Assembly Bill 1672 ("Small Employer Health Insurance Reform").

STATE OF CALIFORNIA

DEPARTMENT OF INSURANCE

SAN FRANCISCO

Bulletin No. 93-3

April 15, 1993

TO:

ALL INSURERS

PROVIDING

"HEALTH"

COVERAGE TO

SMALL

EMPLOYERS; OTHER INTERESTED PARTIES

SUl::IJt:C I:

Assembly l::lill No. 16/'l. ("Small Employer Health Insurance Reform")

This Department has received numerous inquiries concerning Assembly Bill No. 1672 (Chapter

1128 of the Statutes of 1992) which makes fundamental changes in our laws pertaining to

"health" (medical, hospital and surgical) insurance for small employers, effective July 1, 1993.

(Note that parallel Health and Safety Code provisions in the Bill apply to health care service

plans.)

This Bulletin addresses many of the questions we have received about AB1672.

Citations are to the California Insurance Code.

I. HIGHLIGHTS OF THE NEW LEGISLATION. AB 1672 adds §§10198.6 through 10198.9

(applicable to all employment-related health insurance) and §§ 10700 through 10749 (applicable

to "small employer" health insurance) to the California Insurance Codt:. Note that the legislation

is significantly different from the NAIC model small group health insurance law in many

respects. Any entity or person providing, administering or marketing health insurance to or

through California employers must become fam11Iar with AH 16'/'.2. (Note that "aclmm1strators"

are included within the definition of "carrier" in the legislation.)

SOME OF THE KEY PROVISIONS OF AB 1672 ARE:

•

Guaranteed issue of all health insurance products sold to employers of 5 - 50 employees.

§§10705(h) and 10707.

•

Guarantee.cl renewal of all hP.alth insurance prociuct.s solci to employer., of] - SO employees.

§10713.

•

"Rate bands" limiting the extent to which a small employer's rates can be varied at issue

or increased on renewal to account for differences in health status and similar factors.

§10714.

•

Standardized demographic rating factors. §10700(w).

5 - 50 employees.

§§10705(h) and 10707.

•

Guarantee.cl renewal of all hP.alth insurance prociuct.s solci to employer., of] - SO employees.

§10713.

•

"Rate bands" limiting the extent to which a small employer's rates can be varied at issue

or increased on renewal to account for differences in health status and similar factors.

§10714.

•

Standardized demographic rating factors. §10700(w).

•

Restrictions, not limited to the small group market, on the use of pre-existing conditions

exclusions, waiting periods and "late enrollee" limitations. §§10198.7, 10708 and 10709.

•

Establishment of a voluntary small employer coverage reinsurance mechanism. §§10719

- 10729.

•

Establishment of a publicly-sponsored small employer coverage purchasing pool. § § 10730

- 10749.

The drafters of this legislation fully anticipated that it would cause some disruption in existing

markets and could result in the downgrading of some existing coverage. Unfortunately, these

side-effects are necessarily concomitant to the effort to correct existing abuses in the small

employer market place.

II. FILINGS REQUIRED BY THE LAW. All filings required or provided for by AB1672

should be addressed to the Policy Approval Bureau, Legal Division, California Department of

Insurance, 45 Fremont Street, San Francisco, CA 94105. Cover letters should state prominently

that the filing is made for compliance with AB 1672. The filings provided for in the new law

are summarized below - the cited Code Sections must be consulted for details.

A. MANDATORY FILINGS (Department approval required}:

1. All policy and/or certificate forms to be delivered in the California small employer health

insurance market regardless of the situs of the master policy. §10705(a). Forms previously

approved in California need not be refiled for AB 1672 compliance.

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new law

are summarized below - the cited Code Sections must be consulted for details.

A. MANDATORY FILINGS (Department approval required}:

1. All policy and/or certificate forms to be delivered in the California small employer health

insurance market regardless of the situs of the master policy. §10705(a). Forms previously

approved in California need not be refiled for AB 1672 compliance.

