COBRA strikes insurers' coffers

Major health insurers are seeing a rise in the number of people selecting COBRA coverage, an indication that federal efforts to boost the use of COBRA is working. But the increased use is not coming with a decline in medical costs for those members, as hoped, according to second-quarter earnings reports.

The three biggest publicly traded health insurers—Aetna, UnitedHealth Group and WellPoint—all said more people are selecting COBRA, a program named for the health benefits provision of the Consolidated Omnibus Budget Reconciliation Act of 1986. COBRA allows laid-off workers to extend their employer-sponsored health benefits up to 18 months if they pay the full cost of the benefits.

The jump in COBRA uptake is being attributed to a federal subsidy that gives people laid off between September 2008 and December 2009 a 65% break on the cost of total coverage for up to nine months. The subsidy was part of the federal stimulus bill signed by President Barack Obama in February.

WellPoint, Indianapolis, the nation’s largest health insurer based on membership, reported that its COBRA membership has risen from 1.6% of total commercial risk membership at the end of 2008 to 2.2% at the end of June—more than anticipated. “As the unemployment rate rises, and given the changes to COBRA funding as part of the stimulus package, we’re seeing more COBRA members,” Angela Braly, WellPoint’s president and CEO, said on an investor call on July 29.

The unemployment rate in the states where WellPoint operates is about 9.7% on average, Braly said, and that number is expected to rise further.

WellPoint reported that new COBRA membership is not healthier than in the past. Insurers had hoped that, with the subsidy, more healthy people would choose COBRA rather than go uninsured, creating more of a risk mix in the program. Typically, people who opt for COBRA coverage are sicker and so are willing to pay high monthly premiums to keep their employer’s health coverage while they search for a new job. Often, those who chose COBRA have pre-existing health conditions that make them ineligible for individual insurance on the open market.

Prior to the subsidy, only about 9% of those eligible for COBRA signed on, largely because of the high cost, according to the Commonwealth Fund. Average annual premiums for individuals under COBRA in 2008 were $4,704, while families paid $12,680 on average, according to the fund.

Historically, the medical-loss ratio of WellPoint COBRA members was between 150% and 200%, compared with about 80% of average members. The new COBRA members have an average medical loss ratio of about 175%, according to WellPoint.

“So these are not good risks coming onto the book,” Wayne DeVeydt, WellPoint’s chief financial officer, said during the earnings call. Most of the new COBRA members signed on in June, according to WellPoint, and as a result the insurer said it anticipates medical costs related to COBRA for the second half of the year to be $75 million higher than previously expected.

UnitedHealth Group, Minnetonka, Minn., saw smaller COBRA gains in its second quarter earnings. In January, COBRA membership totaled 1.5% of the insurer’s commercial risk membership. At the end of June, COBRA membership was at 2%, the company said.

Aetna offered a similar story, reporting 2% of its commercial risk membership at midyear is on COBRA, up from 1% to 1.5% historically. The company said the medical-loss ratio of COBRA members remains the same, at between 150% and 200%. “Our COBRA assumption really hasn’t changed,” said Joe Zubretsky, Aetna’s executive vice president and CFO, on its earnings call on July 27.

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