COBRA ALERT!

New Health Care Legislation Changes COBRA Administration Significantly

October 23, 1996

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) was signed into law on August 21, 1996. With its enactment, employers with group health plans subject to COBRA will have to modify several existing and implement many new COBRA administrative requirements.

Of immediate importance are requirements that take effect on October and November 1, 1996.

Overview of HIPAA.
From a COBRA perspective, HIPAA does two things: (1) It reduces the number of Americans without health insurance coverage by mandating portability and coverage availability rules. (2) It changes, clarifies, and amends certain COBRA rules. HIPAA includes a new definition of who can be a qualified beneficiary (QB), clarifies and expands the rules governing the special COBRA disability extension, and coordinates the COBRA requirements with the new coverage portability rules. These rules are generally effective January 1, 1997, and apply retroactively. The new law also requires employers to notify existing QBs of these changes by November 1, 1996

Separately, the minimum wage bill enacted a COBRA clarification on how to deal with the case where a covered employee becomes entitled to Medicare before terminating employment. This clarification to COBRA does not have to be included in the employer notification.

COBRA Related HIPAA Rules.
HIPAA’s portability and coverage availability rules are dependent on an employee being able to prove to a new employer how much coverage the employee had under a prior employer’s plan. Therefore, HIPAA requires employers to provide a "certificate of coverage" to all covered individuals when their coverage expires. This "certificate of coverage" must show proof of all coverage provided over a two-year period. Although notices do not have to be sent before June 1, 1997, those notices will have to pick up coverage from October 1, 1996. Upon request, the notice has to cover periods back to July 1, 1996.

Unfortunately, there is not a uniform effective date for implementation. Generally, the HIPAA rules do not kick in until plan years after June 30, 1997 (that means January 1, 1998 for calendar year plans). But once these rules apply, employers will need information reaching back to July 1, 1996. With such a potpourri of information and required effective dates, employers should immediately start working toward updating or changing their current COBRA administrative systems as well as their overall health plan administrative systems.

COBRA Items Requiring Immediate Attention
Because of the immediacy of certain new law requirements, employers need to:

1. Track coverage from October 1, 1996, forward to comply with the "certificate of coverage" provisions. (A review of the "certificate of coverage" requirements appears later in this article.)

2. Notify existing QBs of specific COBRA changes by November 1, 1996.

3. Amend all plan documents with respect to the changes in the law affecting health coverage, including plan documents and summary plan description (SPDs). New summary information must be communicated within 210 days of the date adopted.

4. Amend initial and qualifying event COBRA notices by January 1, 1997.

5. Audit COBRA procedures. Because the new "guaranteed" insurability rules require individuals to "use up" all of their COBRA coverage, employers should expect that more QBs will elect and pay for COBRA and more lawsuits will be filed claiming noncompliance to meet eligibility.

Other COBRA Items Requiring Attention
Below is a brief review of some of the HIPAA rules. Topics are presented in a abbreviated old rule / new rule review and are not meant as a detailed discussion of each topic.

Portability of coverage: Pre-existing conditions. Effective after June 30, 1997 plan years and periods after July 1, 1996. Current rule. Various pre-existing conditions rules apply. New rule. Pre-existing conditions are specifically defined and exclusions are limited to 12 months (18 months if the person did not enroll when first eligible). This time limit is further reduced by a period of prior coverage under another plan. In other words, if the individual had eight months of coverage under a health plan, the pre-existing limitation would be reduced by eight months. Additionally, any coverage before a period of 63 days when the individual is without coverage is not counted in meeting this limit. So, to avoid the pre-existing limitations entirely, an individual had to have 12 months of continuos coverage prior to joining the new plan.

Essentially, the individual must prove that he or she had coverage that meets or exceeds the above requirements. To obtain this proof, employers are now required to provide these individuals with a written "certificate of coverage," which shows all coverage provided during the 24-month period prior to a cessation of coverage. Although employers do not have to provide these certificates until June 1, 1997, at the earliest, the certificates must potentially cover periods after July 1, 1996. Employers should therefore start planning compliance efforts now.

Special open enrollment rules.
Effective after June 30, 1997 plan years.

Current rule. If an employee does not enroll when first eligible, the employee must generally wait until the next open enrollment period to join the plan. New rule. If someone does not join when first eligible because the person wants to keep other health coverage, including COBRA coverage, the employer plan must let the person join within 30 days of the date that other coverage is exhausted. For example, if a QB wants to keep COBRA coverage, even though a new employer’s plan is available, the QB can keep the COBRA coverage and join the employer’s plan at the end of the COBRA maximum period even if there is no open enrollment at that time. But, if the QB merely stops paying for the COBRA coverage and does not exhaust it entirely, the new plan could impose its waiting period.

Who can be a qualified beneficiary?
Current rule. Only individuals covered at the time of a qualifying event can be QBs who have specific COBRA rights. For example, a spouse who was covered at the time of the qualifying event is a QB; a spouse added to coverage after the qualifying event is not a QB and had no COBRA rights. New rule (effective January 1, 1997). A child born to, or placed for adoption with, a covered employee during the period of COBRA coverage is now a QB with the full rights of a QB.

New rule for disability extension.
Current rule. QBs must be disabled as of the date of the qualifying event to receive the disability extension. New rule (effective January 1, 1997). A QB can be disabled within the first 60 days of COBRA coverage to qualify for the 11-month extension. Also, the extension now more clearly applies to all QBs, not just the disabled QB.

MSAs, IRAs, and LTCs.
Effective January 1, 1997.