2.

A list of all benefit plan designs; standard employee risk rates (the chart of standard

demographic rates) for each risk category for each benefit plan design; participation and

employer contribution requirements, and the highest and lowest risk adjustment factors that a

carrier plans to use for each benefit plan design. §10717(a).

3. All changes in benefit plan designs, risk categories, risk adjustment factors, or standard

employee risk rates. §10717(b). A carrier changing only the standard employee risk rates but

not changing previously approved risk categories or risk adjustment factors need only make an

informational filing of such rates. §10717(c).

(Department approval not required}:

4. Annual certifications that a carrier is exempt from marketing coverage outside an association

pursuant to §10705(b)(2) because it has sold health products only to members of that one

association since January, 1972.

§10705(b)(3).

2

S. Annual statements listing all associations to which or through which a carrier sells health

benefit plans and providing other required information.

§1070S(b)(4).

B. OPTIONAL FILINGS (Department approval required);

1.

Certifications that a carrier has met its cap on enrollment of new small employers.

§10705(1).

2. Requests that the Commissioner make a finding that a carrier need not accept additional

small employer applications because of lack of capacity within its network of providers.

§l0711(c).

3. Requests that the Commissioner make a finding that acceptance of additional applications

wuulu place the carrier in a financially impaired condition.

§10712.

Ill

t of new small employers.

§10705(1).

2. Requests that the Commissioner make a finding that a carrier need not accept additional

small employer applications because of lack of capacity within its network of providers.

§l0711(c).

3. Requests that the Commissioner make a finding that acceptance of additional applications

wuulu place the carrier in a financially impaired condition.

§10712.

Ill. COMMENTS ON QUESTIONS FREQUENTLY ASKED ABOUT A81672. The

comments below reflect our understanding of the intended operation of AB1672 and are derived

from our participation in the legislation's development. They are provided to assist interested

persons in their analysis of the law. "Clean-up" or "trailer" legislation, some of which has

already been introduced, might affect some of the responses below if it is enacted. We have not

yet promulgated emergency regulations, but when we do so, we will give public notice of their

provisions at least 30 days prior to their effective date.

A. APPLICABILITY

1. What employees may be excluded for the purposes ofdetermining whether an employer is a

"small employer" for the purpose ofAB 1672?

Refer to the definitions of "eligible employee" in §10700(g) and "small employer" in §10700(x).

2.

Do the small employer provisions of AB 1672 apply to individual (including

selected group or "franchise "J policies that are written, issued, or administered under

the conditions set forth in § 10702?

We believe that the legislation was intended to apply to such products when they are issued

under the conditions set forth in § 10702. The existing scheme of regulation of such policies

could in no way be considered a substitute for the reforms of AB 1672, so there are no obvious

policy reasons for excluding those products from the new law.

3. Are "supplemental coverages" such as "cancer" subject to AB 1672?

3

legislation was intended to apply to such products when they are issued

under the conditions set forth in § 10702. The existing scheme of regulation of such policies

could in no way be considered a substitute for the reforms of AB 1672, so there are no obvious

policy reasons for excluding those products from the new law.

3. Are "supplemental coverages" such as "cancer" subject to AB 1672?

3

Yes. Such coverages are not exempted in §10700(k}. However, they {and all other products)

may be exempt from AB1672 under §10702.

4. Does AB1672 apply to coverages of individuals or employers who are not "small

employers". as used in the law, but that RrP. mP.mbers of an association "which

includes small employers"?

No. We believe that AB1672 was not intended to apply to such persons or employers.

5. How does AB 1672 apply when an insured large employer contracts to less than

50 employees or an insured small employer grows to three or more employees?

AB 1672 can be construed to require that the carrier non-renew the employer's plan if it does

not want the plan to become subject to the law's requirements. Note that §10700(x) suggests

that this need not occur sooner than the anniversary of the health· benefit plan following the

employer's attainment of "small employer" status.

