Consumer Guide To Group Health Insurance

What is employer group health insurance coverage?

Group health insurance coverage is a policy that is purchased by an employer and is offered to eligible employees of the company (and often to the employees' family members) as a benefit of working for that company. A group health insurance plan is a key component of many employee benefits packages that employers provide for employees. The majority of Americans have group health insurance coverage through their employer or the employer of a family member. One of the advantages for employees in a group health plan is the contribution most employers make toward the cost of the health coverage premium—in many cases, employers pay one-half or more of the monthly premium for an employee.

Are all employer group health insurance policies the same?

Insurance is regulated in large measure by each state. Therefore, the laws regarding health insurance offered by the different types of employers can vary significantly from state to state. Also, different types of employers may offer different benefit plans. Millions of Americans work for small employers, which for health insurance purposes are generally those with 50 employees or less. Millions of other Americans get their health insurance coverage through large employers. Generally, those are businesses with more than 50 employees. The laws about how coverage can be issued to large groups are different than those for small groups, and the way that premium rates are determined is also different. The requirements for sole proprietors purchasing health insurance coverage also vary on a state-by-state basis.

What are the coverage requirements for small employer plans?

At this time, employers are not required to offer health insurance to employees. Many do so because they believe that health insurance coverage is a valued employee benefit that helps employers attract top employees and retain them. Each insurance company applies their own set of underwriting rules based on the number of employees and other factors. State and federal laws apply to varying degrees—again, based on factors including the number of employees, the type of business and whether an insurance company is providing the coverage. There are myriad requirements that apply to group health plans ranging from laws that address benefit communications (ERISA), claims appeals (ERISA) and portability of coverage (HIPAA) among others.

The federal HIPAA law mandates that no matter what pre-existing health conditions small employer group members may have, no small employer or an individual employee can be turned down by an insurance company for group coverage. This requirement is known in the insurance industry as "guaranteed issue." In addition, each insurance company must renew its small employer health plan contracts every year, at the employer's discretion, unless there is non-payment of premium, the employer has committed fraud or intentional misrepresentation, or the employer has not complied with the terms of the health insurance contract.

In most states, small employer health insurance companies are allowed to look back at individual group applicants' medical histories for pre-existing conditions and may decide not to cover certain conditions for a specified period of time. This is known as an exclusionary, or a pre-existing condition, waiting period. Federal law states that small group health insurance companies may impose no more than a six-month look-back/12-month exclusionary period for pre-existing conditions, but individual states can reduce these time periods. Small group insurance companies are also required to give employees credit for prior coverage against any pre-existing condition waiting period that may be imposed, as long as the employee had other creditable health insurance coverage within 63 days of the application for new coverage.

For more information about your state's coverage requirements for small group employer health plans, please see NAHU's Health Care Coverage Options Database.

Your state's Department of Insurance or other state agency that regulates insurance is also a good resource for information.

How are premium rates determined for small group employers?

In 38 states, the law allows small group health insurance companies to determine their initial premium rates for each company using a process known as medical underwriting. The other states make small group health insurance companies use processes known as modified community rating or community rating to determine their initial rates.

When small group plans are medically underwritten, employees are asked to provide health information about themselves and their covered family members when they apply for coverage. When determining rates, insurance companies use the medical information on these applications. Sometimes they will request additional information from an applicant's physician or ask the applicants for clarification. If a company is unable to obtain information necessary to accurately determine the risk of a particular applicant, it will underwrite more conservatively, meaning that the assumption relative to the missing information will be negative rather than positive.

Example: A person has a history of high blood pressure but it is controlled with medication and he is not overweight. If the company is unable to determine if that individual smokes or if he has normal cholesterol, it will assume that the missing information is negative and rate accordingly.

In most states the amount a company can vary a group's premium rates based on medical underwriting factors is limited to a certain percentage of the average small group insurance rate. This is known as a rating band requirement, and the specifics vary by state.

Example: In a state with a rating band requirement of plus or minus 25%, a small group rate could vary no more than 25% above or below the average small group rate for that geographic area. So if the average premium was $100, a small employer's rate could be anywhere from $75-125, based on the overall health status of all of the group members.

The alternative to medical underwriting is known as community rating. Community rating requires insurers to charge all individuals who live in the same geographical area the same premium regardless of their age or health status.

Example: One employer's cost to insure a healthy 27-year-old non-smoking male with no health conditions would be the same cost another employer in the area would pay to insure a 55-year-old male smoker who is suffering from prostate cancer and a heart condition.

A variation on community rating used by some states is called modified community rating.

With modified community rating, health plans may vary the community rate based on limited factors such as age, gender or smoker status. State-modified community rating laws vary greatly. Some allow for many adjustment factors, but many allow for just a few.

Example: In a state that allows modified community rating with a variation for age, an employer would pay more to insure the 55-year-old male smoker with cancer and a heart condition. However, the insurer would have to use the same rate when calculating premiums for the healthy 27-year-old male as it would for a male employee of a different company who is the same age but suffers from juvenile diabetes.

It's important to understand that the employer may not know the underlying rate assumptions discussed in the above examples. Instead, the insurance company assesses each person enrolling in the plan, rates them based on their health history and then "blends" the rate. The employer is provided a rate for an employee and a rate for an employee and dependent or family (or some variation of these).

