of this effect may be due to state-mandated continuation- b help reduce employers’ administrative costs. While those most likely to be affected are former employees’ families, Other income includes Social Security, railroad retirement, unemployment compensation, supplemental employee benefits, veterans’ compensa- The Health Insurance Portability and Accountability Act of 1996 of 1985 (COBRA) Costs per P 2121 K Street, NW articipant, Plan Years 1990–1996 Male head 0 23013 Employee Only group-to-individual portability were guaranteed at the time that a worker leaves an employer. This, however, provisions, as are plans offered by churches (as defined in sec. 414(e) of the Internal Revenue Code); the District of tion, workers’ compensation, employer or union temporary sickness payments, disability insurance, child support, alimony, private or public of-coverage laws and the existence of dual labor markets. the survey data indicate that the majority of COBRA Female head 9 12 beneficiaries would not be adversely affected. The longer 11 5 11 11 - Suite 600 would have the effect of “shifting” the cost of continuation-of-coverage mandates from employers and workers to pension income, annuity income 35 , and other cash income not included elsewhere. It does not include means-tested cash transfer payments. Columbia; or any territory, possession, or agency of the United States. Portability was also the goal of legislation passed in 1996. HIP Other male 5 13 11 AA established greater portability of health insur 5 12 11 - term loss of coverage problem could be dealt with as part of the larger overall problem of health care access, costs, $5,854 $5,591 $5,703 $6,000 $5,399 $5,301 Washington, DC 20037 insurance companies in the individual market, and ultimately Other female 10 12 9 , to individuals covered in this market. Thus, any 11 13 9 ance in that it prohibits group health plans from imposing preexisting condition exclusion periods on individuals • Another alternative would be to guarantee access to health insurance coverage either in the individual market and quality. However, with COBRA and HIPAA generating a relatively large-scale debate over legislation that Group quarters 0 00000 expansion in continuation-of-coverage mandates either through COBRA or through increased access to insurance $5,000 30 $4,307 Family Coverage Advantages of COBRA $4,208 with a history of prior health insurance coverage. HIPAA did not ensure that a worker who changes jobs will have or through state-sponsored high-risk insurance pools. The Health Insurance Portability and Accountability Act does very little to affect coverage levels, even larger scale reforms concerning health care access, costs, and quality $3,903 $3,854 $3,710 in the individual market would increase costs to workers, employers, or insurers. Voice: 202-775-6352 Number of Jobs Active access to health insurance coverage on the new job, and did not ensure that health insurance on a new job would of 1996 (HIPAA) included provisions for group-to-individual portability for workers who have exhausted $3,420 $4,000 $3,332 will likely be that much more difficult to accomplish. COBRA coverage can be considered advantageous for most workers, as it allows continuation of the policy one had Employee One job 52 64 95 HIPAA also includes a provision to encourage states to provide medical coverage for high-risk individuals 25 $2,852 Fax: 202-775-6312 be affordable. In addition, HIP $2,769 AA did not allow individuals to maintain the same group health plan after a job COBRA coverage. Under this provision, workers have an incentive to continue COBRA coverage in order to Madame Chair, this concludes my statement. Thank you for the opportunity to testify this afternoon. I Costs Two jobs, all month 2 2 3 $3,000 in place at work. Although an employee can be required to pay 102 percent of the premium for COBRA coverage, 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 by granting tax-exempt status to organizations that establish high-risk insurance pools. These pools would be change. When a worker changes health plans on job change, there is a chance that he or she may well have to qualify for coverage in the individual market. E-mail: fronstin@ebri.org As mentioned above, this is costly to employers and workers. In Two jobs, not all month 0 2 0 would be happy to answer any questions that you or members of the committee might have. COBRA Costs workers can usually realize significant savings compared with purchasing the equivalent health insurance policy open to individuals with preexisting conditions. If individuals were to enroll in these pools instead of taking $2,000 Two jobs, no overlap 0 2 0 change health care providers, and there is also a high chance that the benefits package will be different; therefore, order to reduce costs to employers, COBRA could be repealed if group-to-individual portability were guaranteed Internet: www.ebri.org Source: Employee Benefit Research Institute estimates from the March 1988–1997 Current in the private market. COBRA premiums will usually be lower than insurance plans purchased directly from an No job 46 30 2 COBRA coverage, the burden of adverse selection would no longer fall on employers. It should be noted, however, “total” portability is not achieved. at the time that a worker leaves an employer Population Surveys. . This, however, would have the effect of “shifting” the cost of Endnotes $1,000 insurance company due to economies of scale in administering group health insurance and the reduced risk of that state sponsored high-risk pools have not been effective in covering a significant portion of the population, in Health insurance would be totally portable if a worker did not have to change health plans on job change. continuation-of-coverage mandates from employers to insurance companies in the individual market, and Source: Employee Benefit Research Institute estimates from the 1993 panel of Survey of Income and Program Participation, Waves 6–9. 3 adverse selection. Furthermore, employment-based health insurance typically covers a larger array of benefits 1 $0 large part due to high premiums. Hence, any attempt to use these pools for health insurance portability may yield Paul Millholland, “Employers’ COBRA Costs,” EBRI Notes, No. 11 (Employee Benefit Research Institute, November 1992): In order to understand portability, a brief examination of pension plans is helpful. All pension plans are portable ultimately, to individuals covered in this market. Thus, any expansion in continuation-of-coverage mandates 1990 1991 1992 1993 1994 1995 1996 than individually purchased health insurance for an equivalent premium. As a result, COBRA coverage would be a mixed results. 1–4. 