6. What happens if a 3 - 50 employer adds or loses employees and ceases to be a

"small employer" as defined in AB 1672?

Nothing in AB 1672 would require a carrier to terminate a health benefit plan when the

employer ceased to be a "small employer" as defined in §10700(x). Note that the cited

Subsection provides that AB 1672 shall continue to apply to such an employer until the next

health benefit plan anniversary.

B.

RENEWAL

1. If o corder declines to participate in the small employer market under AB 1672;

may it continue to renew small employer coverages issued prior to the effective date

of the new law?

No

to be a "small employer" as defined in §10700(x). Note that the cited

Subsection provides that AB 1672 shall continue to apply to such an employer until the next

health benefit plan anniversary.

B.

RENEWAL

1. If o corder declines to participate in the small employer market under AB 1672;

may it continue to renew small employer coverages issued prior to the effective date

of the new law?

No. Such plans generally become subject to AB 1672 - including the obligations to guarantee

issue and guarantee renew - on July 1, 1993 or on the next renewal date, depending upon the

specific requirement. Carriers withdrawing from the small employer market on or after July 1,

1993, must comply with §10713(c}.

2. If a carrier declines to market a product to new customers, may it renew it to

existing small employer customers?

No. The carrier must non-renew existing small employer coverage under that benefit plan design

and offer new benefit plan designs complying with AB 1672 to those employers. This is true

whether the existing customers are associations, small employers who are members of

4

associations or small employers purchasing coverage on their own. Numerous provisions of AB

1672 (§§10716(e), 10714(b)(3) and 10713(d), among others) clearly contemplate that any benefit

plan designs continued, even ifjust renewed for existing business, after July 1, 1993, are subject

to the guaranteed issue requirements.

§§10705(b) and (h).

3. What is "renewal" for the purposes of AB 1672?

AB 1672 does not define 11renewal" - policy provisions vary widely on this matter and what

"renewal" is may depend on the specific product. From a practical standpoint, the typical group

health insurance product "renews" at each premium due date, since the carrier has the right to

end coverage and/or change rates as of that date, even if it contains references to

"anniversaries", etc

AB 1672?

AB 1672 does not define 11renewal" - policy provisions vary widely on this matter and what

"renewal" is may depend on the specific product. From a practical standpoint, the typical group

health insurance product "renews" at each premium due date, since the carrier has the right to

end coverage and/or change rates as of that date, even if it contains references to

"anniversaries", etc. Such a product would be subject to all AB 1672 requirements which attach

upon issue or renewal, at the first premium due date on or after July 1, 1993.

Were a product to provide a small employer with a right to continue coverage at a guaranteed

stipulated rate for a stipulated period, we would consider "renewal" to occur at the end of the

stipulated period. We would not so consider a mere guarantee that coverage would continue for

a stipulated period, subject to the carrier's right to raise rates, since the right to raise rates is

an effective right to terminate coverage.

4 •

If an employer ends coverage by simply ceasing to pay premiums, has it

"disenrolled" for the purposes of the penalty imposed by § 1071 t(d)?

Yes.

A voluntary act by an employer indicating that it no longer wants a carrier's coverage

should constitute disenrollment under the cited Code Section. However, termination of coverage

resulting from circumstances beyond the practical control of the employer (having the wrong

number of employees or failing to meet participation [but not contribution] requirements, etc.)

should not be deemed to be disenrollment under §10711(d).

C.

AGENTS AND BROKERS

1.

Will AB 1672 affect existing exclusive marketing agreements and other

arrangements by which carriers market specific products through selected producers

or special marketing plans?

Yes.

We are reluctant to interpret AB 1672 as upsetting long-established marketing

arrangements among carriers and "producers" (brokers and agents)

to be disenrollment under §10711(d).

C.

AGENTS AND BROKERS

1.

