Take the bite out of COBRA - Consolidated Omnibus Budget Reconciliation Act of 1985's postemployment health benefits provisions

Take the bite out of COBRA

A benefits manager tells how his company has offset the burden of continuing health insurance coverage for discharged workers.

When Congress passed a new law allowing certain workers and their dependents to continue group health coverage after leaving their employers, FMC Corp. and many other companies feared the worst.

Visions of adverse selection, spiraling health care costs for active employees, and severe legal sanctions for mistakes in compliance seemed our certain fate.

Known by its acronym COBRA, the Consolidated Omnibus Budget Reconciliation Act of 1985 included a provision requiring employers to offer their discharged workers and their dependents the chance to continue group health insurance coverage. Divorced spouses of active workers can also participate in what is now commonly called the COBRA continuity benefit. Terminated workers or others eligible for COBRA benefits must pay 102 percent of the full premium to obtain coverage.

To avoid what seemed to be predictable pitfalls, FMC took action early. COBRA motivated us to be creative and make adjustments to our existing health plans in anticipation of losses. Today we find these changes have paid off. We've managed to comply with COBRA and at the same time recoup much of the cost of administering the program for this high-use population.

Coming up with creative solutions to offset the burden of COBRA regulations was a challenge, partly because of FMC's structure. We employ more than 25,000 people in 95 manufacturing and mining facilities around the country. Thirty-three percent of our workers are unionized.

With this kind of distribution, FMC offers a variety of health care plans. We have two fee-for-service medical administrators, 50 different HMOs, three dental administrators, and one vision administrator.

Implementing any changes, however minor, required training and discussion at many levels of our company, but this was effort well spent.

COBRA's poison

Last year our fears about adverse selection from persons enrolled in COBRA were realized. Our 1988 data show that COBRA participants used health services 45 percent more than active employees. Individual COBRA claims last year were low (the highest was $8,500), but the high number of smaller claims added up.

Because we're self-insured for our health care plans, our losses relating to COBRA participants were high--for every $1 of premiums we received, we paid out $1.45 for claims. As a result, we lost $200,000 on COBRA in 1988.

A company can't change the health care needs of COBRA enrollees, but there is something you can do to offset these losses.

Small adjustments equal savings

One thing we did was stop extending coverage to employees leaving FMC. We had provided benefits to workers through the last day of their last month with the company. By changing the termination of coverage date to coincide with the employee's last day of work, FMC saved $130,000 in one year for salaried and non-union employees. Now that COBRA coverage is available immediately for up to 36 months, this adjustment seemed logical.

Our new policy holds true for any medical or dental treatment that may be in progress when the employee leaves us. Previously in our dental plan, if someone was undergoing a major prosthodontic procedure like a crown preparation prior to leaving FMC, we would provide reimbursement as long as the crown was completed and installed within 60 days following the end of coverage. Now this coverage stops on the last day of work and the employee is responsible for payment.

As another example, we previously would continue pregnancy coverage beyond one's employment termination until the birth took place. We no longer continue this coverage except for those individuals who elect the COBRA benefit.

Extending waiting periods for coverage has saved FMC more than $300,000 a year. Coverage used to begin the first day of the month following a new employee's start date. Now we require an additional 30-day waiting period by excluding coverage until the first of the month following completion of a full month of service.

We've also introduced a 180-day waiting period from the date of hire for major and orthodontic expenses in our dental plans. This change has saved us a considerable amount of money because the short-service employee isn't eligible for a large dollar reimbursement.

We've also eliminated conversion options for employees and their dependents. This is saving us at least $15,000 a year. Since COBRA is requiring us to extend a terminated employee's coverage, it made little sense for us to continue allowing conversion coverage following the expiration of one's COBRA coverage. These conversions incur hidden costs. Typically, when an individual decides to leave a fee-for-service plan, for example, the insurance company charges the policyholder--FMC in this case--a policy conversion fee of up to $1,000 per case. Eliminating the option became another place to save money.

