CHAPTER FOUR - GROUP HEALTH INSURANCE

The majority of the changes in Health Insurance as a result of HIPAA are in the Group Health Insurance area. “Group” is not a “product,” but is an arrangement where coverage is provided for groups of individuals under a single master contract issued to a group policyowner. The policyowner may be an employer, an association, a labor union, a trust, or any other legitimate entity not organized solely for the purpose of obtaining insurance. Members of larger groups, generally, may obtain coverage without providing evidence of insurability. Because of reduced marketing and administrative expenses, group health usually costs less than individual plans with comparable coverage and in addition, the plans often provide benefits not available under individual plans—such as maternity benefits.

HIPAA GROUP HEALTH INSURANCE REFORMS

The two principal areas of insurance reform addressed by the HIPAA are group health insurance and Long Term Care Insurance. The stated principal of the Act was the portability problem of an employee moving from one group plan to another situation where there either is no insurance or the employee does not qualify for the health plan at the new employer because of health reasons, or the employee is unable to get individual insurance after the COBRA period with his former employer.

PORTABILITY

Under HIPAA’s “portability” protection, once a person obtained creditable health plan coverage, he can use evidence of that coverage to reduce of eliminate any preexisting medical condition exclusion period that might otherwise be imposed when the person moved from one job to another. This applies whether the person moves from one health plan to another, from a group plan to an individual plan, or from an individual plan to a group plan. Portability is simply being able to maintain coverage and being given credit for having been insured when changing health plans. It does not, of course, mean that a person can take his insurance policy with him from one job to another.

Creditable Coverage

Creditable coverage applies when an individual is given credit for previous insurance when applying for a new health insurance plan. Creditable coverage is coverage under any of the following:

Group health plan;
Health insurance coverage including individual health insurance;
Medicare or Medicaid;
Military health care;
Medical care program of the Indian Health Service or a tribal organization;
A state health benefits program;
The Federal Employee Health Benefits Program;
A public health plan (defined in the regulations); or
A health benefit plan as part of the Peace Corps Act.

PREEXISTING MEDICAL CONDITION

Under HIPAA, a preexisting medical condition is a physical or mental condition for which medical advice, diagnosis, care, or treatment was recommended or received within the 6-month period ending on the enrollment date. The enrollment date is the date of employment of the individual in the plan, or, if earlier, the first day of the waiting period for such enrollment. Pregnancy is not considered a preexisting medical condition.

A preexisting medical condition limit or exclusion may not be imposed on covered benefits for newborns that are covered under creditable coverage, within 30 days of birth.

A preexisting medial condition limit or exclusion may not be imposed on covered benefits for newly adopted children, or children newly placed for adoption if the child becomes covered under creditable coverage within 30 day of the adoption or placement.

Preexisting Condition Period

During this 6-month period, a plan may exclude or restrict coverage of a participant’s or beneficiary’s preexisting medical. Under the Act a group health plan is prohibited from imposing more than a 12-month preexisting condition limitation period—18 months for late enrollees—on an eligible participant or beneficiary. (Note: Under HIPAA those individuals who have individual coverage also have portability protection, but the conditions and requirement are more complex.)

PORTABILITY OF GROUP HEALTH PLANS

HIPAA requires that group health plans offered to an employment-based group—including both employers and employee organizations—that are covered by the Act to meet certain portability requirements.

When a person with prior creditable coverage, first enrolls in a group health plan, the plan cannot impose a limitation period on a preexisting condition that is longer than 12 months (or 18 months for late enrollees). The length of the allowed preexisting condition limitation is based upon any creditable coverage that the person may have. The plan cannot apply any preexisting condition waiting period on pregnancy, a covered newborn, or any covered child under age 18 who is adopted (whether or not the adoption has been finalized). The employer is allowed to require individuals to work for a period of time (waiting period, not preexisting condition period) before they may participate in the health plan.

All employers who sponsor group health plans are required to provide enrollees with a certificate that states the amount of creditable coverage accumulated and whether or not the enrollee was subject to a waiting period under the employer’s plan. This certificate can be used to demonstrate creditable coverage when moving to another group or to an individual health insurance plan.

The Act does not require an employer to continue offering coverage to enrollees who have left their jobs, except under COBRA continuation provisions.

Continuous Coverage

In order to benefit from HIPAA, it is important for individuals to maintain health insurance coverage without experiencing significant lapses in coverage. The portability protection only applies to people with “continuous coverage,” defined as coverage with no lapses of 63 or more days, so individuals should not allow their insurance coverage to lapse for more than 62 days.

If a person moves from one group plan to another group plan, or from individual to group coverage, the new plan must reduce any preexisting condition limitation period for 1 month for every month that the individual had creditable coverage under a previous plan, provided they enroll when they are first eligible and with no break in coverage over 62 days. As an example, if an individual had creditable coverage for 6 months they could have 6 months of a preexisting condition limitation period. If they had 11 months of creditable coverage, they could face one month preexisting coverage limitation coverage. The good news is that once a 12 month limitation is met, no new limitation may ever be imposed provided that continuous coverage is maintained and there is no break in coverage lasting longer than 62 days. This would apply even if there is a change in jobs or in health plans.

Persons may be eligible for a waiver of preexisting condition limitations by presenting certifications that document prior creditable coverage. Health insurers and other health plans must provide the individual with written certifications of the period of creditable coverage under the plan, coverage (if applicable) under COBRA provisions, and any waiting or affiliation period imposed. The certification must be provided at any of three times:

When the person is no longer covered under the plan or otherwise becomes covered under a COBRA continuation provision;
After the termination of the COBRA coverage; or
Upon a request which is made not later than 24 months after coverage ends.