Will AB 1672 affect existing exclusive marketing agreements and other

arrangements by which carriers market specific products through selected producers

or special marketing plans?

Yes.

We are reluctant to interpret AB 1672 as upsetting long-established marketing

arrangements among carriers and "producers" (brokers and agents). Nevertheless, arrangements

which restrict the availability of plans to less than all of a carrier's producers in a geographical

area appear to be inconsistent with the law's requirement that carriers " . . . shall fairly and

affirmatively ... market ... " to all small employers, all benefit plan designs which they sell

in the $mall employer marketplace. §10705(b).

Note that the cited Code Section includes no

5

caveat authorizing a carrier to require a purchaser to use a particular producer or marketing

mechanism.

Subsection (c) and Subdivisions (d)(l) through (d)(4) of §10705 further require that affiliated

companies (as defined) be treated as single carriers. These carriers:

(A) must make all their small employer products available to all small employees;

(B) must prepare a consolidated brochure - available to all producers representing the affiliated

companies - summarizing all their small employer products; and

(C) must provide sample policies or certificates and detailed premium quotes for specific small

employers through all producers representing the affiliated carriers.

From a practical standpoint, the foregoing requirements may mean that carriers and their

affiliates will eventually have to permit all of their producers to sell all of their small employer

plans.

At the very least, the brochure required by §10705(d)(l) would have to disclose the

producer(s) through which an employer could purchase a benefit plan design that was not

available through all the producers representing the affiliated carriers. Otherwise, the carriers

would tail to meet their obligations under §1070S(b) and (c)

ll of their producers to sell all of their small employer

plans.

At the very least, the brochure required by §10705(d)(l) would have to disclose the

producer(s) through which an employer could purchase a benefit plan design that was not

available through all the producers representing the affiliated carriers. Otherwise, the carriers

would tail to meet their obligations under §1070S(b) and (c).

2. How will AB 1672 affect producer compensation arrangements which depend on

the "profitability" of a small employer product?

Section 10705(i) effectively prohibits most, if not all, such compensation arrangements, be they

prospective or retrospective.

D.

RATES

1. Can a carrier establish a "composite rate" for an employer by "averaging" the risk­

adjusted employee risk rates fur existing employees, and then covering new

employees at that rate regardless of their individual risk categories?

No. Subsections (a)(l) and (b)(l) of §10714 do not permit this practice.

2. In defining geographical regions, may a carrier choose between keeping ZIP Code

areas whole and keeping counties whole?

Section 10700(w)(3)(A) does not give carriers such a choice - the 3 digit ZIP Code rule is the

primary. standard, subject to the caveat that, in any event, a county may not be split into more

than two regions.

6

3. In applying the standard employee risk rates, is geographical region based on the

location of the employee's residence or the employer's principal place of business?

We believe that a carrier may determine geographical region based upon the employer's

principal place of business because the specific references to "i:eoi:raphic regions", in

subdivisions (3)(A) and (3)(B) of §10700(w), speak in terms of "small employers". Although

§10700(w) speaks of risk categories in terms of the employee (certainly appropriate for "age"

ancl "family c.ateeory"), we believe that the reference to "geographic region" there is merely a

general reference to the risk categories.

4

usiness because the specific references to "i:eoi:raphic regions", in

subdivisions (3)(A) and (3)(B) of §10700(w), speak in terms of "small employers". Although

§10700(w) speaks of risk categories in terms of the employee (certainly appropriate for "age"

ancl "family c.ateeory"), we believe that the reference to "geographic region" there is merely a

general reference to the risk categories.

4. As coverage for Medicare eligible persons is primary or secondary to Medicare

depending on the size of the employer (over or under 20) - can different standard

employee risk rates be charged depending on whether Medicare is primary or will there

have to be different benefit plan designs tu ref/ec;t this fac;tur?

We would not object to carriers designating "Medicare-primary" and "Medicare-secondary"

rates for their over-6:i populations. AB1672 requires that all of a carrier's benefit plan designs

be made available to all "small employers". Thus, there may not be different "benefit plan

designs", as used in the Jaw, for over-20 and under-20 employers.