More ideas for future savings

We're now considering providing a catastrophic-type medical plan specifically for our terminated employees as an alternative to COBRA continuation coverage. We think this approach would address their needs and have the potential to save FMC up to $200,000 a year.

From the employee perspective, the premiums would be very attractive. Typical employees are not aware of the value of medical insurance protection. When employees leave, they may express interest in continued coverage until it is clear that the premium will cost up to $400 per month. That's a lot of money for someone who is leaving his or her job.

The special catastrophic coverage we're considering would impose significant deductibles and copayments, but cut the premiums in half. We believe if we could break even on such a plan, there would be significant administrative savings for FMC. We have a lot of experience administering medical insurance for our 12,000 retirees from which we can draw.

Spreading the word

So that employees might better understand the reason behind our health benefit changes, we needed to tell our human resources people about the new law and how it should be administered. One of the problems we encountered was how to coordinate COBRA with the administrators at numerous FMC locations: Who should do the billing? Should we leave it to the individual operating divisions? If so, how do we train our human resources people?

To help solve these problems, we published an administration manual to help the human resources staff handle employment termination notices and to provide guidance in interpreting COBRA's "gray" areas.

The manual is in a question-and-answer format that tries to anticipate questions such as who is eligible for COBRA coverage and just how coverage is administered. This approach saves employees from having to spend inordinate amounts of time researching the nuances of the regulations to get the answers to questions. Further, we've had few administrative problems with COBRA, and so far, we've had no complaints from employees.

Notification and billing

In each FMC division, a uniform notification form is used that explains COBRA coverage to qualified enrollees. Before it's given to the employee, a human resources staffer types in the pertinent information including employee name, address, and monthly premium cost. We chose to develop our own forms since the uniform method would help reduce the paperwork load.

The next step involved how to bill COBRA beneficiaries. We decided to let our fee-for-service administrators and HMOs handle billing and premium collection since they had expertise in this area. Each FMC location notifies one of the administrators, in our case, Equicor or Blue Cross/Blue Shield of Illinois.

Both carriers handle monthly billing and collection. They then send each FMC division an eligibility report that identifies the COBRA participants and their payment status. We've linked the claims experience to the premiums collected only in the case of COBRA enrollees even though they are experience rated.

Future concerns

Several areas continue to demand FMC's attention. * COBRA sanctions. Last fall employers did get some relief from Congress on COBRA penalities. The original penalty for failing to offer COBRA coverage or not properly adhering to the regulations was the loss of one year's tax deduction for all the company's health care expenses. The new penalty, included in the so-called "technical corrections" bill, is in the form of a new tax. For instance, for tax years after 1989, employers will have to pay an excise tax equal to $100 per day for each qualified beneficiary, up to a maximum of $200 per family where coverage was not offered. * Election waivers. Under the election waiver provision, a beneficiary can elect COBRA coverage and then drop the benefit at any time during a 60-day period following employment termination. The unlimited exercise of this right during the 60-day election period exposes employers to excessive adverse selection. * Added dependents. COBRA regulations extend coverage to new non-employees. For example, a new dependent acquired through marriage can obtain coverage under the COBRA enrollee's plan. We object to this provision because it extends preferential treatment to non-employees by requiring us to provide coverage to individuals who weren't covered by our plan in the first place. In our opinion, the proposed regulations are going beyond the concept of permitting those persons who would lose coverage to elect to continue coverage for a limited time period. * Strikers' benefits. Striking workers can also elect to receive COBRA coverage. No FMC workers have gone on strike since COBRA became law. We believe allowing striking workers to continue to be eligible for health benefits removes a powerful disincentive to strike. We also believe COBRA violates the concept of "fair play" because the company ends up subsidizing economic action against itself.

While these aspects of COBRA regulations concern us, reopening the law to make changes might open a Pandora's box. It might be better to keep it closed and investigate creative ways to handle the regulations in their present form. At least that's our strategy at FMC.

Kenneth J. Morrissey is employee benefits manager for FMC Corporation, Chicago.

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