Late Enrollment

“Late enrollment” occurs when an individual enrolls in a group health plan other than the first period in which the person is eligible to enroll, or a special enrollment period. They should be aware that a later enrollee could make the person wait for as long as 18 months before a preexisting condition is covered.

Waiting Period

The waiting period is the time that an employee must wait before he is eligible to enroll in a health plan. A typical waiting period is 6 months before health insurance benefits are available and the Act does not prescribe the waiting period—it is up to the insurer and the employer. However, the Act does require that the waiting period be applied uniformly without regard as to the health status of potential plan participants or beneficiaries. Waiting period days are not taken into account in determining the length of a break in coverage.

The waiting period is different than the preexisting condition exclusion limitation period which allows the plans to exclude coverage for certain health conditions for periods up to 12 or 18 months.

F The waiting period that an employee or his family member must endure to become covered under a health plan, must run concurrently with any preexisting condition limitation period.

As an example, if an employer hires a person with no creditable coverage and requires such person to wait for 5 months before becoming eligible for the group health plan, then the preexisting condition limitation period imposed on the coverage of that individual could not exceed 7 months from the date of actual enrollment of the plan. If the individual had 7 or more months of creditable coverage, then no preexisting condition limitation period could be imposed on the coverage under the new plan.

Crediting Prior Coverage

When a person change plans, sometimes the new benefit package may cover some benefits that the most recent prior plan did not cover. The Act allows the new plan or issuer some discretion in applying prior creditable coverage to those new benefits. Plans and issuers may choose between two alternatives when crediting coverage:

They can choose to include all periods of coverage from qualified sources and ignore specific benefits, or
They can examine prior coverage on a benefit-specific basis and are allowed to exclude any categories or classes of benefits not covered under the most recent plan, from creditable coverage.

Under a later (interim) rule, the categories of benefits that may be treated separately are

Mental health;
Substance abuse treatment;
Prescription drugs;
Dental care; or
Vision care.

Example: If a prior plan did not cover prescription drugs and the new plan includes prescription drug coverage, the new plan may exclude prescription drug coverage for up to 12 months under this (2d) method—and, if this method is chosen, plans or issuers must disclose its use at the time or enrollment or sale of the plan, and apply it uniformly. i.e., an insurer must not allow other employees to obtain prescription drug coverage under the same circumstances, for a shorter period of time.

Spouse and Children Coverage

An employer is not required to offer coverage to an individual’s spouse or family. If the employer does offer family coverage, the same protection applies to a spouse and dependents, and, for instance, coverage may not be denied because a family member is sick, and preexisting condition restrictions are limited.

PORTABILITY WHEN MOVING FROM GROUP TO INDIVIDUAL PLANS

HIPAA “guarantees” the availability of a plan and it prohibits preexisting condition exclusions for certain eligible individuals who are moving from group insurance to individual insurance. States are given the right to either accept and enforce HIPAA individual guarantees, (called the “federal fallback”) or they may establish an acceptable alternative state mechanism. For those using the federal fallback approach, HIPAA requires that all insurers who operate in the individual health insurance field to offer coverages to all eligible individuals and prohibits the insurers from placing any limitations of coverage on any preexisting medical condition.

The issuers (usually insurers) can comply in three ways:

Offer eligible individuals access to coverage to every individual insurance policy that they sell in the state; or
Offer eligible individuals access to coverage to their two most-popular insurance policies (popularity based upon premium volume); or
Offer eligible individuals access to a lower-level and higher-level coverage. These two policies must include benefits that are (substantially) similar to other coverage offered by the issuer in the state, and must include risk adjustment, risk spreading or financial subsidization,

Issuers do have the right to refuse coverage for those individuals seeking portability from the group market if financial or provider capacity would be impaired. For example, an HMO can show that it is filled to capacity, health providers cannot accept new patients because of the number of patients they already have, health care within the area in which the individual resides and works cannot be provided at reasonable cost, etc., all could be advanced as a reasons not to cover a person, but the exception would have to be applied uniformly without regard to the health condition of the applicants—for instance they could not accept an individual from the same geographical area and who would be using health care providers that had been represented as being overwhelmed by the number of patients.

Eligibility for Group to Individual Coverage

For an individual formerly insured under a group plan to be eligible for individual coverage the individual must have

Creditable health insurance coverage for 18 months or longer, at least the last day of which was under a group health plan;
Most recent coverage under a traditional employer group, governmental, or church plan;
Exhausted any COBRA or other continuation coverage;
Not eligibility for coverage under any employment-based plan, Medicare or Medicaid; and
No breaks in coverage of 63 or more days.

Persons who purchase insurance coverage on their own, and who do not meet these eligibility requirements, are not protected by HIPAA’s portability and guaranteed availability options. However, they may be protected under state laws.

Limitations of Group-to-Individual Portability

The portability provisions of group-to-individual coverage applies only to individuals whose most recent coverage was provided through traditional employer-based group arrangements, governmental plans or church-sponsored plans. HIPAA defined group plans as those plans that meet the ERISA definition which is limited to those sponsored through employer-employee relationship or an employment-based association. Governmental plans are defined in ERISA as plans established or maintained for its employees by the federal, state or political subdivision. This means that persons whose most recent coverage was sponsored by the military (CHAMPUS and TRICARE), many college sponsored student plans, the Peace Corps, the Veteran’s Administration, the Indian Health Service, Medicare, Medicaid and SCHIP are NOT eligible for the federal group-to-individual portability and guaranteed availability protections. Again, however, states may offer these individuals such protections.