5. How does a carrier rate employees who enter an employer's plan after July 1, but

before the first renewal date under the law?

The carrier would have to rate the new employee consistent with the provisions of the existing

program, including any previously guaranteed rates.

E.

PREEXISTING CONDITIONS, WAITING PERIODS AND LATE ENROLLEES

1. What are the effective dates for the new rules relating to pre-existing conditions,

exclusion of individual employees, and late enrollees?

We believe that § 10707, forbidding the exclusion of individual employees, is effective July 1,

1993, because it refers to carrier actions rather than to health benefit plan provisions, which are

usually changed at next renewal.

However, the other rules (§§10708 and 10709) are less

specific, and we would encourage carriers to impose all the rules simultaneously in the interest

of simplicity. We understand that many carriers intend to do so.

2

individual employees, is effective July 1,

1993, because it refers to carrier actions rather than to health benefit plan provisions, which are

usually changed at next renewal.

However, the other rules (§§10708 and 10709) are less

specific, and we would encourage carriers to impose all the rules simultaneously in the interest

of simplicity. We understand that many carriers intend to do so.

2. What happens to previously-excluded employees or dependents on July 1, 1993?

Previously-excluded (for whatever reason) employees or dependents should be given a 30 day

open enrollment period as of July 1, 1993, in which to elect coverage or to waive it under the

procedure set forth in §10700(m). Such persons may not be treated as "late enrollees" because

7

they will come within the §10700(m)(4) exception in the definition of late enrollees. Even if

written waivers of coverage were taken before the effective date of AB 1672, they would be

invalid because they would not have been given in the context of guaranteed coverage and after

the warnings required by the cited Subdivision.

3. Does a small employer carrier have to credit "time served" in preceding plans

against pre-existing conditions limitations il.!J.Q waiting periods, or just against the

former?

AB 1672's provisions pertaining to all employment-related health insurance specify that credit

be given against both pre-existing conditions limitations and waiting periods where there has

been previous qualifying coverage.

AB 1672 's provisions pertaining to small employers are

silent about waiting periods. We believe that the former provisions state the general rule which

should be applied in all instances.

4. Do the "waiting period" restrictions of AB1672 apply to employer-imposed rules

postponing new employees' eligibility for fringe benefits until they have been at work

for some period of time?

No. AB1672 does not regulate employers' activities

ll employers are

silent about waiting periods. We believe that the former provisions state the general rule which

should be applied in all instances.

4. Do the "waiting period" restrictions of AB1672 apply to employer-imposed rules

postponing new employees' eligibility for fringe benefits until they have been at work

for some period of time?

No. AB1672 does not regulate employers' activities.

5 If a carrier wants to cover immediately a "late enrollee" who could be excluded

entirely for one year under the new law, can it impose a waiver of coverage for a

specified pre-existing condition for that year?

Yes.

It would appear to be consistent with the law to allow carriers to impose individual

"waiver" riders on late enrollees in lieu of totally excluding them from coverage, for the period

of time that the late enrollee could be excluded entirely. §§10198.?(a), 10198.?(d), 10707 and

10709.

F.

ASSOCIATIONS AND TRUSTS (See also, I. TIED PRODUCTS, below.)

1.

May a carrier (an insurer or an administrator) limit the availability of a small

employer nealrfl Insurance proctucr ro members of a specitiect assoctarton?

No.

"Association-specific" products are prohibited except for the §l0705(b)(2) exemption ­

carriers that have sold health products sotety through one association for 20 years. If any other

carrier sells a product to any small employer or to any association that includes a small

employer, then AB 1672's guaranteed issue requirements apply and the carrier must market that

product to the entire small employer market. § 10705(c).

