WASHINGTON—Health insurers, in a show of practical good will and at the urging of the Obama administration, are extending coverage to employees' children up to age 26 before a provision in the new federal health care reform law requires them to do so.

The nation's largest insurers, including Aetna Inc., Blue Cross & Blue Shield Assn. plans, CIGNA Corp., Humana Inc., Kaiser Permanente, UnitedHealth Group Inc. and WellPoint Inc., said they have or soon will extend coverage to older adult children.

In addition, the Internal Revenue Service last week said that the cost or value of the coverage will not be added to employees' taxable income even if the coverage is extended before the effective date in the reform law (see story, page 20).

Under the law, the extension of coverage to employees' children up to age 26 takes effect on the first day of a plan year that starts six months after the March 23 enactment of the law, or Sept. 23. For employers with calendar-year plans, which are the most common, the requirement begins Jan. 1, 2011.

The insurers' extensions are limited. They will apply only to adult children who already are covered by the insurers. The extensions would not apply, for example, in the case of an employee's child who already graduated from college or lost eligibility for coverage under his or her employer's health care plan. That adult child would have to wait until the effective date of the health care reform provision to regain coverage.

The biggest winners of insurers' moves to implement the reform law's adult child provision will be high school students about to graduate who will not attend college and college students about to graduate. Typically, insurers and self-insured employers stop coverage for employees' children at age 18 or 19, or 22 or 23 if the child is a full-time college student.

In such situations, employees can obtain COBRA coverage for their children. But the cost—often $400 to $500 a month—can be prohibitive for lower-income employees.

Insurers say they decided to extend coverage sooner than required to reduce the likelihood of gaps in coverage for young adult children, a group that also can include stepchildren, adopted children and foster children.

“We felt this was the right thing to do,” a spokeswoman for Minnetonka, Minn.-based UnitedHealth Group said.

Industry observers note that insurers were under pressure from the Obama administration to extend coverage sooner than required, saying the administration is eager to show benefits of the new law to counteract complaints about its costs.

“In a sense, the insurers are doing what is being asked of them,” said Frank McArdle, a consultant in the Washington office of Hewitt Associates Inc.

Also, the early implementation of the provision is a public relations plus for insurers, which were criticized for some of their underwriting practices while the reform plan worked its way through Congress.

“They are anticipating some good will for doing this,” said Michael Thompson, a principal with PricewaterhouseCoopers L.L.P. in New York.

In addition, by continuing coverage to employees' adult children, insurers avoid the administrative hassle and cost of dropping coverage and then resuming it a few months later.

“Keeping them in the plans is administratively easier than taking them off and putting them back on” soon thereafter, said Christopher Renz, a partner in the San Francisco office of Mercer L.L.C.

The cost of extending coverage to young adult children before insurers are required to do so will be very low. Some benefit consultants peg the cost increase at a little more than 0.1%, a reflection of the relatively low number of adult children who would be covered initially.

“The initial exposure is very small,” said Randy Abbott, a senior consultant with Towers Watson & Co. in Wellesley Hills, Mass.

Another factor mitigating costs is that many states already require insurers to extend coverage beyond age 22 or 23. For example, a New Jersey law allows employees' children to retain coverage through a parent's health insurance plan through age 30, as long as the adult child is not married and has no dependents. In Utah, a law allows unmarried dependents to retain coverage until age 26, according to the National Conference of State Legislatures in Denver. Those laws, though, do not apply to self-insured plans, unlike the new federal law.

Initially, insurers are not expected to pass on cost increases to employers due to adopting the expansion-of-coverage provision sooner than required, consultants say. With premium rates set at the beginning of a plan year, there would be little ability for insurers to pass on the increase now.

However, an employer's premium at renewal could be affected based on claims incurred as a result of early adoption of the provision, said Sara Taylor, a Hewitt Associates consultant in Lincolnshire, Ill.

When the provision is fully implemented, cost increases reflecting the small increase in the number of people covered and the relatively low cost of young adults' health care will be modest. Consultants have said cost increases for self-funded employers likely will range from 0.5% to 1.5%.

Demographics will be a key factor affecting costs. For example, employers with young workforces would likely have few employees with young adult children, while employers with a high number of employees between ages 45 and 60 likely would have many employees with young adult children.

In all, according to a Hewitt Associates estimate, employers with self-insured plans will cover 5% to 10% more children than they currently do once they expand their plans to implement the provision.

Consultants say employers with self-insured plans are considering early adoption of the adult child coverage provision, but few have acted already.

“We are very cost-claim sensitive,” said Kathy Dupree, benefits manager at Core Laboratories Inc., a Houston-based company that provides services to petroleum companies. “With insurers, the law of large numbers balances things out. But for us, just a couple of big claims can dramatically affect our costs,” she said.

Core Laboratories now covers employees' children up to age 19, or until age 23 if the child is enrolled in college, Ms. Dupree said, adding that the company will amend its health care plan to be in compliance with the adult child coverage mandate on Jan. 1, 2011.