States may provide an acceptable state mechanism for coverage of eligible individuals, must allow a choice of health insurance coverage to all eligible individuals, not impose any preexisting condition restrictions, and include at least one policy form of coverage that is comparable to either comprehensive health insurance coverage offered in the individual market in the state, or a standard option of coverage available under the group or individual health insurance laws in the state.

In addition, a state may implement certain National Association of Insurance Commissioners (NAIC) Model Acts; a qualified high-risk pool that meets certain specified requirements, other risk-spreading or risk-adjustment approach or financial subsidies for participating insurers or eligible individuals, or any other mechanism under which eligible individuals are provided a choice of all individual health insurance coverage otherwise available.

Some states have provided for health insurance coverage pools, mandatory group conversion policies, guaranteed issue of one or more plans or individual health insurance coverage, open enrollment by one or more health insurance issuers, or a combination of such mechanisms.

Basically, 10 states (AZ, DE, HI, MD, MO, NV, NC, RI, TN, and WV) have adopted the federal fall-back position; another 24 states adopted an alternative mechanism of a high-risk insurance pool. The remaining 16 states have various alternative mechanisms, including two that use Blue Cross/Blue Shield as the guaranteed issue carriers. Florida has guaranteed issue to HIPAA persons, and health plans must offer a choice of conversion plans, one of which must be the state approved” standard policy” offered in the small group market. Some states change the preexisting coverage limit time, adjustments in premium for various risks, retaining pregnancy as a preexisting condition, separate open enrollment period for HIPAA-eligibles, etc.

Special Enrollment Periods

The Act provides for two special enrollment period to make sure that people who lose group health insurance coverage can have an easier time of obtaining coverage when available. The two special enrollment periods are for individuals losing coverage and dependent beneficiaries.

Individual Losing Coverage

Any group health plan or issuer, who offers coverage in connection with a group health plan, must allow an eligible employee (but not enrolled) to become covered under the health plan under the following conditions:

The employee or dependent had coverage under a group health plan at the time coverage was previously offered to the employee or dependent, which can include coverage by a spouse’s health plan and he had therefore declined coverage under his own employer’s plan.
The employee must have stated (in writing) when they declined enrollment that the reason for declining the enrollment was that he was covered under another health plan. This condition applies only if the plan sponsor or issuer requires such a written statement.
The employee’s or dependent’s previous coverage was under COBRA continuation provision that had become exhausted or was under some other coverage that had been terminated as a result of loss of eligibility for the coverage for a variety of reasons, including divorce, death, termination of employment, reduction in number of hours of employment, or because the employer discontinued contributing to such coverage.
To use the special enrollment period, the employee would have to request enrollment no later than 30 days after the date in which his prior coverage was terminated, or in the case of COBRA, exhausted.

Dependent Beneficiaries

The other special enrollment period applies to those who became dependents because of marriage, birth, adoption or placement of adoption. This provision would apply if the group health plan makes dependent coverage available and the new dependent’s spouse or parent is a participant, or eligible and the waiting period has been satisfied, to participate in the plan. The new dependent must be allowed to enroll as a beneficiary under the plan provided that enrollment has been sought within 30 days of the “qualifying event” (marriage, adoption, etc.)

Employees or their spouses who are eligible but who have not previously enrolled in the plan may enroll during this special enrollment period and coverage would be effective on the date of the birth, adoption, or placement for adoption. For marriage situations, coverage is effective on the first day of the month beginning after the date the request for enrollment is received.

NON-DISCRIMINATION

Under HIPAA, a group health plan (and an issuer) cannot offer group health coverage with rules for eligibility for any individual to enroll in the plan, based on health status of the person. These are considered as discrimination factors, and include health, medical and mental illnesses, claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. A rather interesting point is that evidence of insurability includes conditions arising out of domestic violence. Also, a group health plan may not fail to re-enroll a participant or beneficiary on the basis of these health status factors. Further, plans may not charge different premiums for enrollees within a group plan based upon these health related factors.

An employer cannot require rules of eligibility to enroll when such rules discriminate based on one or more health-status related factors.

Individuals that engage in “high-risk” recreational activities cannot be denied enrollment or charged different rates than those that do not engage in such activities. However, HIPAA only addresses enrollment policies and premiums, and does not address benefits under the plans. Therefore, there is no federal requirement to cover treatments for injuries associated with high risk activities even if the treatments are covered under the plan. As an example, a plan may exclude coverage for a broken leg or arm, etc., if such occurs as a result of a high risk activity. Further, under a group health plan, while an employer is not required to offer coverage to a spouse or children, if they do offer family coverage, then the same non-discrimination provisions apply to the wife and children,

Premium Amounts

HIPAA does not restrict the premium amounts that an employer or insurer can charge and it expressly permits an employer or group health insurer to offer premium discounts or rebates or to modify applicable copayments or deductibles for participation in health promotion and disease prevention programs. Having said that, HIPAA does prohibit a health plan from charging a higher premium than the premium charged for another similarly situated individual enrolled in the plan on the basis of a health-related factor, particularly a preexisting condition.

Guaranteed Issue

Insurers, Health Maintenance Organizations, and other issuers of health insurance that market in the small group market must accept any small employer that applies for coverage, regardless of the health status or claims history of the employer’s group. “Small employer” is defined by the Act as one with two to 50 employees, however many states have reforms where groups of 2 to 25, 35 or 50 persons are considered as small groups, with a few states provide for guaranteed issue for groups of one.

On the first day of the plan year, the plan has fewer than 2 employees (when two is the minimum) who are current employees, then the plan would not be considered as “guaranteed issue.” “Guaranteed issue” means that the issuer must accept every eligible individual in the employers’ group who is eligible for participation in the plan and applies for it on a timely basis. The interim rules consider the guaranteed issue requirement as applying to all products actively marketed by an insurer in the small group market.