11 in that they allow “vested” workers to keep accumulated assets on job change. For example, if a worker with a either through COBRA or through increased access to insurance in the individual market would increase costs “better buy” than a plan purchased in the individual market. 23 April 1998 Source: Stephen A. Hugh, “COBRA Costs Continue to Be High, Erratic,” Employee Benefit Plan Review (September 1997): 36–44. defined contribution plan changes jobs, the amount accumulated in the account could be rolled over into a quali- 2 to workers, employers, or insurers. The Supreme Court is going to consider the case when a qualified beneficiary already has other health insurance coverage. COBRA coverage can be considered even more beneficial to older workers. Consider the following example COBRA Costs and Beneficiaries fied individual retirement account and, in some cases, into the new employer’s pension plan. Keeping this defini- The dispute concerns whether individuals who have other health insurance coverage prior to the COBRA qualifying event are for a small firm with a traditional fee-for-service health plan offered by Blue Cross Blue Shield in the Washington, eligible for continuation of coverage under COBRA. tion of portability in mind, HIPAA did not make health insurance totally portable. HIPAA “improves” portability • HIPAA “improves” portability as it makes it easier for individuals with preexisting conditions to get new health Several surveys have been conducted regarding issues surrounding the use of COBRA. A survey of approximately DC, region for plan years starting March 1, 1995. Under the health plan, the annual premium for all workers with as it makes it easier to get new health insurance on job change for individuals with preexisting conditions. In insurance on job change. In contrast, COBRA “guarantees” portability, as it allows workers to maintain their 3 Adverse selection occurs when higher-risk individuals are more likely to seek health insurance coverage than low-risk 200 firms, covering 1.42 million workers, conducted by Charles D. Spencer & Associates, Inc., in the spring of each a family plan was $10,859. However, the expected cost of the plan varies greatly across workers. The actuarial cost contrast, COBRA “guarantees” portability, as it allows workers to maintain their current health insurance plan. current health insurance plan. individuals. year has typically yielded consistent answers about the problem of adverse selection and COBRA coverage. for family coverage for workers under age 30 was $4,524, while the actuarial cost for workers ages 55 and older 4 According to the survey, average employer claims costs for COBRA beneficiaries were $5,591, compared with was $12,759. If a worker chooses COBRA coverage, the premium would be $11,076, or 102 percent of the annual Stephen H. Long and M. Susan Marquis, “COBRA Continuation Coverage: Characteristics of Enrollees and Costs in Three Conclusion • If cost issues are not addressed with future COBRA expansions, employers may consider various alternatives to $3,332 for active employees in surveyed plans in 1996. Thus, average continuation-of-coverage costs were Plans,” in Health Benefits and The Workforce, U.S. Department of Labor, Pension and Benefits Welfare Administration premium. Young workers would have an incentive to forgo COBRA coverage, while older workers would have an reduce, shift, or eliminate the impact of this increased cost. One alternative is for employers to continue (Washington, DC: U.S. Government Printing Office, 1992). 156 percent of the active employee claims costs. Large differences between active employee costs and COBRA costs incentive to accept COBRA coverage. As a result, the COBRA coverage pool of insured workers is adversely HIPAA included provisions that directly affected COBRA by clarifying eligibility criteria for newborns and adopted The views expressed in this statement are solely those of the author and should not be attributed to the requiring active employees to share in the increased costs through higher employee contributions. A second have been typical since 1990, when average active employee costs were $2,769, compared with $4,208 for COBRA 5selected. children and individuals with disabilities. These were minor changes to COBRA. More important, however, is the Jacob Alex Klerman and Omar Rahman, “Employment Change and Continuation of Health Insurance Coverage,” in Health Employee Benefit Research Institute, or the EBRI Education and Research Fund, its officers, trustees, alternative is to reduce or eliminate health care benefits for active employees and/or future retirees and their costs (chart 1). Benefits and The W COBRA is also seen as improving health insurance portability and reducing job-lock. Concern about orkforce, U.S. Department of Labor, Pension and Benefits Welfare Administration (Washington, DC: U.S. fact that HIPAA may indirectly result in more individuals electing COBRA coverage, and may result in individuals sponsors, or other staff, or to the EBRI-ERF families. A third alternative is to reduce the size of the work force eligible for health insurance benefits. American Savings Education Council. The Employee Benefit Government Printing Office, 1992). Another study also found some evidence that COBRA beneficiaries used more health care than active portability of health insurance arises in situations where a worker is leaving, or would like to leave, a job, and keeping COBRA coverage for longer periods. HIPAA allows individuals who keep their coverage in effect to avoid Research Institute is a nonprofit, nonpartisan, public policy research organization which does not lobby or 8 workers. This study examined claims data from three large employer health plans, and found that COBRA costs during periods of unemployment and labor force withdrawal. Concerns arise when a worker is unemployed or 6 preexisting condition waiting periods, and guarantees access to health insurance coverage in the individual Jonathan Gruber and Brigitte C. Madrian, “Non-Employment and Health Insurance Coverage,” Journal of Public Economics, take positions on legislative proposals. ranged from 32 percent to 224 percent higher than health care costs for active workers. For one plan, these retires prior to Medicare eligibility and desires “bridge” coverage. In addition, portability could help alleviate the market after COBRA benefits have been exhausted. These HIPAA provisions combined with any attempt to forthcoming. differences were due entirely to demographics, with COBRA beneficiaries being much more likely to be women of loss of insurance benefits when a worker is offered a new job that could alter his or her insurance status. Workers expand COBRA coverage further, either through subsidies or by allowing workers to choose from plans with lower 8 6 2 4 3 1 5 9 7 Percentage