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Health Care Reform May Decrease COBRA Costs in California

By Rita Zeidner  12/3/2013
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The long-term impact of health care reform remains hazy, but some California businesses may get health care cost relief from an unlikely source: a drop in COBRA enrollees.

Many employers have seen their COBRA liability rise because of an increase in layoffs during the economically ravaging recession. But this trend is unlikely to continue in 2014, once insurers can no longer discriminate against people with pre-existing conditions.

Because of its high cost, COBRA traditionally has been the insurance option of last resort, according to J.D. Piro, a senior vice president at Aon Consulting.

“You’d only take [COBRA] coverage if you were going to need it,” Piro said.

In many instances the health care costs of COBRA enrollees far surpass the amount they pay in premiums.

Compared with other states, in California the cost of providing health insurance to former employees is particularly high. Cal-COBRA requires employers with 2-19 employees to offer continuation coverage; federal requirements don’t kick in until an organization has 20 or more workers. Moreover, California employers with at least 20 employees must offer coverage for up to 36 months—twice as long as the federal law mandates.  

The medical costs of COBRA enrollees are so predictably high that some insurers refuse to do business with employers that have a large COBRA-eligible population. As a result, these businesses, which tend to be financially strapped already, lose all bargaining power and are at the mercy of their existing insurer, said Michal Rankin of 3e Financial, a Newport Beach, Calif. consultancy. 

Beginning in 2014, many individuals who would otherwise have continued coverage under a former employer’s plan for up to 36 months will be better off with coverage under the California exchange. Plans sold there must cover a comprehensive set of 10 "essential health benefits."

A survey by the National Business Group on Health (NBGH) found that roughly four in 10 employers (41 percent) believe that COBRA plan participants may find public health exchanges to be the most cost-effective option. Additionally, more than one-fourth (26 percent) think that some pre-65 retirees may opt to get insurance through exchanges, while 20 percent believe that some part-time employees will do the same.

“I believe employers will see some cost savings,” said Helen Darling, NBGH president and CEO. The reason is that people with high health care costs will be leaving COBRA, she explained.

Despite the benefits of getting insurance through an exchange, there are instances that will likely sway some COBRA-eligible enrollees to stick with their current provider for as long as possible, said Sarah Prince of United Agencies Inc., a broker in Burbank, Calif.

*The employer may have negotiated a particularly good rate.

*A preference for a plan with which they are familiar. “It’s the old devil-you-know thing,” she said.

*If their plan starts midyear, they may have already satisfied their deductible or be close to it.

Rita Zeidner is a freelance business writer and former senior writer for HR Magazine.

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