Why COBRA Should Not Be The Only Option For Displaced Workers

Report Health Care Reform

Why COBRA Should Not Be The Only Option For Displaced Workers

April 23, 2002 4 min read
Senior Research Fellow, Health Policy
Nina Owcharenko Schaefer is well known as a champion of patient choice and robust competition in America’s health insurance markets.

The narrow health care provisions in the Trade Adjustment Assistance (TAA) bill will leave many unemployed workers and their families without private health care coverage. The bill's legislative language restricts displaced workers' access to affordable private coverage by limiting its assistance to highly expensive COBRA coverage authorized under the Consolidated Budget Reconciliation Act of 1986, thereby excluding many workers from receiving any assistance for private coverage at all.

This "COBRA-only" policy is unfair. Instead, Congress can ensure that all displaced workers are eligible for assistance and are able to obtain the private health care coverage of their choice. Such a proposal was passed twice by the House of Representatives during the economic stimulus debate, was endorsed by the President, and attracted bipartisan support in the Senate, but Majority Leader Thomas Daschle (D-SD) blocked any consideration by the Senate.

Why COBRA-Only Falls Short.
In order to cope with job loss following the September 11 terrorist attacks and the recession, some Senators proposed extending federal health care assistance to those displaced workers who could maintain their health care coverage under the terms of the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA). COBRA allows unemployed workers to keep their employer-sponsored coverage provided they pay the full premium and a small administrative fee. It applies only to those firms with 20 or more workers and lasts for just 18 months.

This narrowly designed proposal failed to attract broad congressional support during the economic stimulus debate. It has now reemerged as a provision of S. 1209, the Trade Adjustment Assistance for Workers, Farmers, Communities and Firms Act of 2001. S. 1209 would extend the same COBRA-only assistance to workers who lost their jobs due to increased international trade competition.

There are several compelling reasons why a health policy based exclusively on a continuation of COBRA alone for private health care coverage would not be an effective solution for many displaced workers. Specifically:

  • COBRA-only coverage does not cover all workers. A Commonwealth Fund 2001 Health Insurance Survey found that one-third of working adults would be ineligible for COBRA if they became unemployed. Over half of these adults were ineligible because they either work for a small employer or simply did not have coverage. In another 2001 report, the Urban Institute estimated that in 1999, 43 percent of workers and their adult dependents were potentially ineligible for COBRA.

    For the unfortunate workers ineligible for COBRA, the solution for many on the Left is to enroll them in Medicaid. The problem, of course, is that Medicaid is a low-quality health care system that promises more than it delivers. The financially troubled Medicaid program not only is unprepared to absorb more enrollees, but also is having difficulty meeting the current needs of the poor and indigent who depend on it.

  • COBRA-only coverage does little for low- and middle-income families. The Urban Institute's analysis of COBRA found that 68 percent of low-income workers and their dependents would be ineligible for COBRA and 45 percent of all moderate-income workers would be ineligible. The Commonwealth Fund survey noted that Hispanic workers in particular were least likely to be eligible for COBRA coverage. Thus, COBRA-only assistance would benefit mostly persons who came from high-income families while leaving many low- and middle-income families, who need the most help, with no viable option.

  • Even with a subsidy, COBRA coverage is expensive for workers with no income. Many COBRA-qualified displaced workers, who now must depend on their limited and scarce financial resources, may find COBRA coverage, even with the subsidy, too difficult to maintain. The reason: COBRA coverage is very expensive. The average annual cost of an employer-sponsored plan is almost $3,000 for an individual and $7,000 for a family, according to the Kaiser Family Foundation and Health Research and Educational Trust 2001 Employer Health Benefits Annual Survey. The Department of Labor estimates that the average unemployment benefit for a worker is $925 per month. A single mother who lost her job and is struggling to pay her rent and feed her children may simply be unable to find an extra $147 a month for COBRA coverage.

  • Unemployed, displaced workers would be forced to stay with coverage controlled by their former employer. During spells of unemployment, the linkage between employment and health insurance is, for all practical purposes, often broken. If former employees want to maintain their health care coverage through COBRA, the employer who terminated them still controls their coverage. In some cases, this is clearly undesirable. Former Enron employees, for example, might not trust Enron executives to make health care decisions on behalf of their family as they did for their retirement.

How to Extend Assistance to All Displaced Workers.
A sound health care policy would be both generous and inclusive. First, all displaced workers, not just COBRA-eligible workers, should be able to maintain private health care coverage. Second, all displaced workers should be able to choose plans based on their assessment of their own medical and financial situation. Nobody else is better suited to make such decisions for themselves and their families.

Instead of restricting eligibility and eliminating or narrowing coverage choices, as is done in S. 1209, Congress should guarantee that all displaced workers are able to obtain affordable private health coverage of their own choosing. To accomplish this, Congress must:

  • Create an advanceable, refundable tax credit. An advanceable tax credit would allow workers to get help up front, when premiums are due, instead of waiting for the end of the tax year. With a refundable credit, even those workers who owe no taxes would be able to receive the credit. Low-income workers, especially those who are excluded under the COBRA-only proposal, would benefit from this approach.

  • Broaden the allowable use. Instead of being allowed to use their credit only for COBRA coverage, displaced workers should be able to apply it to a health care plan of their own choosing. Broadening its use would ensure that all displaced workers, especially those without access to COBRA, are able to take advantage of the credit. After assessing their own financial and medical needs, displaced workers will also be able to shop and find the most affordable coverage for themselves and their families. Those eligible for COBRA would be able to choose whether to use their credit toward COBRA or shop for a more affordable option.

Congress has yet another opportunity to help the unemployed and prevent displaced workers from joining or remaining in the ranks of the uninsured, but it must do this the right way by reaching out to families who need assistance the most. It can provide these displaced workers with generous assistance that will enable them to secure affordable, private health care coverage for themselves and their families. This could be a first step in creating an insurance system for workers that is truly portable, regardless of their job or job status, and that enables workers to maintain coverage for themselves and their families throughout their lives.

Nina Owcharenko is Health Care Policy Analyst at The Heritage Foundation.


Nina Owcharenko Schaefer

Senior Research Fellow, Health Policy