The House-passed “stimulus” bill includes a little-noticed provision which would impose substantial new costs on employers–exactly what is not needed right now with so many companies struggling to maintain profitability.
Under current law, laid off workers can elect to stay on with their former employer’s health plan (so-called “COBRA” coverage), but the displaced workers have to pay the “full” premium associated with the plan and find other coverage after eighteen months.
Even though employers don’t have to pay an explicit subsidy for COBRA enrollees, the program is nonetheless costly because it suffers from “adverse selection.” COBRA enrollees pay premiums based on average plan costs, but they tend to be older and have more costly conditions than active workers, so their health care costs exceed the premiums they pay. Previous studies have estimated costs for the average COBRA enrollee at 145% of premium payments. Economic logic indicates these extra costs are passed on to current workers in the form of reduced cash wages, or perhaps a smaller workforce.
Now, the House has passed a provision–section 3002(b) of the stimulus bill–which would require employers to extend the period of COBRA eligibility beyond eighteen months for anyone with at least ten years of service with the firm or anyone who is at least 55 years old (this is in addition to a provision establishing a temporary federal subsidy at 65 percent of premium costs). These special categories of former employees could stay enrolled in a COBRA plan until they become eligible for Medicare at age 65. This would mean that a thirty-something displaced worker could potentially stay enrolled in a former employer’s health plan for three decades after separation.
The HR departments for large employers are looking at this provision with great alarm, as indicated in this policy brief. PricewaterhouseCoopers produced an analysis which pegs the ten-year cost of this provision at $39 billion to $65 billion just for those current COBRA-eligible workers age 55 to 64. The estimated costs would be even higher if the analysis assumed, as is reasonable, that many more workers would elect early retirement if they were assured of access to group-rated insurance.
What would employers do if faced with the costs of implementing this provision? It’s fairly predictable. They would hire fewer workers, and pay their current employees less. Not exactly “stimulus.”
Indeed, this is exactly the kind of complex provision which should be considered by Congress only after careful study and a hearing or two to avoid unintended consequences. Certainly it has no business on a bill purportedly aimed at promoting short-term job growth. Unfortunately, logic and reason may not be enough to prevail in the current mad-dash rush to “pass something.”
–James C. Capretta is a Fellow at the Ethics and Public Policy Center and a health policy and research consultant.