Just as the nation appears ready to emerge from the economic downturn that officially began in March 2001, Congress is attempting to come to the rescue with a “stimulus” package. Democratic party leaders in Congress have been pressing to include a health-care provision that would subsidize the purchase of COBRA health insurance for laid-off workers.

COBRA refers to the Consolidated Omnibus Budget Reconciliation Act of 1985. Under COBRA, workers who lose their jobs are allowed to temporarily continue purchasing health insurance from their former employer. Laid-off workers must pay the full premium for the coverage plus an administrative charge equal to two percent of the premium. COBRA coverage for most former workers is available for 18 months.

One proposal now under consideration would give laid-off workers a 50-percent tax credit for the purchase of COBRA health insurance. Rather than stimulating economic growth, this provision would do further damage to the economy.

The bill would allow workers to partially offset the cost of COBRA coverage by taking half the premium as a credit against their taxes. Why will subsidizing COBRA hurt the economic recovery? The answer can be traced to a phenomenon called adverse selection.

Because premiums for employer-provided health insurance cost several hundred dollars per month, only individuals who expect to have large medical expenses have an incentive to purchase COBRA insurance. According to the latest annual survey by Charles D. Spencer & Associates, only 19 percent of ex-workers who were eligible for COBRA chose to purchase it.

Several years of data have consistently shown that the average COBRA enrollee has medical claims expenses about 50-percent higher than the average employed worker. The temporary nature of the coverage contributes to this difference. COBRA enrollees are acutely aware of the limited coverage period and will use medical services more intensively. These larger expenses are spread across the premiums that everyone else must pay.

One researcher determined that health-insurance premiums were, on average, four percent higher than they would have been without COBRA. Thus, COBRA has been a contributing factor to the decision of some employers to drop health-insurance coverage due to its high cost. The plan to subsidize COBRA coverage would increase the average cost of health insurance even more.

By subsidizing the cost of the premium, more laid-off workers will purchase coverage. The subsidy will encourage the purchase of COBRA by individuals who have lower expenses than the current COBRA purchasers but higher expenses than the average enrollee. As a result, the average premium will increase and the effect on the economy will be negative.

Higher health-insurance costs will consume funds that employers could have used to hire new workers or make capital investments. In addition to the monetary cost, employers would be hit with an increased time cost attributable to the administration of additional COBRA enrollees. These costs include communicating with enrollees, collecting premiums from enrollees, and monitoring their eligibility period. The survey by Charles D. Spencer & Associates puts the average administrative cost per enrollee at $24 per month, easily more than the two percent administrative charge. Such costs are especially hard on smaller businesses, the source of most jobs.

Subsidizing COBRA is also a very restrictive way to help unemployed workers get health insurance. Under COBRA, laid-off workers are given virtually no choice about the type of coverage that they can purchase, since many employers offer only one health-insurance plan.

A federal tax credit for the purchase of health insurance is not a bad idea, but it should be given to all Americans to purchase any type of policy. Truly portable health insurance provides individuals with unlimited continuity and freedom of choice. As a restrictive and temporary fix, a COBRA subsidy would only take a bite out of the economic recovery.

Chris Middleton is the Senior Health and Tax Policy Analyst for the Center For Entrepeneurship of the Pacific Research Institute in San Francisco. He can be reached via email at cmiddleton@pacificresearch.org.