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

STATE OF CALIFORNIA

DEPARTMENT OF INSURANCE

SAN FRANCISCO

Bulletin No. 93-3A

November 15, 1993

TO:

ALL INSURERS PROVIDING '"HEALTH"' COVERAGE TO SMALL

EMPLOYERS; OTHER INTERESTED PARTIES

SUIJJECT:

Assembly Bill No. 1672 ("Small Employer Health Insurance Reform") as

amended.

This Bulletin supersedes Bulletin 93-3 of April 15, 1993, and reflects the 1993 amendments to

the "small employer" sections (Insurance Code §§10700 - 10718.6) of "AB 1672" (Chapter

1128. Stats 1992), as well as the Emergency Regulations effective Octnher 1(), JC)()'., (Title 10,

Code of Regulations, §2233, et seq., File No RH-317A). The aforesaid amendments were made

by ABs 1742 (Ch 113), 2059 (Ch 217) and 28 (Ch 1146) of 1993.

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

(currently applicable to all employment-related health insurance - see Item IV, below) and

§§10700 through 10749 (applicable to "'small employer"' health insurance) to the California

Insurance Code, effective July I, 1993. The latter sections fundamentally changed California

law pertaining to health insurance for small employers. Parallel Health and Safety Code sections

in the law apply to "health care service plans" - HMOs and the "Blues", Any entity or person

providing, administering or marketing health insurance in California must become familiar with

AB 1672.

SOME OF THE KEY PROVISIONS OF AB 1672 AS APPLIED TO SMALL EMPLOYERS AND

GUARANTEED ASSOCIATIONS ARE:

•

Guaranteed issue of all health insurance products sold to the following (Ins. C.

§§10700(w), 10705(h) and 10707):

Employers of~ - 50 employees (4 - 50 employees, as of July I, 1994);

"Guaranteed associations";

Members of guaranteed associations;

Employers (regardless of size) purchasing coverage for their employees through

guaranteed associations.

OYERS AND

GUARANTEED ASSOCIATIONS ARE:

•

Guaranteed issue of all health insurance products sold to the following (Ins. C.

§§10700(w), 10705(h) and 10707):

Employers of~ - 50 employees (4 - 50 employees, as of July I, 1994);

"Guaranteed associations";

Members of guaranteed associations;

Employers (regardless of size) purchasing coverage for their employees through

guaranteed associations.

•

Guaranteed renewal of all health insurance products sold to employers with 1 - 50

employees and to persons or entities with guaranteed issue rights, above. (Ins. C. §10713)

•

"Rate bands" limiting the extent to which rates charged to employers with J - 50

employees and to persons or entities with guaranteed issue rights (above) can be varied at

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

(Ins. C. § 10714)

•

Standardized demographic rating factors. (Ins. C. §10700(v))

•

Restrictions on the use of pre-existing conditions exclusions, waiting periods and "late

enrollee" limitations. §§10708 and 10709.

•

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

- 10729.

•

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

§§10730 - I0"/49.

II. FILINGS REQUIRED BY THE LAW. Please refer to this provision in Bulletin 93-3.

ill.

COMMENTS ON QUESTIONS SET FORTH IN BULLETIN 93-3 ABOUT

AB1672. Most of the questions below are from Bulletin 93-3, but the responses have been

revised in accordance with the 1993 amendments to AB 1672 and with the emergency

regulations. Citations are to the California Insurance Code, as amended, except that citations

to "RH-317A" are to emergency regulations in Title 10 of the California Code of Regulations.

These comments are provided only to assist interested persons in their analysis of the law.

A. APPLICABILITY

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nses have been

revised in accordance with the 1993 amendments to AB 1672 and with the emergency

regulations. Citations are to the California Insurance Code, as amended, except that citations

to "RH-317A" are to emergency regulations in Title 10 of the California Code of Regulations.

These comments are provided only to assist interested persons in their analysis of the law.

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(f) and "small employer" in §10700(w).

Note that an employer that purchases coverage through a guaranteed association is a "small

employer" regardless of its size.

2. Do the small employer provisions ofAB 1672 apply to individual (including selected group

or '1ranchise ") policies that are written, issued, or administered under the conditions set forth

in §10702?

Yes. §10700(b).

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3. Are •supplemenral coverages• such as "cancer• subject to AB 1672"!

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

may otherwise be exempt if issued under conditions other than those in § 10702. Note, however,

that such coverages may be - and after January 1, 1994, will be - subject to §§10198.6 ­

10198.8.

