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The win-win demise of COBRA

By Jay MacDonald ·
Tuesday, November 19, 2013
Posted: 6 am ET

For nearly three decades, most American workers have been able to quit their jobs and remain on their companys' group health insurance plans, thanks to a special federal program called COBRA, the acronym for the enabling Consolidated Omnibus Budget Reconciliation Act that was signed by President Ronald Reagan in 1985.

Envisioned as a between-jobs health insurance backstop, COBRA always worked better on paper than in practice, largely because the ex-employees suddenly found themselves saddled with the full premium burden they'd previously shared with their ex-bosses.

COBRA hissing

Large employers, most of who "self-insure," meaning they pay their workers' insurance claims directly, without the aid of an insurance carrier, loathed COBRA because only the sickest of their departing workers would pony up to remain on plan. This disproportionately hit the company where it hurts: in the pocketbook.

That lose-lose proposition is now just weeks away from scheduled obsolescence, thanks to an obscure little law you may have heard about called the Affordable Care Act. And while some large employers who previously railed against President Barack Obama's landmark health care reform have yet to realize it, the impending demise of COBRA may save them millions.

Why? Because, as Jay Hancock of Kaiser Health News reported recently, former employees are likely to find a far better deal -- perhaps with federal tax subsidies -- on the new Obamacare exchanges than by lingering at top dollar on COBRA.

Goodbye COBRA, hello exchanges

"As soon as the law was passed, the question among employers and benefits people was, 'Is there still going to be a reason for COBRA?'" Steve Wojcik, vice president of public policy for the National Business Group on Health, told Hancock. In fact, 41 percent of large businesses polled by Wojcik's employer group said they plan to send former employees directly to the state exchanges next year.

Hancock interviewed Jessica Stephens, a 29-year-old restaurant cook who had to take a second job to meet her monthly COBRA premium of $518. Now, with an income of $25,000 a year, Stephens figures to qualify for tax credits through the Obamacare exchange that would cut her health insurance premium to $200 per month.

"That’s wonderful. I would definitely take the exchange," she says. "I thought I could squeeze by financially doing COBRA, but the last nine months have told me that's not possible."

Possible savings in the billions

How much large employers are likely to save with the eventual demise of COBRA under Obamacare is unclear, but the numbers could run into the billions. In its last survey of COBRA examining numbers from 2008, the newsletter Spencer's Benefits Reports estimated that 4.8 million COBRA beneficiaries cost their employers more than $10 billion that year alone, Hancock writes.

"If the employers know anything about their own experience, they're going to be thrilled when these people go into the exchanges," according to Stephen Huth, who headed up that Spencer’s survey. "And when these former employees find out the (lower) cost, they're going to be thrilled to go into them, too."

What remains to be seen is how much employers will be willing to share the windfall with their current employees and what effect, if any, the influx of the relatively sicker COBRA-insured might have on the exchange marketplace.

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