There are exceptions noted in the Act for network plans that might otherwise exceed capacity limits or in the event that the employer’s employees do not live, work, or reside in the network plan’s area.

Employer groups who have more than 50 employees are not protected by this requirement (unless required under state law); primarily because traditionally issues of health insurance did not, as a rule, examine the health status of employees in large groups during the underwriting phase. HIPAA does require the Secretary of Health and Human Services and the General Accounting Office to report every three years, starting in December 2002, on access to health insurance in the large group market.

Guaranteed Renewability

If the group requests renewal from the group health issuer, the issuer must renew the group regardless of the health conditions of the participants or the amount of use of the services. An issuer has the right to discontinue coverage for non-payment of premium, fraud, or similar reasons not related to health conditions, such as violation of participation or contribution rules.

FEDERALLY MANDATED BENEFITS

In the original Act, HIPAA did not require an employer or issuer of group health insurance to offer specific benefits, however on two occasions since HIPAA was passed, Congress added mandated specific benefits, but only for plans that cover certain coverages. (Discussion of State vs. Federal regulation of insurance is beyond the scope of this text, however does the mandating of two benefits remind one of the adages of the camel getting its nose under the tent?)

Health plans may limit the treatment of mental illnesses by covering fewer hospital days and outpatient office visits, and they can increase cost sharing for mental health care by raising deductibles and copayments. At least 23 (at last count) states have since passed laws that require health plans to impose the same treatment limitations and financial requirements on their mental coverage, as they do on medical and surgical coverage. Other states have enacted laws that require health plans to provide some specified mental health benefits, but not fully the same as for medical and surgical coverage. Self-insured employers are exempt from state regulation under ERISA and are, therefore, immune from these state laws.

Congress in 1996, passed the Mental Health Parity Act (MHPA) which amends ERISA and the Public Health Service Act by establishing new federal standards for mental health coverage offered by employer-sponsored plans, and shortly thereafter, the IRS established identical provisions. The MHPA is rather limited and does not require insurers to provide full-parity coverage.

For group plans that elect to mental health benefits, MHPA requires parity only for annual and lifetime dollar limits of coverage, but the plans are allowed to have more restrictive treatment limitations and cost-sharing requirements on their mental health coverage. Employers with 50 or fewer employers are exempt from the law. Also, employers that can show an increase in claims costs of at least 1% as a result of MHPA can claim an exemption.

In 2003, Congress attempted to pass legislation that would amend and expand MHPA by requiring plans that choose to offer mental health benefits to provide full-parity coverage, however, lawmakers only reauthorized MHPA through Dec. 31, 2002. There have been attempts by the Bush administration (S.543) that would provide for full parity, but it has been opposed by employers and health insurance organizations because of concerns that it would drive up health costs.

Newborns’ and Mothers’ Health Protection Act

The Newborns’ and Mothers’ Health Protection Act was also passed which prohibits group health plans and issuers offering group coverage from restricting the hospital length of stay for childbirth for either the mother or newborn child to less than 48 hours for normal deliveries and to less than 96 hours for caesarian deliveries.

Women’s Health and Cancer Rights Act of 1998

This Act was enacted in 1998 and requires group plans and health insurance issuers providing coverage in connection with a group plan that provides medical and surgical benefits related to mastectomy to cover breast reconstruction procedures. It contains a requirement requiring beneficiaries to be notified of available coverage for prostheses and treatment of physical complications of reconstructive procedures.

Excluding Coverage for Specific Risks

Interestingly, Federal law does not prohibit employers from excluding treatment of specific illnesses or conditions from their health benefit plan. However, there are a number of things that restrict an employer from excluding specific illnesses from coverage. Most states have laws that require that specific benefits or coverages must be included in insured plans. Also, employers that purchase insurance products have little or no discretion in choosing or excluding specific types of services or procedures. The reason for this is that many insurance companies and HMOA have certain standard plans available that do not various much from one employer to another. Self-funded plans are under the umbrella of ERISA that prevents state laws from applying and benefits are crafted by each individual employer plan. Therefore only the few requirements of HIPAA and subsequent amendments require specific coverage on these self-funded plans.

Association-Sponsored Group Health Plans

Association plans must also comply with the requirements of HIPAA that relate to group health coverage. As an example, a sponsor of an association plan cannot drop a group from coverage because of the use or overuse of medical services by its members. The preexisting condition limitations, creditable coverage and renewability requirements apply except in a few limited situations. However, HIPAA does not require an association plan to accept for coverage individuals who are NOT members of the association.

State Requirements

States are allowed to impose their own requirements but HIPAA requires that state laws do not prevent the application of its consumer protection provisions. On the other hand, state laws that regulate rating of risks are exempt from HIPAA. The Act’s provisions relating to portability override state laws. Exceptions are specific types of state laws that provide for greater portability such as state laws that

Define a preexisting medical condition to be one that existed for less than six months prior to becoming covered (instead of the 6 months required under the Act).
Provide for preexisting medical condition limitation periods shorter than 12 (or 18) months in the Act; and
Allow for breaks in continuous coverage longer than the 62-day period specified under the Act.

An example of a state law overriding HIPAA would be where the state mandates a 6-month preexisting condition limitation on enrollees, instead of the 12-month HIPAA limit. Conversely, if the state mandated a 14 month (or period more than 12 months) preexisting condition limitation, this would be overridden by the requirement of the Act.