4. Does AB1672 apply to coverages ofindividuals or employers that are not "small employers•,

as used in the law, but that are members of an association "which includes small employers•?

AB1672 does not require that a plan issued under that law to an association that "includes small

employers" also cover individual members that arc not employees of small employer members

or cover employer-members that are not "small employers". However, AB1672 does apply to

coverages of such individuals or employers who are "members of a guaranteed association" as

defined in §10700(z)

oyers•?

AB1672 does not require that a plan issued under that law to an association that "includes small

employers" also cover individual members that arc not employees of small employer members

or cover employer-members that are not "small employers". However, AB1672 does apply to

coverages of such individuals or employers who are "members of a guaranteed association" as

defined in §10700(z).

("Guaranteed associations" are themselves defined in §10700(y).)

Members of associations that have too few covered persons to be "guaranteed associations" may

also have AB 1672 rights under § 10705. I.

5.

How does AB 1672 apply when an insured large employer contracts to less than 50

employees or an insured small employer }(rows to three or more employees?

RH-317A, §2233.l0(f), exempts existing plans covering such employers from AB 1672.

However, that exemption does not extend to replacement coverage.

6.

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

employer" as defined in AB 1672?

AB 1672 does not require a carrier to terminate a health benefit plan when the employer ceases

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

AB 1672 continues to apply to such an employer until the next health benefit plan anniversary.

Also, employer size is irrelevant for employers that purchase coverage through guaranteed

associations.

B. RENEWAL

I. If a carrier declines to participate in the small employer market under AB 1672, may it

conrin11p tn rPnf'\V smnl/ ,:mplnya mwrages issued prior to the ejfective date of the new law?

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

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

specific requirement. RH-317A, §§2233.20 and 2233.50. Carriers withdrawing from the small

employer market on or after July I, 1993, must comply with §10713(d).

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sued prior to the ejfective date of the new law?

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

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

specific requirement. RH-317A, §§2233.20 and 2233.50. Carriers withdrawing from the small

employer market on or after July I, 1993, must comply with §10713(d).

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2. If a carrier declines co market a product to new customers, may it renew zt 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 that include small employers, small employers

who are members of associations or small employers purchasing coverage on their own.

Numerous provisions of AB 1672 (§§10716(e), 10714(b)(3) and 10713(e), among others) clearly

contemplate that any benefit plan <lesiens r.ontinueD, even if just renewed for existing business,

after July 1, 1993, are subject to the guaranteed issue requirements.

§§10705(b) and (g).

3. What is "renewal" for the purposes ofAB 1672?

See RH-317A, §2233.20.

4. If an employer ends coverage by simply ceasing to pay premiums, has it "disenrolled" for

the purposes of the penalty imposed by (original) §10711 (d)?

Yes. See RH-317A, §§2233.22. The relevant provision is now §1071 J(e) and "disenrolled" has

been replaced by "terminated". Note the special treatment of terminating guaranteed association

members (included within the definition of "eligible employee" in § 10700(f)) who are covered

through guaranteed associations

C. AGENTS AND BROKERS

I.

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

e special treatment of terminating guaranteed association

members (included within the definition of "eligible employee" in § 10700(f)) who are covered

through guaranteed associations

C. AGENTS AND BROKERS

I.

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 arc 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 small employer marketplace. §10705(b). Note that the cited Code Section includes no

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

mechanism. Accordingly, insurers that provide small employer products only through specific

trusts or associations must ensure that any employer wishing to purchase such products has an

unqualified right to join such trusts or associations,

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;

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ts or associations must ensure that any employer wishing to purchase such products has an

unqualified right to join such trusts or associations,

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;

4

(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 fail to meet their obligations under § 10705(b) and (c).

2.

How will AB 1672 affect producer compensation arrangements which depend on the

"prufirubili1y .. uf a small employer product?

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

prospective or retrospective.

D. RATES

I. Can a carrier establish a "composite rate" for an employer by "averaging" the risk-adjusted

employee risk rates for existing employees, and then covering new employees at that rate

regardless of their individual risk categories?

Yes. §10714(c) establishes standards for such rating plans.

"Composite rates" must be used

for no less than six and no more than twelve months

spective.

D. RATES

I. Can a carrier establish a "composite rate" for an employer by "averaging" the risk-adjusted

employee risk rates for existing employees, and then covering new employees at that rate

regardless of their individual risk categories?

Yes. §10714(c) establishes standards for such rating plans.