8

are prohibited except for the §l0705(b)(2) exemption ­

carriers that have sold health products sotety through one association for 20 years. If any other

carrier sells a product to any small employer or to any association that includes a small

employer, then AB 1672's guaranteed issue requirements apply and the carrier must market that

product to the entire small employer market. § 10705(c).

8

2.

How does AB 1672 affect insured "raft-Hartley" plans?

Products issued to such plans must comply with AB 1672's provisions pertaining to pre-existing

conditions limitations and late enrollees which apply to all employment-related health insurance.

§§1019lt6 through 10198.8. However, such products do not have to comply with the "small

employer" provisions commencing with §10700 because they are not benefit plan designs issued

"... to small employers or to trustees of associations that include small employers." § 10700( c).

3. At what date should a carrier selling a trust or association product comply with the

rules concerning premiums - on the date coverage is sold to or renewed for a specific

sma/1 employer or only on the renewal date of the policy issued to the trust or

association?

Any timt: cuvt:ragt: is sukl ur rt:nt:wt:tl tu any small t:mpluyt:r, lht: ruks cun1.:t:111i11g ,ate bands

and limitations on renewal premiums apply. Note that the rate bands for a given product must

be observed both within the trust or association and as to all other small employers who are

entitled to purchase the product under the guaranteed issue sections of the law. §10714.

G. STOP Loss

Does a carrier have to comply with AB 1672 if it provides "stop-loss" coverage for

small employers or for associations which "self-insure" and which would otherwise

be clearly within the law if they were "insured"?

Yes

thin the trust or association and as to all other small employers who are

entitled to purchase the product under the guaranteed issue sections of the law. §10714.

G. STOP Loss

Does a carrier have to comply with AB 1672 if it provides "stop-loss" coverage for

small employers or for associations which "self-insure" and which would otherwise

be clearly within the law if they were "insured"?

Yes.

A stop loss product (including "minimum premium" plans) sold in conjunction with a

"self-insured" small-employer-based health plan is itself a "health benefit plan" under §10700(k)

and therefore all of the small employer provisions - guaranteed issue, guaranteed renewal, rate

bands, etc. - apply. We have long regarded such products to be "group health policies" - they

are not reinsurance because there is no "insurer" to reinsure, and they are not casualty policies ­

if they were, life carriers could not sell them under their certificates of authority.

Finally,

regardless of their form, as sold in a package with "administrative services", they are plainly

marketed as an alternative to traditional employer group health insurance.

Note that "associations" cannot "self-insure" their members or their members' employees under

current California law nor are such arrangements exempt from state law under BRISA.

We are aware of the conventional wisdom that stop loss arrangements are unique to specific

employers, but we believe that the stop loss and minimum premium arrangements currently

available in the under-50 market are nonetheless fairly standardized or would soon become so

even in the absence of AB 1672. Applying the Bill's strictures to such arrangements was seen

by its drafters as the only way to avoid the "gaming" which would otherwise undercut the

pooling of risks anticipated by AB 1672. §§10700(c), 10708(d), 10709(b) and 10198.7(e).

9

remium arrangements currently

available in the under-50 market are nonetheless fairly standardized or would soon become so

even in the absence of AB 1672. Applying the Bill's strictures to such arrangements was seen

by its drafters as the only way to avoid the "gaming" which would otherwise undercut the

pooling of risks anticipated by AB 1672. §§10700(c), 10708(d), 10709(b) and 10198.7(e).

9

H. PARTICIPATION

1. What are "participation requirements" as used in the law?

There is no apparent basis for interpreting the phrase "p~rtidplltion requirements" to mean

anything other than the generally-accepted meaning of the phrase in the industry - standards set

by a carrier requiring that a stipulated minimum percentage of an employer's employees must

be enrolled as a condition of sale. Note that §10706 requires that participation requirements be

uniform for all small employers regardless of plan and that minimum participation requirements

may vary only by size. So also, the cited Code Section does not contemplate that carriers can

impose requirements that individual employees or small employers qualify for or purchase "non­

health" products before they are eligible for guaranteed issue.

