Consumer Guide:

What is employer group health insurance coverage?

It's 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. The majority of Americans have group health insurance coverage through their employer or the employer of a family member.

Many people don't realize that health insurance is issued differently for different types of employers,and that, because insurance is regulated at the state level of government, the laws regarding health insurance offered by the different types of employers can vary significantly from state to state. 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  coverage through large employers. Generally, those are business with more than 50 employees. The laws about how coverage can be issued to large employers are different than those for small employers, and the way that premium rates are determined is also different. The requirements for sole proprietors purchasing coverage also vary on a state-by-state basis.

What are the coverage requirements for small employer plans?

Federal law mandates that no matter what pre-existing health conditions small employer  members may have, no small employer or an individual employee can be turned down by an insurance company for 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  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 health insurance coverage within 63 days of the application for new coverage.

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 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 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, 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.

Annual premium changes for small employer 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 increases in the cost of providing 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 at a specified percentage, plus trend.

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 employer 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.

Federal law mandates all group insurance 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 insurance companies to give employees credit against any exclusionary period for pre-existing conditions if they have had prior health insurance coverage within 63 days of obtaining the coverage from the large employer.

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 employment situation, employees are not generally asked to fill out a medical questionnaire prior to obtaining coverage. 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 means that instead of paying health insurance premiums to a company, the employer sets a pool of funds in reserve and assumes its own risk for health benefit claims. Companies that self-insure generally buy what is known as a stop-loss insurance policy to protect themselves against losses above a certain threshold and 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. Is employer group health insurance available to sole proprietors?

Some states define a small employer as those that have 1-50 employees, but most 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  to document that they actually are legitimate businesses and have the appropriate number of eligible employees to prevent fraud.

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

Millions of people who lose their  health insurance coverage due to a job change, divorce, job loss or other reason are able to keep their coverage, at least temporarily. Most people who are able to continue their 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..

Also, many people leaving group insurance for the individual market have group-to-individual health insurance portability benefits that are mandated by federal law.