DOES COBRA'S RETROACTIVE COVERAGE FEATURE ENCOURAGE DELAYED ENROLLMENT?

I. INTRODUCTION More than 90% of private health insurance policies in the United States are sponsored by an employer (Gruber 2010). Health economists have long been concerned that the employer-sponsored system impacts both labor and health-care markets. In particular, employment separation, job-to-job mobility, and early retirement might subject individuals to sudden, and often unexpected, losses of health insurance (Gruber and Madrian 1987). To address these concerns, the Consolidated Omnibus Reconciliation Act (COBRA) of 1985 aimed to protect employment separators from the possibility of losing employer-provided health insurance. The legislation states that in the event of employment separation, individuals covered by employer-provided group plans are entitled to continue purchasing group coverage for up to 18 months. Although employers often provide health insurance to active workers as a fringe benefit, the law permits employers to charge COBRA beneficiaries up to 102% of the average cost of providing coverage to other members of the group plan. Thus, in deciding whether to enroll, employment separators must compare the costs of COBRA enrollment with the risks of going uninsured. However, COBRA includes a feature that is unusual among insurance markets. Individuals eligible for COBRA have 60 days following employment separation to elect coverage, and if they elect, coverage is retroactive back to the date of employment separation. If medical spending during the months following employment separation will exceed the premium requirement with certainty, then a person would be inclined to enroll in COBRA immediately upon job separation. On the other hand, if future medical spending is to any extent uncertain, then a person might refuse coverage initially, and then enroll at a later date if medical expenses within the following 60 days accumulate in excess of the premium requirement. Only 10% of COBRA enrollees receive help from former employers in paying premiums, implying that there exists an economic incentive to delay enrollment until after the household incurs medical expenses. (1) Suppose, as an example, that an individual experiences job separation on July 1 but does not immediately enroll in COBRA. Also, suppose that COBRA charges $300 per month. If the individual then incurs $700 in medical expenses on August 15, the person would be inclined to elect coverage, because the premium requirement for the 2 months, $600, is less than accumulated medical expenses. On the other hand, if medical expenses on August 15 totaled only $500, the person will not enroll, as he or she must still pay the full 2 months of premiums. In this respect, COBRA contrasts with classic Arrow-Pratt insurance models in which subjects pay premiums prior to experiencing some costly but uncertain future event. The retroactive coverage feature might distort insurance market equilibria, because if employers anticipate that new COBRA enrollees will have already incurred coverable medical expenses, then employers might require active employees to pay higher premiums. Because COBRA was designed, primarily, to assist individuals experiencing employment separation, adjustments to COBRA have become hotly debated topics during times of economic turmoil. Senators Max Baucus and Edward Kennedy argued, unsuccessfully, for a 50% subsidy to COBRA premiums as part of the Bush Administration's 2001 economic stimulus package. A similar proposal resurfaced, and was ultimately included in the American Recovery and Reinvestment Plan signed into law in February of 2009. The American Recovery and Reinvestment Act package provides a 65% subsidy for COBRA premiums for a period of 9 months (later expanded to 15 months) for workers laid off between September 1, 2008 and December 31, 2009. Responding to political pressure, Congress extended coverage to those laid off before June 2, 2010. These modifications to the law will likely change the threshold for incentives to delay enrollment. …