by

Gail Shearer
Director, Health Policy Analysis
Washington Office

and

Susanna Montezemolo
Esther Peterson Fellow
Washington Office

Problems with the Current COBRA Program

Currently, when an eligible worker is laid off, he or she may turn to the COBRA program to obtain health insurance coverage. However, the current system allows many displaced workers to fall through the cracks and lose their health insurance coverage. COBRA simply is not comprehensive enough to help most displaced workers. This section delineates the primary problems with the COBRA system.

Many covered workers cannot afford to pay for COBRA. Although COBRA coverage is generally less expensive and more comprehensive than individual health insurance coverage, it is still far from affordable for most low- and moderate-income Americans. A mere 20 percent of eligible workers choose to enroll in COBRA.(11) In 1999, only 7 percent of unemployed adults had health insurance coverage through COBRA.(12) According to a Kaiser Family Foundation report, the primary reason displaced workers decline COBRA coverage is cost.(13) As one author puts it, "[f]or many workers, . . . the difference between an individual policy's premiums (absolutely unaffordable) and a group policy's premiums (unaffordable) is academic."(14)

Many workers are not covered by COBRA. As described earlier (see introduction), many workers are ineligible for COBRA benefits. As a result of these limitations, one study found that only 57 percent of non-elderly workers and their adult dependents were potentially eligible for COBRA in 1999.(15)

As a result, when workers are laid off from their jobs, many join the growing number of uninsured Americans. Data from the Survey of Income and Program Participation (SIPP) indicate that 17.5 percent of the uninsured have lost/left their jobs in the past four months. 31.3 percent of those switching from private insurance to no insurance have lost/left their jobs in the past four months. 58 percent of the uninsured have lost/left their jobs, switched their jobs, or done both in the past year.(16) Despite COBRA, these workers remain uninsured.

COBRA benefits for displaced workers end up costing employers money because former employees who enroll tend to be sicker and older than those who do not enroll. COBRA coverage is so expensive that workers who have medical problems tend to enroll, while those who are healthy tend to take their chances without insurance. In addition, older workers, who tend to have more serious health conditions than younger workers, are more likely to elect COBRA. This "adverse selection" results in sicker-than-average displaced workers electing COBRA coverage and healthier-than-average displaced workers refusing COBRA coverage. This drives up the total costs of the employer health plan and increases the average cost of insuring each employee. According to one report, "a study of three large health plans found that on average, those who enroll in COBRA have higher health needs than those who do not; for example, they are more likely to use maternity and mental health care benefits."(17) Another study found that the average health care costs of a COBRA enrollee are over 1.5 times that of the average enrollee in an employer-sponsored plan.(18)

Subsidizing COBRA premiums would make coverage more attractive to healthier workers. This would expand the pool of covered individuals and would lower the average cost of health plans for employers and insurance companies. A COBRA subsidy would therefore reduce the pressure for employers to drop coverage or for insurance companies to raise premiums; this would help dampen pressure to increase premiums paid by workers.

What is Needed: Congress Should Ensure that Health Insurance
Coverage is Affordable for the Newly-Laid Off

Consumers Union believes that Congress should design a health insurance subsidy for laid-off workers that will make health insurance affordable, within reasonable budget parameters. We believe it is appropriate to aim for a cost of $25 billion, with a total of 5 to 10 million beneficiaries.(19) (Other funds should similarly be targeted to both provide financial relief to the newly laid off while stimulating the economy, e.g., though unemployment insurance.) Key design parameters for the health insurance subsidy include the following.

• The federal subsidy for laid-off workers should be between 50 percent and 75 percent of the premium. Although ideally Congress would pass a full subsidy for laid-off workers, the Congressional Budget Office's preliminary estimates show that this would be inordinately high - costing considerably more than $25 billion.
• A state option to provide additional premium subsidies should be included on a sliding-scale basis for individuals and families with income up to 450 percent of the federal poverty line. Although the federal subsidy will help many workers obtain health insurance, many low-income displaced workers will still be unable to afford COBRA continuation of coverage without an additional subsidy.
• A state option to provide Medicaid coverage for laid-off workers ineligible for COBRA coverage should also be included to ensure that these workers can obtain affordable health insurance.
• Funding should come from general revenues, not from funds that have been earmarked by Congress to provide coverage for low- and moderate-income children through the State Children's Health Insurance Program (SCHIP). Shifting SCHIP funds merely takes away money from health insurance for children to fund health insurance for laid-off workers. The purpose of this legislation should be to temporarily increase the total available money for health insurance, not to take away money for children's health insurance.
• The program should aim to provide short-term coverage to between 5 and 10 million displaced workers. This is a large portion of laid-off workers needing a subsidy and is within the $25 billion budget (assuming an average cost in the range of $2,500 to $5,000).(20) With new claims for unemployment totaling 468,000 for the week of October 6, the total number of newly unemployed workers could reach 20 million in a one-year period. Not all these workers will suffer long unemployment spells, and some will receive health care coverage through a spouse or partner rather than receiving a partial federal subsidy; as a result, the number of people receiving subsidies at any one time will be considerably lower than this number. We believe that it is appropriate to design a program for between 5 and 10 million people.
• The program should encourage broad risk-pooling, as is normally the case with employment-based coverage, but not with individual coverage. Doing so will slow the rate of increase in health care costs and may even result in lower premiums for insured people.