New rules. After an individual has received unemployment compensation for at least 12 weeks, he or she can withdraw money penalty free from their IRA accounts to pay for medical insurance, including COBRA. Medical spending accounts (MSAs) have been created under a four year test program. Employees at certain employers (those with fewer than 50 employees) can use tax-deductible contributions through salary reductions to pay for uncovered medical bills. Though the account cannot be used to purchase health insurance, it may be used to pay for COBRA coverage. MSAs and plans that are substantially all long term care plans are not subject to COBRA.

Guarantee of individual coverage.
(effective July 1, 1997).

HIPAA provides that the individual insurance market must make available without any pre-existing conditions, individual health coverage to eligible individuals. To be eligible, an individual must: a. have completed 18 or more months of prior coverage under a group health, government, or church plan. b. be ineligible and without Medicare (Parts A or B), Medicaid, or group health coverage. c. not have been terminated from his or her most recent prior coverage for nonpayment of premiums or fraud. d. if eligible, elect, pay, and exhaust COBRA or similar coverage required by state law. In other words, guaranteed individual health insurance is available only if individuals have been on COBRA for the full 18, 29, or 36 months appropriate to their qualifying event. There are many implications of these requirements.

1. Many more people will take COBRA, if for no other reason than they are required to do so to be eligible for "guaranteed" individual coverage.

2. The administrative burden and subsequent liabilities and cost for employers will increase.

3. If the cost of COBRA claims versus active employee claims stay consistent (approximately 150 percent higher), the cost of health insurance will rise.

4. More lawsuits against employers who are in noncompliance with COBRA (e.g., "I would have taken COBRA if only my employer had notified me correctly!")

Thus, HIPAA achieves the same goals as the original COBRA rules. It helps provide health coverage, but imposes the real cost of such coverage on the employer-sponsored plans.

Employer Strategies to Reduce HIPAA’s More Costly Rules.
There is often more than one "correct" procedure for complying with COBRA rules. For example, one employer may start the COBRA period after a disability leave while another employer runs the COBRA concurrently with such leaves. Also, some employers take their time in providing COBRA notices, other try to provide them as soon as possible after a qualifying event.

Employers should implement procedures that help protect themselves from some of HIPAA’s costly requirements. Namely, an employer that would be the "new employer" may be allowed to write its plan documents to count only time under prior comparable coverage toward reducing pre-existing limitations. That is, time spent under a dental-only plan would not count toward reducing the pre-existing limitations for the group health plan. (Wait for government regulations before implementing this rule, though.)

Employers can also offer alternative coverage in lieu of COBRA coverage, become more aggressive with COBRA-imposed deadlines, or utilize the concurrent method mentioned above for disability, retiree, or severance packages. 

MODEL NOTICE

[Company letterhead]

Notice of Changes in COBRA coverage

[Date]

[Employee/Beneficiary Name]

[Social Security number]

[Street address]

[City. State, zip code]

Several changes in COBRA continuation of coverage provisions take effect next year. These changes have been mandated by the Health Insurance Portability and Accountability Act of 1996, passed by Congress earlier this year. Because your health care coverage may be affected by these changes, please read this notice carefully.

 1. COVERAGE FOR DISABLED BENEFICIARIES

You, or your spouse or dependents may be able to extend your existing coverage from 18 months to 29 months, if the Social Security Administration determines that you, or a covered dependent, were or became totally disabled at any time during the first 60 days of COBRA continuation coverage. Under previous rules, you had to be disabled on the day you qualified for COBRA coverage to be eligible for the additional coverage. Premiums during the additional 11 months of coverage may be at a substantially higher rate than for the initial l8-month period. To qualify for the extension, you must submit a copy of the Social Security Administration disability determination notice within 60 days of the date of such to [Name and address of responsible individual].

Note: These changes apply only if you have health coverage under the COBRA law on or after January1,1997

2. DEFINITION OF A QUALIFIED BENEFICIARY

Spouses and dependent children who were covered by the employee's plan always have had separate COBRA election rights. The 1996 law includes a child who is born to or placed for adoption with the covered employee during the period of COBRA coverage. In effect, this change would allow such a child to have his or her own COBRA election rights (if, for example, the parent/employee died). As has been the rule is the past if you add a dependent during the COBRA period, coverage and premiums will be adjusted accordingly

Note: These changes apply only if you have health coverage under the COBRA law on or after January 1, 1997 

3. COBRA COVERAGE AND PREEXISTING CONDITIONS

The Health Insurance Portability and Accountability Act of 1996 makes it easier for an employee to change jobs and become covered by a new employer's plan even if the employee (or covered spouse or dependent) has a preexisting medical condition. Effective [the first day of your plan year that begins on or after July 1, 1997], any time during which you and your family had continuous health coverage (including COBRA) prior to changing jobs will reduce, month for month, the new plan's preexisting conditions exclusions. In this situation, your COBRA coverage will end when the new employer's group health plan covers you without regard to any preexisting conditions. In general, if you have been covered for the previous 12 months, you will be covered by a new employer's plan without regard to any preexisting conditions. Contact your new employer to verify your coverage. (Note: A break in coverage of more than 63 days may subject you to preexisting conditions exclusions When your COBRA continuation coverage ends, you will be provided with a "coverage certification" that will describe the duration of your coverage under COBRA.)

Sincerely,

[Plan administrator]

This model notice is made available through the courtesy of Spencer Research Reports, published by Charles D. Spencer & Associates. Inc. Items in brackets indicate information that the plan administrator will need to complete.

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