COBRA CONTINUATION COVERAGE

The Consolidated Omnibus Budget Reconciliation Act of 1985, known as COBRA, requires that businesses with 20 or more employees that offer group insurance to their employees to offer continued group health insurance coverage to employees and their dependents after certain events, which includes a 12 month extension of coverage. The COBRA coverage is considered creditable coverage for individuals who move from one group policy to another group policy or move from a group policy to an individual policy. This would then allow an individual to move from COBRA to a new health plan without having to wait for coverage of any preexisting medical condition under the new plan, providing the individual does not have a lapse in coverage of 63 or more days.

For individual coverage, this is a little more complex. In order to be eligible for guaranteed availability and portability with individual plans, an individual must first have elected and exhausted any available COBRA or other continuation coverage. Eligible persons who do not qualify for COBRA or other continuation coverage may go directly to the individual plans. It should be noted, however,

F the insurer who accepts the eligible individual for coverage can charge whatever rate is allowed under state law as the Act does not limit the premiums that insurers can charge.

This is not to say, however, that the Act ignored COBRA, as in fact, they made several changes to the COBRA continuation of coverage provisions.

A disabled qualified beneficiary and all other qualified family members of the beneficiary are also eligible for the additional months of COBRA.

The qualifying event of disability applies in the case of a qualified beneficiary that is determined under the Social Security Act to be disabled during the first 60 days of COBRA coverage,

A qualified beneficiary for COBRA coverage includes a child who is born to, or placed for adoption with, the coverage employee during the period of COBRA coverage; and

COBRA can be terminated if a qualified beneficiary becomes covered under a group health plan which does not contain any exclusion or limitation affecting a participant or his or her beneficiaries because of the requirements of the Act.

Under the Medical Savings Account provisions (discussed earlier) individuals can withdraw funds from their MSA to pay their COBRA premiums, without penalty.

GROUP HEALTH INSURANCE MARKETING

Groups insurance basically is nothing more than a method of marketing, although in some ways the product differs from the individual plans. Group marketing must be addressed by itself if for no other reason than the developments in the product, tax incentives and, ergo, marketing techniques.

Agents

Agents are the mechanism that sells the group health products, just like in individual health sales, however there are some differences. Agents that market group health insurance are often licensed to sell individual health insurance and many do sell both individual and group. However, group requires more than simple product knowledge, so it is more common for agents to be employees of the insurer or for more than one agent to share in the commission. Agents who work for one company or who are employed by the insurer, are usually provided with office space, clerical and backup services, training and fringe benefits.

Some insurers are too small to have their own group representatives, so they designate all sales and services responsibilities to contracted agents and brokers.

Some insurers do not use agents or brokers and only approach prospective policyholders through their salaried employees, such companies are known as direct writers.

Brokers

Technically, brokers are independent salespersons, although usually the agent is thought of as representing the insurer and the broker represents the purchaser. In actual practice, however, this relationship is more complex. Sometimes a broker will recommend, advise and assist employers in purchasing the best coverage for their particular situation, they can sometimes receive fees from employers for their service. But, if an agent sells an insurance plan to an employer, he is then acting as a representative of the insurer and receives compensation—as an agent.

A group broker may act as a Third Party Administrator (TPA) —a firm that is neither the insurer nor policyholder of a group insurance plan but who takes responsibility for the administration of that plan. This is generally used in self-insured plans.

Employee Benefit Consultants

Employee Benefit Consultants are individuals or firms that specialize in group benefits for employees. They act like brokers inasmuch as they advise employees in finding the right group coverage and they receive a fee from the employer. The difference is that in most cases, a broker assists his client in purchasing a group policy, but the consultants focus on making recommendations to the employer upon which the employer then takes action. Actually, the difference between brokers and employee benefit consults get rather hazy at times.

Group Representatives

Basically, group representatives are employees of the insurer that are responsible for the marketing and servicing of group insurance. In some companies, group representatives are responsible for sales and group service representatives are responsible for providing service to the clients.

THE SALES PROCESS

The actual process of marketing group health insurance consists of several steps which may be taken individually, or combined with other steps, depending upon the situation.

Prospecting

As with any type of sales, before something can be sold, there must be someone to purchase the product. This is regarded by many as a special science and is usually done by agents and brokers, except for large groups, group representatives will often do their own prospecting, but generally, at this stage, they are involved in informing agents and brokers about their programs, motivating them to sell them, and providing support when needed.

Sometimes, not often, an employer may issue a request for proposals (RFP) which notifies insurers that they are seeking coverage and invites them to propose a plan. The RFP is usually issued by large employers’ benefits section. At this point, it is more of an actuarial contest as generally for the large employer, there is flexibility in benefits not available to the small or medium size group.

Proposal

Once an employer becomes a “prospect,” and the necessary information obtained, the first decision of importance at this point is whether to proceed to the next step—designing a health insurance plan that meets the needs of the prospect and then packaging the plan into a proposal to be presenting to the prospect. This is the decision of the home office of the insurer in most cases, although the recommendation of the group representative is very important as the group representative is the one that must make the determination that the proposal meets the expectations of the prospect, whether the prospect meets the standards of the insurer’s underwriting standards, and whether there is a good chance of making the sale (or not).

If the decision is made to make the presentation, then the plan is designed—usually with the involvement of the group representative and the home office personnel (underwriting and actuarial primarily). They must evaluate the needs of the prospect, design a plan to meet those needs, underwrite the plan, and determine the appropriate premium. Obviously, more detailed information from the prospect is necessary at this time, such as claims and premium experience of the prospect, particular hazards present, the objectives of the prospect, and their financial condition. If the employer is unionized, any collective bargaining agreements affecting the coverage is useful, if not necessary.