"Composite rates" must be used

for no less than six and no more than twelve months.

Note that composite rates must be

computed on a per-employer basis - employers may not be grouped together for the purpose of

computing composite rates.

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

whole and keeping counties whole?

Yes. See subparagraphs (A) and (B) of §10700(v)(3).

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

of the employee's residence or th£' Pmplr,yn'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 "geographic regions", in

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

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

and "family category"), we believe that the reference to "geographic region" there is merely a

general reference to the risk categories.

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4. As coverage for Medicare-eltg1ble 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 to reflect this factor?

Yes to the first question. See §10700(v)(l). The second question i.s now moot.

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4. As coverage for Medicare-eltg1ble 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 to reflect this factor?

Yes to the first question. See §10700(v)(l). The second question i.s now moot.

5. How does a carrier rate employees who enter an employer's plan after July 1, 1993, but

hPfnrP 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, LATE ENROLLEES AND

MEDICAL UNDERWRITING

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

of individual employees, and late enrollees?

We helieve that § 10707, forbidding the exclusion of individual employees, was effective July

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

are usually changed at next renewal. (See the definition of "renewal" in RH-317A, §2233.20.)

The other rules applicable to small employer products (§10708 and 10709) are less specific.

However, corresponding provisions in §10198.7, which currently apply to virtually all

employment-related health insurance - including "small employer" products - were effective July

I, 1993. (See Bulletin 93-4.) Thus, insurers should have implemented all the rules as of July

1, 1993.

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

See RH-317A, §2233.50. Previously-excluded (for whatever reason) employees or dependents

should have been 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(1)

insurers should have implemented all the rules as of July

1, 1993.

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

See RH-317A, §2233.50. Previously-excluded (for whatever reason) employees or dependents

should have been 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(1). Such persons may not be

treated as "late enrollees" because they will come within the §10700(1)(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 guarantet>II c.ovnage 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 and waiting periods, or just against the furmer?

A small employer carrier must credit "time served" in preceding plans against both pre-existing

conditions limilation, and waiting periods, pursuant to §10708(c).

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4. Do lhe ·waifing period" restrictions ofAHlo72 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. However, producers must not suggest that

employers impose such rules or participate in determining the periods of inelieihility for

insurance subject to AB1672. Otherwise, the insurers that they represent could be held to be

imposing illegal waiting periods through their agents' acts.

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

ods of inelieihility for

insurance subject to AB1672. Otherwise, the insurers that they represent could be held to be

imposing illegal waiting periods through their agents' acts.

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 uf Lutally excluding them from coverage, for the period

of time that the late enrollee could be excluded entirely. §§10707 and 10709.

6. In councing cime served under prior qualifying coverage, does one look back to one plan, or

to all the plans thar covered rhe new plan member withour gaps in coverage? For example, what

would be the result where the new member was covered in 1992 by Plan A, switched to Plan B

in March, 1993, and applied for coverage under Plan Con July 2, 1993, after the ej/ecrive date

ofAB1672.

We believe that time served in multiple preceding plans - including plans that ended

July

1, 1993 - should be counted so long as any gaps in coverage between plans were shorter than

provided for in §10708(c)

We see nothing in the law that would justify a carrier's limiting

qualifying prior coverage to the most recently held coverage, at least unless there were gaps in

coverage greater than that specified in the statute. Likewise, while the requirement that carriers

give credit for prior qualifying coverage became effective July I, 1993, Lht:1t: is 11ulhing in the

law that limits qualifying prior coverage to coverage held on or after that date. Note that there

is no "retroactivity" problem with this interpretation, because no duties are imposed on anyone

prior to the effective date of the new law.

before

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. Likewise, while the requirement that carriers

give credit for prior qualifying coverage became effective July I, 1993, Lht:1t: is 11ulhing in the

law that limits qualifying prior coverage to coverage held on or after that date. Note that there

is no "retroactivity" problem with this interpretation, because no duties are imposed on anyone

prior to the effective date of the new law.

before

7. ls a small employer still eligible for guaranteed issue if it refuses to submit its employees to

medical underwriting and oJlers to accept rhe maximum pennissib/e risk adjusrmenr factor

instead?

We believe so, since medical underwriting may be used only to determine a small employer's

risk adjustment factor. The guaranteed issue requirements in AB 1672 are not conditioned on

an employer's consent to submit its employees to medical underwriting.