2. What employees may be excluded for the purposes of determining whether the

carrier's participation requirements have been met under AB 1672?

Section 10705(h) suggests that a carrier must exclude persons who have waived coverage (under

§10700(m)(l)(B)) because they have other coverage through another employer's plan before

determining whether an employer has met the carrier's participation requirements. Note that

"eligible employees", as defined in §10700(g), includes out-of-state employees. cf. §10700(x)

Of course, a carrier may also exclude additional classes of persons before determining

participation. Note that the rules for determining whether an employer is a "small employer"

under § 10700(x) are different.

3

rmining whether an employer has met the carrier's participation requirements. Note that

"eligible employees", as defined in §10700(g), includes out-of-state employees. cf. §10700(x)

Of course, a carrier may also exclude additional classes of persons before determining

participation. Note that the rules for determining whether an employer is a "small employer"

under § 10700(x) are different.

3. Can a carrier require compliance with participation requirements as a condition of

renewal?

We believe that carriers should observe the same rule for periodically determining satisfaction

of participation requirements that applies to determining that an employer is a "small employer"

- on the anniversary of the health benefit plan covering the employer. §10700(x). Note that if

an employer's failure to comply with participation n:quin:ments amounted to misrepresentation

or fraud, a carrier could non-renew pursuant to §10713(b).

4. If a small employer falls a carrier's parficipafion or contributiun requitements, can

the carrier sell a product which does not comply with AB 1672 to that employer?

No. All "health" products sold to employers of 3 to :50 employees are subject to AB 1672.

5. May a carrier insure a small employer who chooses to cover less than all of its

eligible employees?

10

Yes, but only if the distinction between who is and who is not offered coverage is ". . .

determined by conditions related to employment ...". §10270.S(a)(l). Thus, an employer

could choose to cover only its salaried employees, even though it might also have permanent,

full-time hourly employees. However, an employer could not choose to cover just "favorite"

employees.

An employer covering less than all of its eligible employees could not demand

coverage from a carrier under §10705(h). Also, §10705(g) prohibits producers from inducing

or encouraging small employers to separate out otherwise-eligible employees.

6

s, even though it might also have permanent,

full-time hourly employees. However, an employer could not choose to cover just "favorite"

employees.

An employer covering less than all of its eligible employees could not demand

coverage from a carrier under §10705(h). Also, §10705(g) prohibits producers from inducing

or encouraging small employers to separate out otherwise-eligible employees.

6. Does a carrier which is marketing coverage in the open marketplace and also

through the Voluntary Alliance Uniting Employers Purchasing Program ("Health

Insurance Plan of California") have to use the same geographical regions and

participation and employer contribution standards (i.e., those of the Program} in both

segments of its business?

We believe not. Article 4 (starting with §10730) grants very broad authority to the Major Risk

Major Medical Insurance Board (which will initially administer the Program) to define the

features of the products which it will make available to small employers. The only linkage with

the "open" small employer market specifically recognized in the Article is in the context of

"rates", which are required to be "consistent" with the rates participating carriers use in the open

market under §10746. We do not see any intent in the legislation to require that pool carriers

use the same standards in both markets nor do we see any strong policy reasons for suggesting

that they should.

I. TIED PRODUCTS

1. May a carrier add "frills," such as glossy newsletters, free infant car seats, health

classes, etc., to employers' plans within an association but not to the plans available

to employers purchBsing outside the BssociBtion?

No. These frills are part of what an association small employer receives for his premium and

are thus part of tht: bt:ndit plan design.

2. Would a carrier that is willing to guarantee-issue some health-only products also

be permitted to otter a "tied product" which contains health and fife!

No

thin an association but not to the plans available

to employers purchBsing outside the BssociBtion?

No. These frills are part of what an association small employer receives for his premium and

are thus part of tht: bt:ndit plan design.