The key to designing this temporary health insurance subsidy program is to remember the needs of this vulnerable population. The ultimate test should be whether health coverage is affordable. A program that fails to enable laid-off workers to continue with their previous coverage and permits a gap in coverage will be deemed a failure. A program that does not meet the needs of individuals and families with moderate incomes and leaves them uninsured or underinsured will also be deemed a failure. The goal is to bridge the gap in coverage that all too often results when a person is laid off from his or her job.

Proposals Under Consideration By Congress

Congress is considering a variety of approaches to meet the health care needs of laid-off workers. The proposals vary considerably in terms of their effectiveness in making health coverage affordable, the number of people who benefit, whether they help all laid-off workers (including those ineligible for COBRA), and the source of funding (i.e., new federal funds vs. existing federal funds). The key proposals under development are explained below, listed in order from most promising to least promising.

Gephardt Proposal (under development). House Minority Leader Dick Gephardt (D-MO) is working on a proposal that would provide a 75 percent subsidy to all COBRA-eligible laid-off workers for up to one year. The proposal adds a "wrap around" to allow states to further subsidize COBRA premiums for low-income displaced workers (defined as at or below 450 percent of the federal poverty line) at the enhanced SCHIP match rate, which currently averages 70 percent. (In other words, states would pay 30 percent of the new Medicaid costs, which is less than the 43 percent average state share under existing Medicaid programs.) States could also use these funds to cover displaced workers ineligible for COBRA for up to one year through the Medicaid program.

This bill, like the Kennedy-Baucus bill in the Senate described below, balances displaced workers' and taxpayers' interests. It ensures that all laid-off workers - even those ineligible for COBRA - are able to receive affordable health insurance after losing their jobs. It also provides incentives for all COBRA-eligible workers to take advantage of the program. Among COBRA beneficiaries, it differentiates between low-income displaced workers, who need an additional subsidy, and those who have the means to pay the additional premium themselves, which minimizes the impact on taxpayers. The Medicaid premium "wrap-around" is an important feature: Even when partially subsidized, COBRA is simply too expensive for many low- and moderate-income displaced workers. According to the Center on Budget and Policy Priorities, "[f]ifty percent of an average COBRA family premium would consume about one-third of the national average monthly unemployment insurance benefit."(21) This bill provides a generous 75 percent guaranteed federal subsidy to COBRA-eligible workers, which ensures that more workers can enroll in continued coverage than could do so under a smaller 50 percent subsidy.

Kennedy/Baucus Proposal (under development). Senators Ted Kennedy (D-MA) and Max Baucus (D-MT) have proposed, though not yet introduced, a broad package to assist laid-off workers that includes $16 billion for health insurance subsidies over a two-year period. Under this proposal, the federal government would subsidize 50 percent of COBRA premiums for all COBRA-eligible laid-off workers. The proposal also would allow a Medicaid "wrap-around," which would increase Medicaid funding at the enhanced SCHIP rate and allow states to use this money to subsidize the remaining 50 percent premium for low-income, COBRA-eligible displaced workers. States could also use this money to allow laid-off workers not covered by COBRA to enroll in Medicaid for up to 12 months.

This proposal has many of the same benefits as the Gephardt proposal described above. It carefully balances workers' and taxpayers' interests. It ensures that all laid-off workers are able to receive affordable health insurance. It provides incentives for all COBRA-eligible workers to take advantage of the program. Among COBRA beneficiaries, it differentiates between low-income displaced workers, who need an additional subsidy; and those who have the means to pay the additional premium themselves, which minimizes the impact on taxpayers.

S. 1502, the "COBRA Plus Act of 2001." Senator Jim Jeffords (I-VT), along with Senators Blanche Lambert-Lincoln (D-AR), Lincoln Chafee (R-RI), Evan Bayh (D-IN) and Olympia Snowe (R-ME), introduced the S. 1502, the "COBRA Plus Act of 2001," on October 4, 2001. This bill would provide a refundable tax credit (up to $1,320/year for individuals and $3,480/year for families) to pay up to 50 percent of COBRA premiums for workers who become unemployed on or after September 11, 2001. The bill provides for advance payment of the credit to the sponsor of the group health plan (thus allowing those eligible to receive the credit without waiting for next year's tax refund).

Unlike many other health care tax credit proposals, this bill channels the funds through the employment-based system and therefore keeps healthy and sick laid-off workers in the same risk pool. The level of the subsidy and the maximum amounts for individuals and families are larger than many other tax credit proposals and will provide some relief to those eligible for COBRA benefits. However, since individuals and families are required to pay at least 50 percent of their health insurance premiums, and since this proposal does not include additional premium subsidies for those with low and moderate incomes, S. 1502 would provide only limited relief. It does not address the needs of laid-off workers who are ineligible for COBRA benefits. Health insurance will therefore continue to be out of reach for laid-off workers who are not eligible for COBRA benefits or who cannot afford to pay 50 percent of the premium.