The completed proposal is comprised of a description of each coverage in the plan and the premiums for each coverage, plus information on the insurer (financial strengths and accomplishments, and a list of well-known group policyholders [if any]). For the large group, a cost illustration must show what part of the premium is used to pay benefits and expenses, and how much can be returned to the policyholder in the way of an experience refund—not presented to smaller groups as they usually are not eligible for experience refunds.

Presentation

The proposal presentation may be made by an individual agent or broker, by the agent and broker, by the agent and group representative, or by the group representative. Often the proposal must be submitted to the prospect’s broker or consultant, whose job it is to then analyze the proposals submitted by several insurers and make recommendation to the prospect. As a general rule, group representatives of the insurer are allowed to participate only by small brokerage firms

Often, there will be changes in the proposal to meet the requirements or expectations of the prospect and/or the insurer. When the prospect evaluates the proposal and the reputation and capabilities of the insurer, and agrees with the proposal, then the sale is made.

Employee Enrollment

The next step after the acceptance of the proposal by the employer is the enrollment of the employees. If the participation is optional—the employees have the option of contributing to the premiums and receiving coverage, or not participating—enrollment is required in order to determine whether a sufficient number of employees will participate under the participation requirements of the plan. However, even if the employees do not have this option, enrollment is necessary for adequate administration and records.

When an insurer takes over an existing plan provided by another insurer, employees will often be already enrolled, however often it is still necessary to re-enroll employees. If a new coverage—such as dental or vision coverage—is added, or if the employee contribution is increased which then gives the employee the option of whether they want to continue, then enrollment is necessary. Even if there is no particular reason for re-enrollment, some insurers will want to re-enroll anyway so that the employees will be aware of the plan and to introduce themselves as the new insurer.

Regardless, the new insurer will provide information about the new plans, either in the form of letter(s) or pamphlet. If enrollment is going to be required, the active support of the employer’s personnel is necessary for the insurer to be provided with all of the enrollment cards.

Installation of Group

After the enrollment process has been completed, the insurer’s group representative sends the policyholder’s signed application, the employee enrollment cards, and the first month’s premium to the insurer or field office, for the final acceptance. It is possible at this time that the sale might “fall through” as there may not be an acceptable participation of employees or for some other reason. Otherwise, the insurer then issues the group policy and the group representative (usually in the company of the agent or broker) reviews all administrative aspects of the plan with the policyholder, such as premium billing and accounting, claims procedures and benefits. Administrative procedures are established and then the plan goes into effect and is installed.

Servicing of the Group

The group representative (or service representative) make periodic services calls on the policyholder to assist in the proper administration of the plan. Usually, a check-off list is completed that reviews administrative practices and then administrative procedures are established. The agent is often given responsibility for providing administrative assistance and other necessary services to small and medium-sized groups.

Group Sales Attractive to Agents

As a passing thought, group sales are attractive to many agents for a variety of reasons, which include:

An agent who sells group insurance makes contacts with prospects for other business or individual insurance. An agent who services the account that he has sold has opportunities to market other insurance products, even, in some instance, property and casualty insurance product (by obtaining proper licensing for these products) or working with others who have the P&C expertise.

Conversely, there are agents already marketing other products to business clients, and now has the opportunity to add group health and a complete line of products and service. An example would be an agent who markets payroll deduction plans, perhaps cafeteria type plans, such as dread disease policies, short term disability, etc., and can become familiar with the employees and employer, and may have an opportunity to “look at” or review their group benefits overall, in particular their group health insurance plan. There have been situations where an agent was able to convince the client that the agent should become the “agent-of-record” for the company, thereby eliminating (for the employer client) the need to be “bothered” by all of the insurers who are trying to sell him a variety of products, and, in effect, having a unpaid consultant working for the employer making suggestions and analyzing risk problems. If handled right and professionally, the agent-of-record situation can be beneficial for both the agent/broker and the employer.

And, of particular interest to those agents who are married, selling group insurance is mostly a daytime, 9-to-5 type of position, as opposed to agents who sell individual insurance as they must sell when the individuals are at home, including weekends and holidays.

GROUP UNDERWRITING

Underwriting is the process of examining, accepting, or rejecting insurance risks and classifying those selected, in order to charge the proper premium for each. Underwriting for group health insurance is dissimilar to individual health insurance underwriting except for some medical information areas as discussed. In all cases, the information that is used for underwriting in the home office is broadly applicable to the underwriting often performed by agents and field sales personnel. The following discussion addresses medical expense and disability income insurance, but the same principles apply for all health insurance coverages.

Predicting Claims

Underwriting is the process of determining whether to offer coverage and on what terms. And (as suspected by some agents) the first step is to try to determine if there is any reason that the insurer should NOT offer coverage. Past that, what terms are necessary in order to accept the risk—“terms” meaning the benefits to be provided, the premiums that are charged, and the overall provisions of the contract.

In actual practice, as opposed to individual health insurance, the group underwriter focuses mostly on the terms as in most cases, an offer has been made. The underwriter must devise a policy that has sufficient benefits for the benefit of the prospect, with benefits, premiums and other provisions so that the insurer will make a reasonable profit. In order to make such an offer, the underwriter must have fully considered the risks that will be taken and what the level of claims can be expected. Therefore, it is fair to say that the very heart of underwriting is the prediction of claims.

In group health insurance, it is nearly impossible for a plan to be in force without having claims, therefore the fact that there will be claims is a “given,” so the determination must be as to how many and in what amounts the claims will occur. The underwriter then determines what the premiums must be to cover such claims experience and make a profit, and what benefit provisions must be included in the policy so that the claims do not go above the predicted level.

