COBRA

Outsourcing COBRA Administration: Saving Money in An Uncertain Economy
by Michael Close

If gloomy predictions are correct, the economy may get worse before it gets better. Many employers are paying more attention to the bottom line these days by trimming unnecessary costs wherever possible. This belt-tightening will likely include changes to employers’ benefits offerings, such as reducing contribution levels or switching to a CDHC model. But it may also include reductions in workforce, which come with cor-responding COBRA obligations for most employers.
COBRA requires most employers who sponsor group health plans to offer qualified beneficiaries (covered employee and their covered spouse and dependents) the opportunity to continue coverage under the same group health plan after they experience a qualifying event. The employer is not required to contribute towards the premiums for this continuation coverage, but any claims that COBRA participants incur will factor into the employer’s claims experience.

Increased Costs Associated with COBRA Coverage

When employers are forced to reduce staff, their COBRA population will increase along with associated claim costs. A 2006 survey by Charles D. Spencer & Associates reveals that COBRA election rates have risen to 27% – among the highest levels since the inception of the survey in 1989.
The survey also found that COBRA claim amounts are on the rise, with -COBRA participants representing an average of $9,914 in annual costs to the employer, compared to an average of $6,831 for active employees. This means COBRA coverage is 45% more costly than coverage for active employees.
The survey also found that the average annual administrative cost per COBRA participant is $406. These costs come from the employer’s requirements under COBRA including preparing and distributing notices, collecting premiums, and maintaining compliance with COBRA’s complex rules and regulations. With the increase in election rates, COBRA claims liability could spiral out of control. This unexpected increase in claims experience is often referred to as the “hidden cost” of COBRA administration. It can have a significant effect on the employer’s efforts to control costs.

The Advantages of Outsourcing

Many employers simply do not have the resources to administer COBRA obligations accurately, efficiently, and effectively. An employer can reduce much of the administrative burden and expense by partnering with the right COBRA administration vendor.
Even employers that carefully monitor their COBRA administration program may benefit from outsourcing. They may get additional cost savings as a result of the administrator’s expertise and efficiency.
Many employers will experience an immediate cost savings by outsourcing COBRA duties instead of performing them internally. When the administrative savings are coupled with the claims cost savings, outsourcing COBRA administration can prove to be a significant cost-savings measure.
The key to outsourcing COBRA administration is to find the right outsourcing partner. An employer should consider several key issues when evaluating an outsourcing partner including the following:
• Adherence to COBRA rules and regulations.
• The experience of the administrator.
• Contractual indemnification provided by the administrator, protecting the employer from financial penalties for errors committed by the administrator.
• Participation by the administrator in regular audits of the administrator’s systems, controls, and procedures by an independent auditing firm.
• Performance standards and guarantees, providing assurance and financial guarantees that the administrator will meet established service standards.

The Broker’s Role

Employers look to brokers for guidance with all things benefits related, including COBRA administration. A broker can strengthen the relationship with the employer and solidify their position as a trusted advisor by making an employer aware of these hidden costs and helping find a solution.
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Michael Close is president of CONEXIS. He joined CONEXIS in 2003 as chief sales and marketing officer and became president in 2005. CONEXIS has been the first company to offer extensive performance standards and guarantees to all clients, regardless of size. Close has more than 20 years of executive experience in managed health care and employee benefits and is a member of the National Association of Health Underwriters (NAHU). He also has a bachelor’s degree in marketing from Ohio State University. For more information, call 1-877-CONEXIS.