Carnahan amendment. Senator Jean Carnahan (D-MO) added her "Displaced Workers Assistance Act" as an amendment to the aviation security bill. The amendment, which applies to airline, airport, and airplane manufacturer workers laid off in the wake of the September 11 attacks, assists workers in two ways. First, it provides for a 100 percent federal COBRA subsidy for COBRA-eligible industry workers for up to one year. Second, it allows industry workers who are ineligible for COBRA to receive Medicaid coverage for up to one year. Senate Democrats sought to invoke cloture to end a filibuster of the amendment; they failed by four votes, and the amendment died. According to Senator Carnahan, "[t]his is the first time since September 11 that the Senate declined to help a group of people affected by the attacks. The airlines got $15 billion, but the workers didn't even get a vote."(22)

This amendment would have done much for airline industry workers laid off in the wake of the attacks. However, it would have provided no assistance to the myriad workers outside the airline industry who also have suffered greatly since the attacks. Congress should pass a strong measure that provides health insurance assistance to all workers laid off since the September 11 attacks.

Administration Proposal (under development). The Bush Administration has proposed legislation that would allow states to expand health insurance coverage to laid-off workers. The proposal temporarily expands the National Emergency Grants program by $3 billion. Through the program, states in which the Governor has certified that the September 11 attacks have had a major impact on layoffs could use grants to pay up to 75 percent of COBRA health care premiums for up to ten months for displaced workers, among other things. In addition, the proposal allows states to use the $11 billion in unspent SCHIP matching funds to support this expansion.

This proposal is flawed in many ways. First, it applies only to workers in states greatly affected by the September 11 attacks - even though laid-off workers in other states also need health care coverage. Second, it only applies to workers who are eligible for COBRA coverage, denying relief to those who are ineligible for COBRA. Third, it does not guarantee a federal subsidy; it merely encourages states to use federal money for health insurance. In fact, states can use this money for other purposes, such as unemployment insurance. (Laid-off workers need both expanded unemployment insurance and a health insurance subsidy.) Fourth, the provision of $3 billion is simply not enough money to cover the health insurance needs of laid-off workers. (A 50 percent subsidy, combined with a state Medicaid option, is expected to cost around $16 billion.) Finally, the Administration's proposed use of $11 billion in unspent SCHIP funds is inappropriate, as described in the previous section. The Administration should promise separate federal dollars to ensure that both children and laid-off workers are able to access high-quality, affordable health insurance.

H.R. 3090, the "Economic Security and Recovery Act of 2001." H.R. 3090, the economic stimulus bill recently amended and passed by the House Ways and Means Committee, increases the Social Services Block Grant (SSBG) by $3 billion, which can be used to expand health care coverage for laid-off workers. Under current law, states are appropriated funds through SSBG to provide services to increase self-sufficiency, prevent abuse and neglect, and encourage community-based care for people with long-term care needs. This bill provides a one-time increase in SSBG funding for FY2002. States could use these funds to buy health insurance for unemployed workers who do not qualify for federal health insurance programs and their families.

It is important to consider these provisions in the context of the overall economic stimulus proposal. Other provisions of the bill, which costs a total of $99.5 billion in 2002, would repeal the corporate alternative minimum tax ($25 billion), provide a faster depreciation schedule for business investments ($40 billion), reduce the individual capital gains tax ($1.4 billion), and accelerate the individual income tax rate reduction ($13 billion).(23)

The economic stimulus package falls short of meeting the health care needs of displaced workers in America. Specifically, it does not directly subsidize COBRA or provide a Medicaid "wrap-around" for those ineligible for COBRA, nor does it appropriate nearly enough money to cover all displaced workers. It also fails to take advantage of the benefits that COBRA subsidies would bring to employers by broadening the risk pool of individuals electing COBRA coverage. Further, SSBG-funded programs have no experience in providing health care coverage and are not necessarily the best conduit for a short-term expansion of health insurance.(24) Moreover, the $3 billion in appropriations would cover only a small fraction of laid off workers. This bill is simply an inadequate fix for the millions of workers in America who have lost or will lose their jobs and employer health insurance coverage.

Conclusion

The economy, which was slowing in summer months, has only worsened since September 11. Hundreds of thousands of workers apply for new unemployment insurance benefits each week, and most are not covered by COBRA or cannot afford the premiums. In these economically perilous times, Congress must act to help displaced workers in need of health care coverage.

Congress should enact legislation to make health coverage affordable for all laid-off workers, as proposed by Senators Kennedy and Baucus and House Minority Leader Gephardt. Funding should come from general revenues and should be sufficient to cover 5 to 10 million workers. A state option to increase Medicaid funding (for those who need additional premium subsidies and for those ineligible for COBRA) should be included. The legislation should ensure that all Americans who lose their jobs during this economic downturn can obtain affordable health insurance.

The proposed health insurance subsidies would directly benefit a vulnerable population, would directly stimulate the economy, and would bolster consumer confidence to the further benefit of the economy. Absent this change, all workers in America face the reality that they are just a pink slip away from being uninsured.