WASHINGTON—Employers should brace for an extension of the COBRA health care premium subsidy, which has led to a surge of laid-off employees keeping employer-provided coverage.

Last week, White House Press Secretary Robert Gibbs said President Obama is looking into whether the subsidy, embedded in economic stimulus legislation that the president signed into law in February, should be extended.

“There are a number of ideas that have been implemented that are coming to a legislative end,” including the COBRA premium subsidy, which the administration is analyzing, Mr. Gibbs said.

In addition, Washington sources say, the House Democratic leadership is considering extending the COBRA subsidy.

Under the American Recovery and Reinvestment Act of 2009, the federal government pays 65% of COBRA premiums for up to nine months for workers involuntarily terminated through the end of this year. The subsidy is not available in other COBRA entitlement situations, such as voluntary termination of employment. In those situations, beneficiaries pay the full COBRA premium, which is 102% of the group rate.

The premium subsidy, which generally became available starting March 1, has had a dramatic effect on the COBRA opt-in rate, doubling the percentage of laid-off employees opting for COBRA.

From March 1 through June 30, monthly enrollment rates for laid-off employees averaged 38%, according to a Hewitt Associates Inc. analysis of COBRA enrollments among 200 large employers (see box).

The reason for the surge is obvious: Coverage is more affordable when the federal government picks up 65% of the COBRA premium, which for individual coverage often is about $400 a month and for families is about $1,200.

“The subsidy has been a godsend to those who have lost their jobs,” said Tom Lerche, health care practice leader with Aon Consulting in Chicago.

But unless Congress extends the subsidy, soon it will disappear for millions of unemployed Americans and their families. Beneficiaries who have collected the subsidy since March will see that end in November; and workers who lose their jobs beginning Jan. 1, 2010, will be ineligible without an extension.

Popular measure

But benefit observers say continuing high unemployment—the rate hit a 26-year high of 9.8% in September—and the popularity of the subsidy make it almost certain that federal legislators will agree to extend it.

An extension is “almost a no-brainer,” said Andy Anderson, a partner with Morgan, Lewis & Bockius L.L.P. in Chicago.

“One way or another, a legislative vehicle will be found to which” a subsidy extension will be attached, said Frank McArdle, a consultant in the Washington office of Hewitt.

Others, though, are less certain.

“While the passion is there, the appetite (in Congress) for additional federal spending is greatly reduced,” said Neil Trautwein, vp and employee benefits counsel with the National Retail Federation in Washington.

The congressional Joint Committee on Taxation estimated earlier that the subsidy would cost the government about $25 billion for about 7 million jobless individuals and their families.

Unknown, though, is the cost of the subsidy to employers. A rough rule of thumb prior to the subsidy law was that for every $1 employers collect in COBRA premiums, they pay out $1.50 in beneficiaries' claims. That is because those opting for COBRA typically are heavy users of health care services.

“The basic problem is adverse selection,” said Mark Ugoretz, president of the ERISA Industry Committee in Washington.

In theory, the government premium subsidy should improve the risk pool because a greater number of healthier beneficiaries would be more likely to opt for coverage. But there is no evidence of that yet. In fact, Aon Consulting's Mr. Lerche noted that beneficiaries may be using even more health care services because they fear they may not land a new job and employer-provided coverage before COBRA runs out.

“There is an added impetus to get everything done,” Mr. Lerche said.

Even if the COBRA risk pool has improved, premiums received by employers still fall short of covering beneficiaries' claims costs, said Scott Keyes, a senior consultant with Watson Wyatt Worldwide in Stamford, Conn.

“There are still higher-than-average-risk individuals” opting for COBRA coverage, Mr. Keyes said.

“On the face of it, the subsidy is a government-financed program. The reality is there are some significant costs to employers,” said Kathryn Wilber, senior counsel-health policy at the American Benefits Council in Washington.

Few administrative issues

Still, if Congress extends the subsidy, employers won't face the administrative problems they incurred earlier this year when the subsidy legislation was passed.

Because Congress made the law retroactive, employers had to locate and notify employees who were laid off as early as Sept. 1, 2008, and who initially rejected COBRA, that they had a second opportunity to opt for coverage.

In addition, employers had to guess—until the Internal Revenue Service later provided guidance—in certain less-than-clear-cut situations whether former employees were entitled to the subsidy.

Since then, administration of the COBRA premium subsidy “has become a normal course of business” for employers, said Karen Frost, a Hewitt Associates health and welfare outsourcing leader in Lincolnshire, Ill.

For employers, the premium subsidy program “is no longer an administrative issue; it is a cost issue,” said Watson Wyatt's Mr. Keyes.