September 30, 2008
BACKGROUNDER: SMALL EMPLOYERS AND
HEALTH INSURANCE IN CONNECTICUT
By: Janet L. Kaminski Leduc, Senior Legislative Attorney
This OLR Backgrounder provides information on Connecticut laws relating to group health insurance for small employers.
SMALL EMPLOYER DEFINITION
For purposes of applying certain health insurance statutes, Connecticut law defines a “small employer” as any person, firm, corporation, limited liability company, partnership, or association that:
1. is actively engaged in business or self-employed for at least three consecutive months and
2. on at least 50% of its working days during the preceding 12 months, employed no more than 50 “eligible employees,” the majority of whom were employed within Connecticut (CGS § 38a-564(4)).
An “eligible employee” is one who works at least 30 hours a week. A part-time, temporary, or substitute employee is not an eligible employee. A sole proprietor, a partner of a partnership, or an independent contractor is an eligible employee, provided the person is included as an employee under a small employer's health care plan (CGS § 38a-564(3)).
In determining the number of eligible employees:
1. companies that are affiliated or eligible to file a combined tax return are considered one employer;
2. employees covered through the employer by a health insurance plan issued to, or in accordance with, a trust established under collective bargaining are not counted; and
3. employees not actively at work but covered under the small employer's health insurance plan under workers' compensation or federal continuation of benefits requirements established by the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), or other applicable laws, are not counted.
“Small employer” does not include a:
1. municipality, association of personal care assistants, or community action agency purchasing health insurance through the Municipal Employee Health Insurance Program (MEHIP);
2. nonprofit organization purchasing health insurance through MEHIP, unless the secretary of the Office of Policy and Management and the state comptroller ask the insurance commissioner in writing to deem the nonprofit organization a small employer for the purposes of the health insurance statutes; or
3. private school in Connecticut obtaining health insurance through a health insurance plan or an insurance arrangement that an association of private schools sponsors.
GUARANTEED RENEWABLE COVERAGE
Health insurance plans issued to small employers are “guaranteed renewable” with respect to the eligible employees and their dependents. Thus, coverage for the eligible employees and their dependents is renewable at the small employer's option, with some exceptions (e.g., nonpayment of premium, fraud, material misrepresentation, noncompliance with the insurer's required participation rate (number of enrollees) (CGS 38a-567)(1)). (A small employer may offer coverage to employees that are not “eligible employees” under the law's definition, but the law does not require such coverage to be guaranteed renewable.)
Except in the case of a late enrollee who has failed to provide evidence of insurability satisfactory to the insurer, the health insurance plan may not exclude any eligible employee or dependent who would otherwise be covered under the plan on the basis of an actual or expected health condition. A health insurance plan may not exclude an eligible employee or dependent who, on the day before the initial effective date of the plan, was covered under the small employer's previous health insurance plan through workers' compensation, COBRA, or other applicable laws as long as the employee or dependent requests coverage under the new plan on a timely basis (CGS § 38a-567(2)).
A “late enrollee” is an eligible employee or dependent who requests enrollment in a small employer's health insurance plan after the initial enrollment period for which the person was eligible (CGS § 38a-564(9)). An eligible employee or dependent is not considered a late enrollee if:
1. the request for enrollment is made within 30 days after his or her coverage under another group health insurance plan terminated and (a) he or she had not initially requested coverage under the small employer's plan solely because of this other coverage and (b) that other coverage ceased due to (i) termination of employment, death of a spouse, or divorce or (ii) that plan's involuntary termination or cancellation by its carrier for reasons other than nonpayment of premium;
2. he or she works for an employer who offers multiple health insurance plans and elects a different health insurance plan during an open enrollment period;
3. a court has ordered coverage be provided for a spouse or minor child under a covered employee's plan and request for enrollment is made within 30 days after the court order is issued; or
4. the request for enrollment is made within 30 days after the employee's marriage or the birth or adoption of the employee's first child.
SMALL EMPLOYERS MAY GROUP TOGETHER FOR INSURANCE
Under a Connecticut law enacted in 1993, small employers “may group together solely for the purpose of securing group health insurance coverage” (CGS § 38a-560).