Claims prediction is simply predicting with a fair degree of accuracy, the incidence of illness in a group by looking at past experience and projecting it forward. Therefore, past experience is the most critical piece of information needed by an underwriter. If the underwriter is looking at a 300-person group and they can find groups of the approximate size, operating in a business quite similar to the prospect, with a comparable mix of male & female, with similar payrolls, they will have a good indication as to how the prospect’s claims experience will perform.

It may be noted that the underwriter does not factor in solely the experience of groups of approximately the same size, but they take into consideration many other factors. For example, if the prospect business has a younger average age than like groups, health claims experience should be better, however if the younger group were heavily female, then there could be more maternity benefits paid. If the company was more sedentary, such as technical persons—accountant, computer technicians, data entry staff, etc.—than a similar sized group that was engaged in construction, then better health claims experience could be expected. The disparities between groups can cause all kinds of detailed exploration in the search for comparable experience.

In the majority of cases, however, actual claims experience is available and the group is not seeking insurance for the first time. Therefore, the underwriter can analyze claims experience and project that forward under the assumption that the past experience will be repeated.

Adverse Selection

Adverse selection is the “grinch” in group health insurance underwriting (and other types of underwriting also). If, for example, the eligible members have the option of having coverage and paying premiums, or declining the coverage, the members who elect for coverage are more likely to become ill than those that decline coverage because those that accept coverage are older and/or in poorer physical condition than the average employee in the group. This can go even further if the premiums paid by the employee are increased because of the claims experience of the group, in which case the number of non-participants will increase, leaving a smaller number of employees covered and those that are covered are, in all likelihood, expecting to use the benefits in the near future.

If the expected claims are based upon the statistical average, adverse selection can destroy the assumptions upon which premiums were based. This is a major responsibility of underwriters—to avoid adverse selection.

Statistical Averages

If a group is newly formed and has no claims experience, then statistical averages must be used. Actual experience, as indicated before, is always a more accurate predictor than statistical averages. Conversely, if the body of experience is rather large, then the statistical averages could be more predictive as experience would be based upon a much larger base of insureds.

For small groups, the actual claims experience of the group may be useful, but since it is such a small sample, it would not be as accurate a predictor as the average experience of many similar groups. As an example, if the group is 10 lives, it would not be at all unusual for the group to go for a year without any person having a serious illness. Conversely, it would not be unusual for any one person to have very expensive medical treatments and care. If in one year the experience was very low, and the next year very high, in both cases experience could be changed by the health condition of only one person. For large groups the claims experience is usually roughly the same for every year and the experience can be used to project claims data for each year.

For small groups insurers may combine the experience of many small groups to establish an experience pool and claims projections are derived from such a pool. This allows the underwriters for the small group to have one of the advantages of large-group underwriters; that of the ability to base claims projections on a large body of actual claims experience.

Claims projections for large groups are, therefore, more accurate, but that does not necessarily guarantee a profit. An inaccurate claims projection for a large group would have a greater impact on the insurer’s profit, than inaccuracy in projecting claims experience on small groups. For a small group, a 20% higher-than-projected claim ratio would not be the disaster that a 20% higher claims ratio would be for a large group with a million-dollar annual premium.

Premium Rates

Premium construction is similar to projecting claims by the use of averages for small groups, which are derived from rating manuals that have been compiled by rating organizations or actuarial firms. Often standard rates for small groups are used, with adjustments (usually annually) for actual claims experience.

Competitive Benefits and Premiums

Nearly always, the demon of competition arises, particularly if the group is large and the premiums are substantial. The underwriter must get sufficient premium to make a profit, but at the same time, they must be competitive with other insurers who would just love to have the business. The balancing act is very difficult for an underwriter and at times, an insurer will just “fly in the face of experience” and become competitive just so as not to lose market share.

While this competitiveness can reduce the profit on a group, from the viewpoint of the policyholders, it is a good thing as terms are more favorable if the insurer is more competitive. There have been instances (and there will probably always be instances) where an insurer will write a large group on a low-profit or even, no-profit, basis, in order to keep the volume of insurance in force higher (helping the value of the company stock usually). In many large groups, there is an experience refund whereby the policyholder will share in the profits on the group.

Adverse Selection in Small Groups

Adverse selection is of considerable concern for small groups. An example which has been the situation in many small group cases, a small business owner does not have a group health program for his employees. One of his family members becomes seriously ill and will require expensive treatment. The employer then gets group coverage for his employees and offers family coverage so his family members will be covered. In a large group, the experience of a single individual does not have much of an impact on claims experience, but in a small group there are not so many persons that can balance the experience of one individual and one such expensive claim can create a significant increase in claims.

Many insurers have addressed the problem of adverse selection in small groups by excluding preexisting conditions or by requiring evidence of insurability from the individual in the group and sometime from covered family members also. However, HIPAA and state laws limit the use of preexisting condition exclusions and prohibit the exclusion of individual employees because of health conditions.

SMALL GROUP REGULATIONS

HIPAA and the small group market reforms that have been enacted by many states in the early 1990s require that insurers that write small group health insurance plans must accept any small group that applies and that is eligible under the law. Therefore, under these laws, the underwriting function of deciding whether or not to accept a group for coverage has been eliminated since the insurer does not have a choice. So, in these situations, underwriting includes only ascertaining whether the group is eligible and determining the terms that will be offered.

