COBRA subsidy shelved amid growing budget concerns

WASHINGTON—The once politically popular program that provides COBRA premium subsidies for involuntarily terminated employees is winding down as broad congressional support has nearly vanished, experts say.

Embedded in a 2009 economic stimulus measure and renewed several times since then, the program in which the federal government pays 65% of the COBRA premium has enabled millions of employees who lost their jobs and their dependents to keep group coverage by making it more affordable.

The most recent extension of the 15-month subsidy expired May 31, with employees laid off since then no longer eligible for the subsidy.

With congressional concerns mounting about the soaring federal budget deficit, it is highly unlikely lawmakers will approve another extension.

“Right now, the odds of extending the subsidy don't look very bright. While many members of Congress would agree on the worthiness of the subsidy, they are choking on the cost,” said Frank McArdle a consultant with Hewitt Associates Inc. in Washington.

“It's over,” Chantel Sheaks, a principal with Buck Consultants L.L.C. in Washington, said of the possibility that the subsidy will be extended.

In March and April, lawmakers approved extending the program. Last December, Congress not only approved a retroactive extension but also expanded the length of the subsidy to 15 months, six months longer than the original nine-month program.

Signs that congressional support was dwindling first became apparent in May, when House Democratic leaders stripped a provision in a Senate-approved tax bill that would have extended the subsidy to employees laid off through the end of the year.

Amid growing congressional opposition to any proposal that would add to the burgeoning federal deficit, Senate Democratic leaders threw in the towel in June and dropped their support of COBRA subsidy extension of any length.

The biggest reason for the loss of congressional support is lawmakers' fears about a public backlash against measures that would add to the federal deficit, Washington observers say.

“There is a general backlash at so much government spending” at a time of big deficits, Buck Consultants' Ms. Sheaks said.

In fact, the Congressional Budget Office last week revised its previous estimates and now projects a $1.07 trillion federal budget deficit for fiscal 2011, up from the $980 billion deficit it projected in January.

That is the “problem for the COBRA extension. Unemployment is still high, but the budget situation is getting worse. Unless a way is found to pay for it, approval of another extension would be a heavy lift,” Mr. McArdle said.

Congressional budget analysts pegged the cost of the original COBRA subsidy law, which was not funded, at about $25 billion.

Still, the chances of another extension could improve if the nation's unemployment rate dramatically worsens, some say.

“If the (unemployment) numbers get worse, that could be an impetus for Congress to act,” Mr. McArdle said.

While the cost to the federal government has been high, the subsidy has made COBRA coverage more affordable, resulting in far more laid-off employees retaining coverage from their former employers.

A Hewitt Associates analysis involving 200 large employers found that 38% of laid-off employees eligible for the subsidy opted for COBRA from March through May in 2009, double the percentage of laid-off employees opting for coverage in the months immediately preceding the creation of the subsidy. The program generally became available on March 1, 2009.

On the other hand, the COBRA subsidy created administrative hassles for employers. That was especially true in the early days of the subsidy when there was no regulatory guidance to define, among other things, situations in which employees would be considered to be involuntarily terminated and entitled to the subsidy.

“In the beginning, there was a lot of confusion,” said Rich Stover, a Buck Consultants principal in Secaucus, N.J.

There also was a financial cost to employers as COBRA premiums received by employers typically do not cover the cost of medical claims incurred by those opting for coverage due to adverse selection, said Scott Macey, of counsel with Covington & Burling L.L.P. in Washington.