For additional information on purchasing cooperatives, see OLR Research Report 2006-R-0005.
SMALL EMPLOYER RATING LAW
Connecticut law requires insurers and HMOs to use an adjusted community rating process when developing premium rates for small employer groups (CGS § 38a-567(5), (6), & (8)). Community rating is the process of developing a uniform rate for all. An “adjusted” community rate is a rate the insurer or HMO develops by modifying the community rate by one or more classifications the law permits.
An insurer may adjust the community rate (i.e., base premium) to reflect one or more of the following “classifications:”
1. age, but age brackets of less than five years are prohibited;
3. geographic area, but an area smaller than a county is prohibited;
4. industry, but the rate factor associated with any industry classification is prohibited from (a) varying from the arithmetic average of the highest and lowest rate factors associated with all industry classifications by more than 15% and (b) increasing by more than 5% a year;
5. group size, but the highest rate factor associated with group size is prohibited from varying from the lowest rate factor associated with group size by a ratio of more than 1.25 to 1.0;
6. administrative cost savings resulting from the administration of an association group or a MEHIP plan, as long as the savings reflect a reduction to the small employer carrier's overall retention that is measurable and specifically realized on items such as marketing, billing, or claims paying functions that the plan administrator or association takes on directly (savings may not reflect a reduction realized on commissions);
7. savings resulting from reduced profits of an insurer that writes small business plans or arrangements for an association group or MEHIP plan, provided any loss in overall revenue due to a reduction in profit is not shifted to other small employers; and
8. family composition, but the insurer can use only one or more of the following billing classifications: employee; employee plus family; employee and spouse; employee and child; employee plus one dependent; and employee plus two or more dependents.
The law requires an insurer to collect data for all demographic rating classifications before quoting premiums to a small employer. It prohibits an insurer from asking about health status or claims experience of the small employer, its employees, or their dependents, before quoting a premium.
The law also requires any differences in the base premiums that an insurer charges for different health benefit plans to be reasonable and reflect objective differences in plan design. Differences cannot include variations based on the nature of the groups that the insurer assumes will select the particular health benefit plans.
For more information about community rating and small employer rating laws in other states, see OLR Research Report 2008-R-0377.
Suspension of Rating Law
The law authorizes the insurance commissioner to suspend all or any part of the small employer rating law for one or more rating periods if (1) an insurer asks for the suspension and (2) he finds that it either is reasonable in light of the insurer's financial condition or would enhance the efficiency and fairness of the marketplace for small employer health insurance (CGS § 38a-567(19)).
Exemption from Rating Law
The law exempts certain employers purchasing an association group or MEHIP plan from the small employer rating law (CGS § 38a-567(22)). Public Act 08-181 (§ 3) changes the rating law exemption criteria effective October 1, 2008.
The act lowers, from 10,000 to 3,000, the total number of people needed to be covered in order to qualify for the exemption. The exemption may be granted at the comptroller's or association group plan administrator's option under certain circumstances. The association group or MEHIP plan offered or issued must:
1. cover small employer groups as a single group and insure at least 3,000 employees;
2. charge or offer each small employer the same premium rates for each employee and dependent; and
3. be written on a “guaranteed issue” basis (i.e., a small employer group cannot be turned down).
The act also requires such an association to be a “bona fide group” as defined in the federal Employee Retirement and Security Act (ERISA). It cannot (1) be a “fictitious group” (a grouping for rating purposes where a rate differentiation is based solely upon group membership) or (2) issue a plan that unduly disrupts the insurance marketplace, as determined by the commissioner.
ERISA and “Bona Fide Group”
Despite the reference in PA 08-181, ERISA does not define a bona fide group. Rather, it defines “employee welfare benefit plan,” which includes “any plan…established or maintained by an employer…for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise…medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment….” ERISA defines “employer” as including “a group or association of employers acting for an employer… (29 USCA § 1002).”
The U.S. Department of Labor (DOL), the agency that interprets and enforces ERISA, has used these definitions to determine, and explain in opinion letters, whether particular organizations or associations are bona fide groups for ERISA purposes. These administrative interpretations carry the force of law (Marcella v. Capital Dist. Physicians Health Plan, Inc., 293 F. 3d 42, 49 (2d Cir. 2002) (finding that a group or association that contains non-employers cannot be an “employer” within the meaning of ERISA)).
