Employers recently surveyed by Aon Consulting predict that health care costs will escalate as a result of the new federal COBRA subsidy.

Even though the subsidy will reimburse employers for 65% of their COBRA premiums, it paves the way for more COBRA enrollees, due to unemployment, and greater costs associated with administering the subsidy and communicating its details to employees, explains Aon. In addition to higher overall health care costs, the subsidy will lead to potentially higher-than-expected employee contribution rates for health care coverage in 2010.

Almost 60% of employers of 300 employers surveyed expect their overall health care costs to rise because of the COBRA subsidy. Forty percent anticipate cost increases between 1% and 5%, 40% expect costs to rise by between 6% and 10%, 12% expect increases of between 11% and 15%, and 8% expect an increase of 16% or more.

“As employers begin to plan for their 2010 health benefits, they must take the new COBRA subsidy costs into consideration,” says Tom Lerche, Aon Consulting’s Healthcare Practice leader. “Most plan sponsors continue to experience a 7% to 11% health care cost trend rate, so additional costs from this subsidy will impact overall health care plan strategy for 2010.”

Prior to the enactment of the study in February 2009, COBRA costs for many employers ranged between 140% to 160% of COBRA premium.

“Typically, 5% to 10% of former employees enroll in COBRA, and we expect that number to increase to 14% to 18% as a result of the subsidy,” Lerche said.

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