2. Would a carrier that is willing to guarantee-issue some health-only products also

be permitted to otter a "tied product" which contains health and fife!

No. All benefit plan designs must be guaranteed issue to all small employers.

Even if the

"tied product" were guaranteed issue, the life insurance premium would be subject to the rate

bands because it would have to be paid to obtain the health coverage.

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J. PPOs

1. Can a PPO-based plan be guaranteed issue only within its network area or must

it be guaranteed issue statewide even though its out-of-network coverage is

inarlequate?

It would seem illogical not to permit such a plan to restrict guaranteed issue to its network area.

However, this Department is very concerned that PPOs do not draw their boundaries to exclude

undesirable areas. We would regard obviously-gerrymandered network areas to be violations

of a carrier's obligation to "fairly and affirmatively market" its products under §10705(b).

2. Are multiple option plans - "point ofservice" or HMO/indemnity packages - where

health coverages are provided by different carriers but which are offered to employees

together, permitted under AB 1672?

Yes. We view a plan's 11linkage" with another plan as a component of the plan. We think that

AB 1672 does not require that plans with such linkages be separately marketed, etc., without

the linkages. However, since they are still separate plans, it would be inappropriate to limit

participation in one of the linked plans to a certain percentage or number of covered persons and

require that the remainder participate in the other linked plan.

K

as a component of the plan. We think that

AB 1672 does not require that plans with such linkages be separately marketed, etc., without

the linkages. However, since they are still separate plans, it would be inappropriate to limit

participation in one of the linked plans to a certain percentage or number of covered persons and

require that the remainder participate in the other linked plan.

K. DISCLOSURE AND SOLICITATION

For disclosure purposes, can standard employee risk rates be expressed, and can

differences among benefit plan designs be described, os variations from a basic pion

design with accompanying rate supplements or factors for the effect of each

variation?

Yes. Standard employee risk rates for multiple benefit plan designs which are comprised of a

common benefit package with various "add-on" benefits may be displayed as a matrix showing

the rates for the common benefit package and supplemental rates for the risk categories and the

"add-on" benefits.

IV.

AB1672's

APPLICATION

TO

ALL

EMPLOYMENT-RELATED

HEALTH

INSURANCE. AB 1672 makes significant changes, not limited to the small employer market,

in the laws governing pre-existing conditions exclusions, waiting periods and "late enrollee"

limitations in all employment-related individual or group insurance programs covering three ru:

more persons. It establishes maximum time limits on pre-existing conditions exclusions and

waiting periods for coverage. It also requires that insurers credit, toward the satisfaction of such

exclusions and waiting periods, newly-insured persons with the time that they have been covered

under. qualifying preceding health benefit plans in specified circumstances. (Note that these

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three ru:

more persons. It establishes maximum time limits on pre-existing conditions exclusions and

waiting periods for coverage. It also requires that insurers credit, toward the satisfaction of such

exclusions and waiting periods, newly-insured persons with the time that they have been covered

under. qualifying preceding health benefit plans in specified circumstances. (Note that these

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provisions apply regardless of whether the employer contributes to the premium.)

§§10198.6

through 10198.8.

V. INQUIRIES:

•

About this Bulletin or AB 1672 as it applies to Department of Insurance licensees

should be directed to:

Policy Approval Bureau, Legal Division

California Department of Insurance

45 Fremont Street

San Francisco, CA 94105

Telephone (415) 904-3-&rr,!f71 :1..

•

About ABT672 as it applies to "health care service plans" should be directed to:

Division of Health Care Service Plans

California Department of Corporations

111 5 11th Street

Sacramento, CA 95814

Telephone (916) 324-9013

•

About the publicly-sponsored small employer purchasing pool ("Health Insurance

Plan of California") should be directed to:

Major Risk Medical Insurance Board

818 K Street, Second Floor

Sacramento, CA 95814

(916) 324-4695

JOHN GA~AMENDI

Insurance Commissioner

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