How Health Care Reform Takes a Bite Out of COBRA

Most business leaders get chills at the thought of health care reform.

Like a polar vortex blowing through the office, it brings new compliance burdens, new taxes and fees, and complexity that rivals the human brain.

But now, because the Affordable Care Act (ACA) paved the way for the creation of state health insurance exchanges, there’s at least one reason to warm up to the law:

COBRA is no longer the only viable option for continuing health coverage.


COBRA quickie


The Consolidated Omnibus Budget Reconciliation Act (COBRA) applies to companies with 20 or more employees, and gives covered individuals the right to continue group health plan coverage for a limited time if coverage is lost due to a “qualifying event.”

Qualifying events include:

  • Voluntary or involuntary job loss
  • Reduction in hours worked
  • Divorce or legal separation
  • Dependent child reaching age limit
  • Death of the employee

If elected, COBRA is typically available for 18 or 36 months, depending on the qualifying event. But it’s only a temporary fix, and it doesn’t come cheap.


A better exchange rate


The main drawback of COBRA coverage is cost. Not only does a COBRA participant have to pay the entire premium (they lose any employer subsidy), but there’s an additional 2 percent administrative fee. This creates a tighter financial squeeze, especially for someone who just lost his job.

That’s where the state exchanges come in.

In these marketplaces, individuals can shop for health insurance, choosing from four plan types with different cost-sharing levels. Additionally, because of new health care reform rules, they don’t have to worry about being denied coverage because of current health status or a pre-existing condition.

Finally, depending on the individual’s income, they may qualify for a tax subsidy that makes exchange coverage more affordable. According to a recent analysis by Avalere Health, 84 percent of those who ultimately enroll through the exchanges are expected to be eligible for federal subsidies.


Different strokes


But that doesn’t mean state exchanges are the best option for everyone. Some individuals might elect COBRA for a few months to tide them over until they find coverage elsewhere.

This allows them to:

1. Get temporary health insurance without having to commit to a new plan.
2. Satisfy the ACA’s individual mandate, which states that every American must have qualifying health insurance or risk a penalty.

See also: The Individual Mandate and How It Could Affect Your Business

Beyond that, an individual may already be dealing with a medical claim or need ongoing care. Shopping the state exchange could mean a new carrier and a new network of doctors.

And if they’ve already met their deductible or out-of-pocket maximum for the year, COBRA keeps them from starting back at zero on a new plan.


What it means for employers

Individuals who elect COBRA coverage are often those who use it most. This can put a financial strain on the company that sponsors the group health plan, especially if the plan is self-insured.

Even if the plan is fully-insured, if the company has more than 50 employees, the carrier can take into account the additional usage by COBRA participants and the overall ratio of COBRA participants to active participants.The carrier can then use this information to justify raising the company’s premium.

In short, high-usage COBRA participants can have a significant impact on a company’s bottom line.

So make sure former employees know state exchanges are an option for health coverage.


Do the math


Health insurance is a numbers game. The more people in the pool, the more the risk is spread, which can lower premium costs. But how can small businesses move from the kiddie pool to the deep end?

One way is through a co-employment relationship with a professional employer organization (PEO). With a PEO, employees of small businesses get access to a large-group health insurance plan. Moreover, the financial and administrative burdens tied to providing coverage fall to the PEO.

See also: Health Care Reform and How a PEO Can Put Your Mind at Ease

And because a PEO is a form of HR outsourcing, the small business is also freed of many HR and administrative tasks that can hinder innovation, productivity and, ultimately, profit.

Learn how Insperity can help your business curb COBRA costs and handle health care reform.