Expand COBRA, but do it the right way

Expand COBRA, but do it the right way
© iStock

What if a massive hurricane were bearing down on us, and to evacuate people, Congress proposed an airlift, but would only pay for first-class tickets instead of using the Air National Guard? 

Well, some in Congress are proposing a similarly extravagant solution to the legitimate crisis of millions of unemployed Americans who are about to lose their health insurance. The Heroes Act includes a proposal for the federal government to pay full COBRA premiums for the unemployed at an estimated cost of $106 billion over two years. And yes, that would solve the problem, but without changes, the proposal has the same strong whiff of a boondoggle as a first-class airlift.

That’s because COBRA is stunningly expensive, over $20,000 on average for family coverage in 2019. The expense is why people don’t sign up for COBRA if they can avoid it. For instance, in 2017 when 11.5 million Americans were unemployed, only about 130,000 signed up for COBRA  — barely over one percent.

ADVERTISEMENT

COBRA premiums are high for two reasons. First, when a person is laid off, their company stops paying their portion of the premium, which is usually several times what the worker pays  — and to add insult to injury, the consumer typically still has a large deductible. 

The second main reason is the high prices that the plans must pay for care delivered to COBRA patients.

These high prices stem from a globally unique healthcare market failure that for complicated reasons the U.S. began to experience around 1980, leaving us now with per capita spending twice or more that of our international economic competitors, for roughly the same quality and volume of healthcare. 

One hallmark of this market failure is that the insurers who represent American employers have been unable to negotiate internationally competitive prices with providers, notably hospitals and drug makers. 

For reasons we can debate, but that probably includes price benchmarking against the lower-cost Medicare program, this weakness evaporates when the very same insurers negotiate on behalf of their public rather than private sector clients. For instance, insurance companies delivering a private-brand version of Medicare have achieved hospital prices that are much closer to international standards. 

ADVERTISEMENT

The bizarre upshot is that at the moment there is a two-tiered price system for medical care depending on how the patient gets their coverage, even when the same insurance company is purchasing the care. For instance, when Acme Insurance buys knee replacements for its COBRA members, it pays two, three, or even more times what it will pay the same hospital for members of its Medicare or Medicaid plans.

Why the U.S. business community did not long ago stage a revolt against paying these global outlier prices while their own carriers were charging other major clients much lower internationally competitive rates is a topic for another day. The point here is that effectively all of the COBRA plans already have a two-tiered price system in place with their suppliers, available for immediate use by an expanded COBRA. 

And aside from its high prices, the COBRA platform is a consumer-friendly and administratively efficient choice, since COBRA patients continue with their current plan without the stress of changing doctors. 

So if Congress wants to protect taxpayers at the same time it is supporting the newly unemployed, Congress should require the insurers to switch their new COBRA clients over to the provider pricing already in use with their other government-affiliated clients. 

The premium then could be reduced significantly to account for the lower charges the insurers would be paying, though the rate should also be adjusted to eliminate any COBRA deductible, to further protect families who lost their livelihoods.

It’s true that medical providers won’t make quite as much money as they would under the current proposal, but it’s important to remember that any new COBRA subsidy  — even if based on lower, internationally competitive prices  — will result in a windfall for both healthcare providers and insurers. 

Remember, history tells us that if COBRA remains unaffordable, almost none of the unemployed will sign up, leaving the insurers collecting exactly zero-premium dollars. Meanwhile, any COBRA expansion, even one based on internationally competitive prices, will benefit medical providers because uninsured people either don’t seek out medical care, or can’t pay for it when they do show up at the hospital, or they will qualify for Medicaid, which pays even lower prices. 

In a crisis, airlifting hurricane refugees may make sense. But limiting the airlift to first-class travel  — that smells like pork-barrel. 

Instead, let’s provide affordable coverage to millions of out-of-work Americans in a smarter, lower-cost way: subsidize COBRA, but require the insurers and providers to use their existing internationally competitive price schedules.

Ted Doolittle is currently the Healthcare Advocate for the State of Connecticut. He previously served as a senior Medicare official, and before that worked for a major health insurer.