How to calculate COBRA rate for self-funded national plan that uses different premiums for different regions?

[Christine Roberts]

Company maintains a self-funded national plan for which a TPA has developed fully-insured equivalent premium rates. There are 27 locations and each location has a different fully-insured equivalent rate. How does the employer calculate the COBRA rate? Does it look at the Plan as a whole and come up with a national COBRA rate or does it base the COBRA rates off the fully insured equivalent at each location?

Since the COBRA statute refers to coverage costs for "similarly situated" active employees, and since regional differences in health costs is a factor that goes toward determining whether or not one is "similarly situated," I am presuming that different COBRA rates for different regions is appropriate, assuming different regional coverage costs. Any comments appreciated.

[GBurns]

It is usually different COBRA rates for different areas or locations etc etc. However, it should never be the employer calculating COBRA rates, it should be the plan actuary or claims administrator's actuary.

[Kirk Maldonado]

COBRA premiums must be based on active workers' cost for all divisions, not just the division that employed the person on COBRA. Draper v. Baker Hughes, ED Cal 1995 LEXIS 10210.

[GBurns]

In reading summaries of Baker Hughes it seems that charging different premiums per location, whether branch, incorporated division or subsidiary which would all be part of a "controlled group" should not be done for coverage whether COBRA or not. So it seems that there should only be 1 National rate and 1 COBRA rate. Did I read right?

Here is a summary:

http://www.benefitsolved.com/resources/caseLaw/draper.htm

Are there any other cases?

[KIP KRAUS]

The Draper v. Baker Hughes court decision is very interesting.

What do the courts say about COBRA rates when employees of a controlled group participate in various HMOs in different geographical areas where the rates of the HMOs are different?

It’s interesting that the court ignored geographical differences in medical costs when making their decision.

[GBurns]

I guess that the GAO found good reason, regardless of Draper v Baker Hughes, to put the following in their recent report on Small Business Health Coverage Requirements:

Federal Requirements Restrict Variation in Premiums for Individuals with Employer-Sponsored Health Coverage

Federal requirements do not address how premiums for employer-sponsored health coverage are set but rather HIPAA’s nondiscrimination provision prohibits, for businesses of all sizes, premiums from differing for similarly situated individuals on the basis of health-related factors.22 Similarly situated employees might share the same geographic location or employment status. HIPAA does not prohibit health insurers or employers that self-fund from taking into account the health of the employees and their dependents when setting the group’s premiums, but it does prohibit them from charging employees or their dependents different amounts based on this health information. Further, HIPAA does not prohibit premiums from varying among employees for other reasons. For example, employees in different employment categories, such as those in different geographic locations or with different employment status, may be charged different amounts for health coverage.

The full report is viewable at:

www.gao.gov/new.items/d031133.pdf

I guess different gegraphic locations and different providers and different costs can and should make a difference.

[Don Levit]

When we talk about different premiums can not be assessed due to health risk, what about different premiums due to the "amount at risk?" Assume an employee converted a previous "limited benefits" plan from his former employer. This plan has a $50,000 family benefit. It does not coordinate benefits with any other policy, so it will pay first. Now, with this policy in force, his amount at risk under his present employer's plan is lower, for the benefits would start at a $50,000 deductible (instead of a much higher exposure of, say, $1,000). Couldn't this employee receive a "credit" of around $200 per month, because his group plan's risk begins at a much higher level? Instead of the premiums being tied to health status, here the premium is tied to a different "at risk" status?

What do you think?

Don Levit

[GBurns]

How does the employee or any other policy holder have any "amount at risk"? the only entity with an "amount at risk" is the insurance company.

Also if this employee converted a policy held under previous employment, What is the relevance to whatever this employeee now has under this new employer's benefits plan?

What do you mean by "because his group plan's risk begins at a much higher level?"? How do you get a connection between an individually owned policy and the employer group plan?

Insurance rates in a group plan are usually tied to age.

[Don Levit]

I am asking the group to look at my proposal from a different perspective. I am saying that if an employee has a converted individual policy from a previous employer which would be the primary payer, if another (group) policy exists. In this case, with the group plan paying after the converted policy pays all its benefits, the group plan has lower exposure on the front-end.

For example, if the converted policy would pay out $50,000 in benefits, the group insurance company would be at-risk at $50,001 of family benefits. If the group plan typically would pay family benefits after $1,000 of expenses (assuming no employee had other in-force medical insurance), its at risk exposure is higher (than if it started paying benefits after a $50,000 "deductible"). Because the insurer has a lower up-front risk, this particular employee should get a significantly lower premium from the group insurer, by virtue of his having additional (primary) coverage.

I am only trying to point out that group insurers could charge different rates for different "deductibles," due to the presence of additional primary coverage. These varying premiums would not be based on health status. They would be based on different at risk status the group insurer would incur, depending on the amount of coverage of the primary policy.

Don Levit

[KIP KRAUS]

Don:

Stated simply, group insurance arrangements are rated on the basis of the group’s risk and its expected claims. I’ve never heard of an insurer taking someone’s individual health policy into consideration when rating a group. Group insurance is exactly what it means, it insures a group of people and the risk is spread among the group.

The fact that one person has an individual policy that pays before the group policy is of little concern to the group insurer or employer it only lessons the claims experience of the group. Think of it this way if spouses have group coverage in addition to coverage with the employee’s employer this also lessons the claims risk where the spouse’s medical expenses are concerned.

I hope this makes sense.