The DOL has taken the view that a single “employee welfare benefit plan” may exist where a cognizable, bona fide group or association of employers acts in the interests of its employer members to establish a benefit program for the members' employees (Advisory Op. 94-07A and 2001-04A).
It has stated that whether a bona fide employer group or association exists must be determined based on the facts and circumstances involved. This determination includes:
1. how members are solicited;
2. who is entitled to, and actually does, participate in the association;
3. how and why the association was formed and what, if any, preexisting relationships its members had;
4. the powers, rights, and privileges of employer members; and
5. who actually controls and directs the benefit program.
The employers that participate in a benefit program must, either directly or indirectly, exercise control over the program in order to act as a bona fide employer group or association (Advisory Op. 2005-25A).
Thus, whether an association group is a bona fide group for purposes of being eligible for an exemption from Connecticut's small employer rating law must be determined on case by case basis taking into consideration the DOL's “facts and circumstances” criteria.
CONNECTICUT SMALL EMPLOYER HEALTH REINSURANCE POOL
A 1990 law created the nonprofit Connecticut Small Employer Health Reinsurance Pool (“the pool”), the nation's first such pool, which became the National Association of Insurance Commissioners (NAIC) model for reinsurance pools. The pool is mandatory, meaning all insurers issuing health insurance and insurance arrangements providing health plan benefits must be pool members (CGS § 38a-569).
A board selected by the pool, subject to the insurance commissioner's approval, administers the pool. The board members must represent domestic insurance companies (one-third) and small employer carriers (two-thirds). The insurance commissioner is an ex-officio member. The pool is funded by (1) premiums collected from insurers who purchase reinsurance coverage from the pool, (2) annual assessments on all pool members to cover losses, and (3) investment income. The law authorizes the pool to establish reinsurance rates and perform other appropriate functions.
Pool members may purchase reinsurance coverage for an entire small group or for certain employees or dependents in a group, generally those the insurer believes are high risk (i.e., likely to have high claim costs). The covered individuals and employers are unaware of the reinsurance, as the insurer may not disclose its existence.
An insurer wishing to reinsure an individual or a group must do so within 60 days of issuing the underlying coverage, under current board rules. For small groups of one or two employees, an insurer may purchase reinsurance at every third plan anniversary.
The reinsurance coverage includes a $5,000 deductible per insured individual. Thus, the underlying health care plan must cover $5,000 of benefits for a person before the reinsurance coverage takes effect. The reinsurance coverage pays all claims for covered expenses above $5,000.
See OLR Research Report 2006-R-0797 for a comparison of Connecticut's and New York's reinsurance pools.
The Robert Wood Johnson Foundation's State Coverage Initiative has compiled information on other states' reinsurance pools that may be viewed at: http://www.statecoverage.net/matrix/reinsurance.htm (accessed September 26, 2008).
MUNICIPAL EMPLOYERS HEALTH INSURANCE PROGRAM
MEHIP is a health insurance program established by statute in 1996 that the Office of the Comptroller sponsors for municipal employees. The legislature has expanded MEHIP eligibility over the years to:
1. certain nonprofit corporations;
2. community action agencies;
3. small employers (since 2003); and
4. certain individuals, including members of an association for personal care assistants and people eligible for a:
a. federal health coverage tax credit or
b. retirement benefit from the Connecticut municipal employees' retirement system (CGS § 5-259(i)).
Information about MEHIP is available on the comptroller's web page at http://www.mehip.org/snoDefault.aspx. According to the website, “MEHIP attempts to reduce premiums for enrolled small businesses by allowing the state to pass on savings gained through administrative efficiency. These savings are possible, in part, because the marketing and billing structure for the program already exists, and does not include expensive advertising in the commercial media.”
Under MEHIP, small employers may choose coverage from one of three carriers: Anthem Blue Cross Blue Shield, HealthNet, and Oxford Health Plans (a United Healthcare Company).