Annual premium changes for small employer group plans are based in part on the plan participants' claims history and on the claims history of the company's overall small employer group pool. Small employer group plan renewal rates also include a component to account for overall expected increases in the cost of providing health insurance coverage by the company, such as changes in laws that may impact operating costs. These costs are known in the industry as "trend." Many states cap renewal rate increases for small employer groups at a specified percentage, plus trend.

For information on how small group health insurance plans are rated in your state, please see NAHU's Health Care Coverage Options Database.

What are the coverage requirements for large employer groups?

Large group health insurance contracts, unlike small group health insurance contracts, do not have to be offered on a guaranteed-issue basis, so a health insurance company could reject an entire large employer group based on its claims history. However, no individual employee who is eligible for benefits can be excluded from large group coverage based on medical history. If a company issues a policy to a large employer, then all of its eligible employees must be issued coverage if they choose to enroll.

Federal law mandates all group insurance contracts, including large group contracts, be renewed every year at the employer's discretion, unless there is non-payment of premium, the employer has committed fraud or intentional misrepresentation, or the employer has not complied with the terms of the health insurance contract. The law also requires health insurance companies to give employees credit against any exclusionary period for pre-existing conditions if they have had prior creditable health insurance coverage within 63 days of obtaining the group coverage from the large employer.

NAHU's Health Care Coverage Options Database can provide you with specific information about large group insurance plan requirements in your state.

How are premium rates determined for large employer groups?

Large group health insurance is medically underwritten at the time of purchase, with rates based on employee participation and prior claims experience. In a large group employment situation, employees are not generally asked to fill out a medical questionnaire prior to obtaining coverage. The employees may be asked some limited medical questions depending on the employer size and whether the employer has a record of claims experience. The health insurance company bases annual premium changes for large employer groups primarily on the claims experience of the group in past years, as well as any overall increases in the cost of providing health insurance coverage. An example of such costs would be changes in laws that may impact operating expenses.

Who regulates employer group health insurance plans?

Many employer-based health insurance plans are fully insured by a health insurance company. This means the employer contracts with a health insurance company to provide its employees benefits, pays premiums for such coverage, and the insurance company assumes all claims risk. The states regulate fully insured group plans.

However, larger group health plans (usually several hundred employees or larger) may choose to either fully or partially self-insure their group benefit plans. This is also called self-funding. This means that instead of paying health insurance premiums to a company, the employer sets a pool of funds in reserve and assumes the risk for health benefit claims. Companies that self-insure generally buy what is known as a stop-loss insurance policy to protect the employer's assets against losses above a certain threshold. They also contract with either a third-party administrator or a health plan to administer benefits and handle claims.

Many employees of companies that self-fund coverage do not even realize that their plan is self-funded by their employer. Self-funded plans are regulated federally by the Department of Labor under the Employee Retirement Income Security Act of 1974 (ERISA), so they are sometimes known as ERISA plans. If employees are uncertain whether they are covered by a fully insured (and state-regulated) plan or a self-funded (and federally regulated) plan, they should ask their employer. Contact information for the state and federal regulators of group health insurance coverage can be obtained through NAHU's Health Care Coverage Options Database.

A self-funded plan does not have to meet all of the insurance laws and requirements imposed by a state. If a state mandates coverage for a medical service or treatment, e.g., in vitro fertilization, a self-funded plan providing coverage to employees in that state would not have to provide the in vitro fertilization coverage.

Is employer group health insurance available to sole proprietors?

Some states define a small employer group as those that have 1-50 employees, but most states require companies to have at least two employees to qualify for group coverage. Insurance companies and the individual states often have specific and strict requirements for very small employer groups to document that they actually are legitimate businesses and have the appropriate number of eligible employees to prevent fraud. Employers generally have to provide payroll tax documentation validating who is an employee.

The states that allow sole proprietors to purchase group coverage are often referred to as states that guarantee coverage for "business groups of one." In some of these states, business groups of one are treated in the same manner as larger employer groups. In others, they are treated as their own distinct pool and rated separately by the health insurance companies. In the states that do not allow for sole proprietors to purchase group coverage, these business owners often purchase individual health insurance coverage. For information about whether or not your state allows for group insurance to be sold to business groups of one, see NAHU's Health Care Coverage Options Database.

What rights do I have if I lose access to my employer group health insurance coverage?

Millions of people who lose their group health insurance coverage due to a job change, divorce, job loss or other reason are able to keep their group coverage, at least temporarily. Most people who are able to continue their group health insurance benefits are eligible to do so according to the federal Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). However, COBRA does not apply to all employers, and many states have mandated other continuation-of-coverage options for people who are not covered by COBRA. In some states, continuation coverage mandated by the state may be more generous than COBRA. The benefit summary booklet provided by the employer may provide details about continuation coverage or who to contact for additional information.

Also, many people leaving group insurance for the individual market have group-to-individual health insurance portability benefits that are mandated by federal law. For more information about continuation-of-coverage options, visit NAHU's Consumer Guide to Continuation of Coverage Options or the NAHU Health Care Coverage Options Database.

Since requirements for group health insurance policies can vary by state, how do I find out what the requirements are in my state?

Each state's requirements for group insurance is in NAHU's Health Care Coverage Options Database. The database also contains contact information for the state and federal regulators of group health insurance policies, so that you can contact them with questions or concerns.