Since the insurer is required to accept those in poor health insured in a group health insurance plan, obviously the claims experience is going to be much higher that it would have been if there were more flexibility in accepting those in poor health. Since the claims experience is going to be higher, the premiums are going to be higher also. A person who had been a member of a large group and who had participated in the premiums, then goes to a smaller company where they discover that their premium was much higher, may have a hard time understanding why it is more expensive in a small group—especially since they, personally, have never had a large health claim. Because of these regulations, in some cases individual health insurance can be less expensive than the individual’s share of the group premium. However, the employer usually pays part of the group health premium so the higher cost to the employee is usually not that substantial.

Nothing to do with “regulation” per se, but it should be pointed out that small groups have a higher administrative expense than large groups, therefore insurers usually try to keep the expenses under control by offering simple plans with limited benefit provisions.

“TURNED DOWN”

Although regulations usually prohibit an insurer from refusing coverage to a small group, there still are situations where an underwriter will recommend that the insurer not offer coverage. Note that although regulations may prohibit an insurer from refusing coverage to a small group, there is no restriction as to the premiums that may be charged for the coverage and in some cases, a high premium may be tantamount to declining to offer coverage. The reasons for not wanting or accepting a group can be found in the following four reasons:

Low Participation

If only a small percentage of eligible employees enroll in a plan, the enrolled group will have a much higher number of those with health problems—adverse selection.

Fictitious Groups

A “fictitious group” is a group that is formed for the purposes of obtaining insurance for its members. Underwriting statistics are based upon the assumption that any group considered for coverage is a random sampling of persons; therefore the group contains a mixture of healthy and unhealthy people. If a group is formed for other reasons—such as a common employer—this is the situation. Conversely, if the group is formed just to get insurance, the group will consist of many persons who have a much higher probability of incurring medical expenses. Adverse selection again.

Imagine the situation where insurers must accept a group, whether they were formed for insurance purposes only or for other reasons. Associations of persons with certain medical conditions, such as multiple sclerosis, muscular dystrophy, leukemia, etc., would form groups just so their medical care could be shared with the insurers. Soon there would be no such thing as group health insurance (or health insurance companies).

Administration Difficulties

If a policyholder does not perform the required administrative duties on a timely basis, such as enrolling employees late or does not keep adequate records of terminations, the insurer can have frequent and expensive difficulties. If the history of the group, or if because of other information, indicates that the policyholder cannot perform the required administration, the underwriter may recommend that coverage be denied.

Persistency

Insurance companies rely heavily upon proper persistency for profitability. Persistency is the length of time that an insured risk stays with the insurer. It must be remembered that an insurer incurs considerable first-year expenses when a group is first insured because of first-year commissions, other sales expenses and administrative (including underwriting) expenses. The premium for the risk is based upon persistency assumptions that the risk will remain with the insurer for a length of time whereby the insurer can recoup its high early year expenses. For most group health insurance plans, a minimum of three years is necessary.

If the group does not stay with an insurer for a reasonable period of time, then an underwriter would recommend that the group not be accepted because of poor persistency history. Frequently a newly-formed business may have difficulties in obtaining insurance if their financial basis is not strong or if their particular type of business does not stay in business very long, historically. This is one of the reasons that underwriters usually ask for detailed financial information.

PROJECTING CLAIMS EXPERIENCE

Premiums depend upon projected claims experiences, and for small and medium-sized groups, they are based upon standard averages adjusted for the general characteristics of the group. The characteristics that are taken into consideration consist mostly of the following:

Age

Obviously this is important as older people create more medical expense and disability claims than younger persons. Adjustments are made on the average age of the group.

Sex

As a generality, women have more health problems than men and have a higher percentage of disability—25% higher than men. Men’s claims are usually a factor only for accidental death and dismemberment insurance. Adjustments are made based on the proportion of men to women in the group.

Dependent Coverage

Most groups include dependents so the percentage of the group members who are dependents has considerable impact on claims experience because dependents are children and spouses, and age and sex affect claims. In recent years, the proportion of dependants has changed rather dramatically mostly because of the increase in single-parent households and the decrease in the average number of children in a family. Also, the increase in the number of working women has had a substantial impact, such as the fact that dependant participation may fall below acceptable levels if many employees have coverage from their spouse’s employer. This is particularly noticeable if the company has a high proportion of married women whose husband’s insurance covers the children.

This “duality” of family health insurance in recent years has had an effect on participation rules and many plans now do not take into consideration those employees who have health coverage under their spouse’s health insurance in determining the required participation level.

Type of Business

Health insurance, in most cases, does not provide coverage for illnesses and accidents resulting directly from the employment of the person as these expenses are usually covered under the employer’s Workers’ Compensation insurance. However, illnesses that result indirectly from work activities or the physical environment of the workplace are usually covered under the group health insurance plan. Back problems from sitting in place for long periods of time, or colds and other respiratory problems caused by temperature of the workplace, etc., are all factors that must be taken into considered in underwriting.

Another situation that must taken into consideration, is the fact that some businesses have higher paid employees than other businesses, and those in the lower-paying businesses will hire the less-healthy individuals as a general rule, so these employees do not meet the general health standards of other companies, and adjustments must be made for these types of groups. For instance, restaurants do not pay as well as a technology company and restaurant employees (as a general rule) would not be as “healthy” overall.

Income

Those with higher-than-average income generally get more frequent and better medical care, which means for underwriting purposes that a group with a large number of high-income employees will have higher medical claims. Conversely, though, as indicated previously, lower-paying jobs may involve working conditions that indirectly cause health problems, so groups with a large number of low-income workers may also have high claims.

Geographical Area

As a general rule, the geographical location of a business has little affect on the number of claims made, it does affect the cost of claims as charges for medical care vary widely by geographical areas. For instance, medical expenses in New York are much higher than in, as an example, Des Moines.