Two of the nation’s biggest social safety nets, Medicare and Social Security, are facing a dire future according to a recent annual report from the Social Security Agency.
The cost of Social Security is projected to exceed its income in 2020 which would mean the program will need to pull from its trust funds. If no legislative action is taken, its predicted that Medicare’s hospital insurance fund is will be depleted by 2026 and the Social Security Reserve fund will be exhausted by 2035. Furthermore, according to the estimations of the Employee Benefit Research Institute (EBRI), slightly more than 40 percent of households are expected to run short of money in retirement for households whose head of the house is currently between the ages of 35 and 64. While these numbers are alarming, lawmakers from both parties believe that if push comes to shove the Social Security funds shortage can be fixed. Just for a fun exercise, let’s say that the Social Security and more specifically the Medicare funds run out and the programs cease to exist, would be the implications on employee benefits and COBRA?
Hypothetically speaking, if Medicare as a Federal program were to dissolve there would be major ripple effect consequences in multiple sectors but especially within healthcare, HR, and employee benefits. For those that are unaware, COBRA has two qualifying events for employees, termination of employment and a reduction of hours. For dependents, there are four qualifying events, death of the employee, divorce or legal separation, aging off the plan, and the employee going on Medicare. Considering going on Medicare is one of the few COBRA qualifying events, it would be safe to say that the impact on COBRA would be vast. But how would that look?
Speculative Impact on Participants, Employer Groups, and COBRA.
As previously mentioned, an active employee going on Medicare, causing their dependent to lose coverage is a COBRA qualifying event for their dependent – so in the absence of Medicare there would be one less event type. By applying simple math, less event types would assume less COBRA qualifying events. That said, with Medicare Entitlement perhaps being the second least common qualifying event only to death of employee, the impact on group plans and how COBRA is administered would not be profoundly substantial in terms of the dependent event type itself. Where the biggest impact would be noticed would be the number participants electing COBRA and the trickle-down effect on the group health plan costs caused by elderly participants electing COBRA. Its not uncommon for American employees to specifically wait until they are Medicare eligible before retiring just so they don’t have to pay the full premium costs of regular health care. Considering retiring is the same as a voluntary termination qualifying event, if a group doesn’t have retiree benefits, its safe to say that there would be a significant increase of retired employees electing COBRA in the absence of Medicare. Seeing as though older plan participants accrue more medical expenses then their younger counterparts, in a world without Medicare, the logical conclusion is that insurance carriers would increase the cost of group healthcare to compensate for the increase of those costly claims.
As if employer sponsored health care wasn’t expensive enough already, it would likely be astronomical in the abolishment of Medicare. One concept that would likely see an increase in utilization from employers and carriers would be Age-Banded plans. These plan designs charge a premium based on the plan participants ages so that the elderly plan participants who are typically accruing the brunt of the medical expenses are paying the majority of the costs. Conversely, whereas Age Rated plans would likely see an increase, Self-Funded plans would likely see a decrease due to the increase risk on the employer of the medical costs of elderly plan participants who otherwise would have been on Medicare. From a COBRA perspective, not only would participants who are retiring be electing COBRA at a higher clip, but they would likely need to say on it as long as possible with Medicare no longer being an option. Which is why even with Medicare entitlement being a COBRA qualifying event, the termination of Medicare would actually increase the COBRA activity for most employer groups.
Apart from the health care plan designs and the increased usage of COBRA, there would be plenty of other areas of employee benefits and HR that would be affected as a result as well. For instance, the increased cost of medical coverage could presumably cut funding for other ancillary benefits that aren’t as essential. Not to mention the average age of retirement might start getting pushed back causing less openings in the workforce. There’s no telling the immeasurable domino effect terminating Medicare as a Federal program could have. Of course, this is all hypothetical, conceptualized in a vacuum, but it just goes to show how important and engrained Medicare has been in the American infrastructure since its inception in 1966. If it continues to receive less funds than it’s putting out, it will be interesting to see at what point the Nation as a whole starts to push the panic button.