Management Course: COBRA
A Supreme Court decision and expanded eligibility top the list of developments
making compliance with COBRA's continuing coverage provision more complicated
The Consolidated Omnibus Budget Reconciliation Act of 1985 made history in June,
when the nation's highest court issued its first COBRA decision. The ruling - that
employees whose job-based health benefits were ending could elect COBRA
coverage even if they already had group health insurance-triggered predictions of a
spate of lawsuits.
It also marked a serious shift in thinking. Before the landmark Supreme Court
decision, consultants and lawyers routinely told employers that the law did not require
them to offer continuing coverage to those with other insurance. Not anymore.
In Geissal v. Moore Medical Corp., a cancer patient and his wife sued his former
employer for dropping his COBRA policy after discovering he had preexisting
coverage through his spouse's job. The question centered on eligibility and the
wording of the law. COBRA coverage can be stopped, the statute specifies, on the
date on which the qualified beneficiary "first becomes, after the date of the election,
covered under any other group health plan."
Using language reminiscent of the infamous presidential dissection of the meaning of
"is," Justice David Souter noted that COBRA does not say "if the beneficiary 'is'
covered or 'remains' covered..." but when the beneficiary becomes covered. The high
court's unanimous conclusion: The right to this continuing coverage ends when the
beneficiary signs on with another group policy after electing COBRA, not because of
In a B&H Legal Alert (July), Sheldon Weinhaus, the attorney for the plaintiffs, urged
employers to "conduct a thorough review of their COBRA benefit administration
practices" in light of the ruling. He advised those with doubts about the meaning of a
rule or regulation to play it safe by adopting a literal interpretation.
Nonetheless, the Supreme Court did not resolve - or even address - every
manifestation of COBRA. For instance, asks Stephen Huth of the Chicago-based
Charles D. Spencer Associates: "Does Geissal mean Medicare should be treated the
same as any other group health plan?" Most insurance experts say Yes, and
recommend that employers extend COBRA coverage to retirees who request it.
Also not addressed in Geissal was the issue of notification. That has come up in an
increasing number of legal battles over such things as whether notice of COBRA
eligibility was issued in writing, when notification was received and by whom, and
whether the written notice cited a precise cost or an estimated premium. Court rulings
have not been consistent.
The Supreme Court's decision on COBRA eligibility applies retroactively, meaning
that plaintiffs can sue companies for previous denials. But, Weinhaus says, to the best
of his knowledge, no such lawsuits have been filed to date.
HIPAA's broader range
The Health Insurance Portability and Accountability Act of 1996 is another hot
button, because HIPAA expands the scope of COBRA coverage.
Since its enactment, COBRA has ensured that individuals who stand to lose
employer-sponsored insurance have the opportunity to continue the policy for 18 to
36 months, depending on circumstances. Qualifying events include job loss or a
reduction in work hours, or, for a dependent, when status as a minor ends or the
family breadwinner becomes eligible for Medicare, dies or files for divorce or legal
As of June 1997, HIPAA requires that workers who become disabled within 60 days
of electing COBRA be allowed to keep the coverage for an extra 11 months.
The portability law also allows adults to add adopted or newborn children to their
COBRA policies at any time. Previously, dependents qualified only if they had been
covered by the beneficiary's pre-COBRA group health plan.
HIPAA also guarantees that people who attempt to move from group to individual
coverage cannot be rejected by insurers, but there are caveats: For one thing, HIPAA
requires people to exhaust their COBRA benefits in order to qualify for individual
coverage. For another, the law says nothing about the premiums such individuals can
The GAO reported earlier this year that some insurers were trying to "circumvent" the
portability law by denying coverage to sick individuals, charging group-to-individual
converts as much as 600 percent of the standard rate and cutting back on agents'
commissions for selling policies to them. The Clinton administration responded by
ordering plans to certify their compliance with HIPAA if they want to do business
with the massive Federal Employee Health Benefits Program.
What's the impact of these changes? Many observers predicted big jumps in the
numbers of those taking advantage of COBRA when HIPAA passed, but that hasn't
happened thus far.
According to a 1998 Charles Spencer survey of nearly 200 companies employing 2.8
million, only 6 percent of workers and beneficiaries were entitled to COBRA
coverage in 1997 - an eight-year low. Last year's high employment rate, Huth says, is
partly responsible for the decline.
In addition, only one in five eligibles - a mere 1 percent of employees nationwide -
took advantage of COBRA this year. And just 0.2 percent of those who elected the
continuation coverage in 1997 switched to individual policies when their COBRA
policy ended this year.
Huth notes, however, that it's too soon to gauge HIPAA's effects on COBRA,
particularly since many unionized workers won't get the portability provisions until
their contracts expire.
Still, the fact that there are few takers isn't all that surprising. COBRA coverage is far
from a windfall for beneficiaries. Under the terms of the law, those who elect it pay
102 percent of the group premium for the first 18 months and up to 150 percent after
that; the surcharge is designed to cover administrative costs.
COBRA premiums average just over $4,300 a year, according to Spencer - an average
that combines the cost of single and family coverage. But premiums are based on a
group health plan's total costs for the previous year rather than on current COBRA
For years, COBRA costs have outpaced employee costs, and this year is no exception.
To date, overall COBRA costs, including claims and administration, are averaging
$5,300 per participant. Per employee costs are averaging $3,500 to date. The gap
between the two ranges from less than 10 percent to more than 500 percent of group
health costs for individual employers.
This year, Huth maintains, employers' subsidy of COBRA recipients came to about 50
percent. The reason is adverse selection. "Only those who are sick or expected to be
sick" are likely to pay for it, he says.
Besides the employer subsidy, Huth says, businesses set aside funds for an area in
which it's next to impossible to anticipate future costs. That's because there's little
relationship between active employee health costs and COBRA costs.
And, since COBRA premiums are based on total plan costs from the previous year,
paying for this mandated coverage is like a roll of the dice. "Sometimes you win," he
observes "and sometimes you lose."