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Guest Article

From Mandated Health Benefits--The COBRA Guide, published by Thompson Publishing Group, Inc.

Run COBRA Program Aggressively, Says COBRA Expert


Summary: Several methods that employers and plan administrators can use to aggressively administer their COBRA programs -- and minimize adverse selection and COBRA violations -- were discussed in two recent audio conferences by COBRA Expert Paul M. Hamburger, P.C.

By running their COBRA programs more aggressively, COBRA administrators can "minimize the window of opportunity" that exposes group health plans to potential adverse selection after a COBRA qualifying event cobra coverage, Paul M. Hamburger, P.C., explained during June 11 and 19 audio conferences sponsored by Thompson Publishing Group, Inc. Hamburger is the author and contributing editor of Mandated Health Benefits -- The COBRA Guide, published by Thompson Publishing Group, Inc.

Hamburger noted that, because of the length of COBRA's election and initial premium periods, qualified beneficiaries can wait and see if a health condition develops before electing COBRA coverage. While COBRA administrators cannot shorten these periods, Hamburger outlined certain methods they can use to shorten employer and plan administrator notice periods.

Regarding initial COBRA notices, he noted that COBRA does not provide a deadline for providing a notice. However, it crucial that the employee and spouse -- once they become covered under the group health plan -- both receive initial notices. Furthermore, if a covered employee later gets married, the new spouse should get a notice. "COBRA notices make excellent wedding gifts," he said. However, at no point do dependent children have to get their own notice, he added.

Furthermore, because plan administrators only have to prove that the notice was actually sent, all they have to do is maintain records proving that fact. They don't need to have employees sign a form indicated that they received the initial notice, according to Hamburger.

Similarly, with election notices, Hamburger noted that courts are "almost uniform" in ruling in favor of plan administrator that has "clear and adequate procedures" proving that an election notice was sent. It is not necessary to make copies of the notices for recordkeeping and evidentiary purposes -- computer logs are adequate, Hamburger indicated.

"COBRA coverage allows you to buy insurance after your house has burned down," according to Hamburger. This means that qualified beneficiaries can wait for a certain period to see if it is worth electing COBRA based upon their medical expenses. Therefore, plans need to minimize that window of opportunity, according to Hamburger.

While COBRA administrators cannot change the 60-day election period or the 45-day initial premium period payments -- or encourage individuals to elect and pay for COBRA promptly -- they can focus on the employer/plan administrator notice periods. He suggested several "aggressive" administration approaches to use in identifying a qualifying event as soon as it happens, including ways to coordinate other benefit programs -- such as pension and life insurance -- to get an early "heads up" that qualifying events may soon occur.

Penalties

Hamburger noted that the employers and plan administrators are aware of COBRA's statutory penalties, but they also should note that, "courts will not to be too quick to participate in what they perceive as a shakedown by a qualified beneficiary who doesn't want COBRA coverage but just wants to get their hands on some quick notice penalty dollars ... but will penalize a plan administrator who has failed to have adequate notice procedures in place."

While the Internal Revenue Code provides for excise tax sanctions, Hamburger noted that in his experience, he has never heard of those penalties being imposed. But he added that statutory penalties and excise tax sanctions are not the only issues to consider regarding the expense of COBRA litigation. Other issues include:

  1. "make whole relief," under which plans essentially reimburse for medical expenses that were not paid during the period when a qualified beneficiary was improperly denied COBRA coverage, minus COBRA premiums;
  2. legal fees -- and not just those incurred by the plan; courts have the discretion to make the losing party pay the attorney's fees of the prevailing party; and
  3. the potential damages arising from a DOL investigation, which can be "very time consuming and very costly."

In the worst-case scenario, the DOL can seek a consent decree that names the individuals responsible for overall plan administration. In some companies, this can include a committee of high-level officials such as the CEO or company chairman. "This can lead to a great deal of reputational damage as this gets reported in the press," according to Hamburger.

Correcting COBRA Violations

One common concern of employers is what to do when they inadvertently offer COBRA coverage to someone who was ineligible for that coverage, or was on the coverage for longer than they were entitled to, according to Hamburger. In "turning off the spigot" -- a term from a COBRA case, Cofer v. Transworld Airlines -- Hamburger noted that the first thing to do if the person was never entitled to coverage is "stop paying the claims."

Next, employers and plan administrators should fix the problem that led to the error in the first place. Then they must address what to do about the claims that occurred prior to the date "the spigot was turned off."

"Dealing with retroactive claims is tricky because ... you are trying to 'put the water back in the pipes,' and it is a little difficult to do that," Hamburger noted. He finds nothing wrong in sending a letter to an ineligible individual notifying them about the error, and then trying to recover any medical claims. However, he cautioned that employers and plan administrators should be sure that:

  1. the person was not entitled to COBRA coverage under this approach -- if he or she actually was, and the COBRA coverage was retroactively terminated, a court may be inclined to assess notice penalties;
  2. they committed no material misrepresentation that led the individual to rely on the fact that COBRA coverage was available); and
  3. they coordinate with the insurer and other service providers.

When COBRA coverage is never offered to an person entitled to that coverage, Hamburger stated that, "you need to act ... you need to offer the COBRA coverage; you need to send the notices [to trigger the election period]."

Hamburger also described other approaches that a plan administrator may consider reasonable under the circumstances and that may mitigate its exposure to notice penalties.

Stock and Asset Sales

After describing COBRA's general rules for stock and asset sales, Hamburger noted several key issues to keep in mind, including the "regulatory residual COBRA liability" that exists for sellers "regardless of the form of the transaction," according to Hamburger. Even if the buyer contractually takes on the COBRA liability, if it fails to do so, that liability defaults back to the seller. Therefore, he recommended that sellers ensure that their insurers and health plan administrators are aware of this potential liability.

Hamburger also explained how to troubleshoot other COBRA administrative problems, including:

  • health flexible spending arrangements (FSAs) -- and the best way to deal with HIPAA-excepted FSAs;
  • COBRA's other coverage cut-off rule -- and why employers and plan administrators should watch out for a "springing right" to terminate COBRA coverage that he has seen "in a lot of documentation";
  • Medicare entitlement -- and the danger of using Medicare-carve out plans for certain COBRA qualified beneficiaries; and
  • alternative coverage such as retiree coverage -- including tips to consider when retiree coverage is not identical to COBRA coverage.

For information on obtaining these two, 90-minute audio conferences on "Troubleshooting COBRA Compliance" on audiocassette and CD, call: 1-800-925-1878, or go to: http://www.thompson.com/conf/offer/upcoming.html and click on the link to the COBRA audio conference.

Excerpted from the August 2002 supplement to Mandated Health Benefits -- The COBRA Guide, ©Thompson Publishing Group, Inc., 2002. All rights reserved.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.
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