A “special health care plan” is a health insurance plan for previously uninsured small employers (CGS § 38a-564(11)). The law requires the Connecticut Small Employer Health Reinsurance Pool board of directors to develop these plans as a lower-cost health insurance coverage option for uninsured small employers and to submit them to the insurance commissioner for approval (CGS 38a-565(a)(1)).
A small employer can purchase a special health care plan if it did not maintain health insurance coverage for its employees at any time during the one-year period before applying for the plan. A small employer cannot purchase a special health care plan for more than three years (CGS § 38a-565(2)).
The law permits the Health Reinsurance Association (HRA) (see below) to issue special health care plans to small employers with 10 or fewer eligible employees, the majority of whom are low-income eligible employees (CGS § 38a-570). A “low-income eligible employee” is a small employer's full-time employee, with a normal work week of 30 or more hours, whose annualized wages from the small employer are less than 300% of the federal poverty level (CGS § 38a- 564(19)).
Public Act 08-33 removed the requirement that private insurers offer special health care plans to eliminate a conflict with federal law. The state laws (1) requiring insurers to offer the special health care plans to some small employers and (2) prohibiting small employers from purchasing the plans for more then three years conflicted with the federal Health Insurance Portability and Accountability Act (HIPAA).
HIPAA requires an insurer that offers plans to small employers to (1) offer all small employers all its products approved for sale in the small group market that it actively markets and (2) accept each small employer that applies for the coverage and pays the premium. HIPAA also requires insurers to renew small employer's plans at the policyholder's election, except in limited cases (e.g., nonpayment of premiums, fraud).
Rates and Loss Ratio
The law requires HRA's board of directors to establish premium rates based on recommendations of its actuarial committee. When developing its recommendations, the committee must consider the premiums other insurers are, or would be, charging for similar insurance, among other pertinent information (CGS § 38a-570(1)). In establishing the premium rates, the law permits HRA's board to consider any relevant factors impacting premium, claims, and expenses that other insurers may consider when setting premium rates, including characteristics of small employers and insureds. It also:
1. requires an anticipated loss ratio of at least 80%;
2. requires HRA to administer the special health care plans without profit or loss;
3. subjects the premium rates to the small employer rating law (see above); and
4. permits HRA to reinsure special health care plans with the Connecticut Small Employer Health Reinsurance Pool (CGS § 38a-570(1)).
Health Care Providers
Health care providers cannot provide services in Connecticut unless they provide services, upon request, to people covered by special health care plans for the reimbursement rate the law specifies (CGS § 38a-572). The law sets the reimbursement rate at 75% of what Medicare pays. For services or supplies that Medicare does not cover, the rate is 75% of what Medicare would pay if it did, as determined by the board and approved by the insurance commissioner (CGS § 38a-564(22)).
Health Reinsurance Association
The legislature originally created HRA to provide comprehensive health insurance to people who cannot obtain insurance from commercial insurers (CGS § 38a-556). By law, all Connecticut health insurers and HMOs are (1) HRA members and (2) assessed for its losses. HRA's board of directors is composed of nine individuals the participating member companies select. Pool Administrators, Inc., located in Wethersfield, Connecticut, administers HRA.
HRA is Connecticut's insurer of last resort for high-risk individuals (i.e., the high-risk pool). It also serves as the state's acceptable alternative mechanism for complying with the guaranteed issue option in the individual market required under federal law.
Insurer's Duty to sole proprietors
Effective May 7, 2008, PA 08-33 revised an insurer's duty to offer small employer coverage to eliminate a conflict with federal law. Federal law defines small employer as an employer with two to 50 employees. Connecticut's definition includes sole proprietors.
Under prior law, insurers had a duty to offer a small employer plan to any small employer (50 or fewer employees, including a sole proprietor) for which it denied other coverage. The act limits the insurers' duty by applying it only to a sole proprietor. Thus, under the act, an insurer must promptly offer a sole proprietor the opportunity to purchase a small employer plan if (1) the insurer denies coverage that the sole proprietor requested or (2) the insurer or its producer does not offer, for any reason, coverage that the sole proprietor requested. (For example, a sole proprietor may have applied for, and been denied, coverage under an individual health insurance policy. At that time, the insurer would have to offer a small employer plan to him or her.) By law, an insurer may require proof that the person has been self-employed for three consecutive months.