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As More Employees Elect COBRA Coverage, Companies Pay Higher Claim Costs

More than one-quarter of eligible employees now elect post-termination health plan coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). And claim amounts for COBRA recipients are costing companies about 45 percent more than claim costs paid for active employees, according to a survey of U.S. benefit plan administrators by Spencer's Benefits Reports.

Under COBRA, workers and their families who lose their health benefits because of certain circumstances (such as voluntary or involuntary job loss, reduced work hours, transition between jobs, death or divorce) can choose to continue group health benefits provided by their group health plan for limited periods of time. Qualified individuals may be required to pay the entire premium for coverage, plus up to 2 percent more for administrative costs.

This year's finding that 27 percent of eligible employees elected post-termination health plan coverage was "among the highest percent of eligible employees to participate in COBRA since Spencer's first conducted a COBRA survey in 1989," says Stephen A. Huth, managing editor for Spencer's Benefits Reports. "This means higher costs for employers in terms of claims compared to their overall active employee population."

Specifically, the survey found that:

• Average annual COBRA costs for employers were $9,914 in 2006, compared to an average annual cost for active employees of $6,831, making coverage for COBRA 45 percent more costly than that for active employees.

• Compared to Spencer's 2004 survey, employer costs for COBRA and active employees have increased 19 percent and 13 percent, respectively.
• While administrative costs for COBRA varied significantly, the average cost was approximately $406 annually or about 4 percent of average claims costs.
In addition, the survey examined what employers felt were the primary difficulties with the COBRA law. Employers indicated that:
• Their top concern is that beneficiaries can't afford the coverage.
• Their second leading concern is costs for employers, amplified because COBRA claim costs are significantly more than health claim costs employers pay for active employees.
• Other leading concerns included complexity of rules and laws, and communicating the plan to participants and beneficiaries.
• Their final top concern was difficulty employers had in collecting premiums.

"One of the leading areas of complexity for plan administrators is understanding the COBRA rules in relation to Medicare," says Huth. "There are specific COBRA rules that have to be followed, and there are additional rules from the IRS to determine Medicare entitlement. A misstep here can leave an employee, spouse or dependent not covered or paying unnecessarily for coverage they don't need."

However, Huth notes that there are positive aspects of COBRA that should not be overlooked.

"Even a voluntary, expensive and complicated system like COBRA has provided substantial benefits, with an estimated 4.7 million individuals annually receiving coverage to which they may not otherwise have access," he says. "It's also provided the bridge in the insurance gap for individuals who want to take early retirement and enabled job mobility to employees who may otherwise not move to a more desirable job for fear of losing health insurance."

By Stephen Miller

Stephen Miller is editor/manager of SHRM (Society for Human Resources Management) Online’s Compensation & Benefits Focus Area.

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