IndePn, mp,dical

underwriting is only implicitly authorized in the law's rating sections, which countenance

different rates based on claims expectations.

7

Similarly, where there is medical underwriting and it is clear from the initial applications that

an employer will be subject to the maximum risk adjustment factor, delaying the quotation of

premium rates "pending the receipt of additional medical information" is improper. Such delay

could be found to violate the 30-day effective date requirements of §10706.5 and the carrier's

obligation to "fairly and affirmatively'' market coverage under §10705(b). Even if the additional

medical information is requested to determine whether the risk :anj11stment factor could be

reduced, delay in its receipt should not delay the premium rate quotation (and the issuance of

coverage), since risk adjustment factors may be reduced at any time.

Of course, a carrier can still require individual applications to identify prior qualifying coverage,

Ins. C. § 10700(v) risk categories and to verify eligibility.

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

I

reduced, delay in its receipt should not delay the premium rate quotation (and the issuance of

coverage), since risk adjustment factors may be reduced at any time.

Of course, a carrier can still require individual applications to identify prior qualifying coverage,

Ins. C. § 10700(v) risk categories and to verify eligibility.

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

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

health insurance product to members ofa specified association?

No. "Association-specific" products are prohibited except for the §10705(b)(2) exemption - a

carrier that has sold health products solely 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). Note that the amended law gives

"guaranteed associations" and the members thereof many of the rights vis-a-vis carriers that

small employers and their eligible employees have.

2.

How does AB 1672 affect insured Taft-Hartley plans?

Such programs are not subject to the small employer provisions of 1672 unless they solicit

coverage of employers that are not parties to the underlying collective bargaining agreement.

Note also that benefit plan designs issued pursuant to Joint Powers Agreements entered into

under certain California Government Code provisions are similarly exempt from the small

employer provisions of AB 1672. RH-317 A, §2233. 10.

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bject to the small employer provisions of 1672 unless they solicit

coverage of employers that are not parties to the underlying collective bargaining agreement.

Note also that benefit plan designs issued pursuant to Joint Powers Agreements entered into

under certain California Government Code provisions are similarly exempt from the small

employer provisions of AB 1672. RH-317 A, §2233. 10.

3. At what date shnuld a rarrin .~PIiing a trust or association product comply with the rules

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

or only on the renewal date of the policy issued to the trust or association?

Any time coverage is sold or renewed to any small employer, the rules concerning rate 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 ur members

of guaranteed associations who are entitled to purchase the product under the guaranteed issue

. sections of the law. §10714.

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G. S1DP 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. RH-317A, §2233.IO(g).

Note that "associations" cannot "self-insun::" their members or their members· employees under

current California law nor are such arrangements exempt from state law under ERISA

ll-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. RH-317A, §2233.IO(g).

Note that "associations" cannot "self-insun::" their members or their members· employees under

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

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-SO 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 IOI9R.7(e)

H. PARTICIPATION

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

RII-317A, §2233.80, defines "participation requirements",

Note that §10706 requires that

participation requirements be uniform for all small employers and that minimum participation

requirements may vary only by size and by whether the employer contributes 100% to the cost

of coverage. The cited regulations require that participation requirements be the same regardless

of plan and prohibit 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?

RH-317A, §2233.80(b) requires a carrier to exclude persons who have waived coverage (under

§10700(1)(l)(R)) heca11se they have other coverage through another employer's plan before

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

mployees may be excluded for the purposes of determining whether the carrier's

participation requirements have been met under AB 1672?

RH-317A, §2233.80(b) requires a carrier to exclude persons who have waived coverage (under

§10700(1)(l)(R)) heca11se they have other coverage through another employer's plan before

determining whether an employer has met the carrier's participation requirements. So also,

guaranteed association members eligible for coverage but not electing it shall be excluded for

the purpose of determining guaranteed association participation. (§ I 0706) Of course, a carrier

may also exclude additional classes of persons before determining participation, since that will

make the requirements easier for employers to meet. However, participation requirements must

still b~ applied "uniformly" to all small employers. Note that "eligible employees", as defined

in §10700(f), includes out-of-state employees and members of guaranteed associations. Note

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also that different rules apply for determining whether an employer is a "small employer" under

§10700(w).

3. Can a carrier require compliance with panicipation requirements as a condition of renewal?

Section 10713(c) authorizes a carrier to nonrenew an employer's plan for failure to comply with

the carrier's participation or employer contribution requirements at the time of renewal. Note

that whether an employer is a "small employer" under §10700(w) is determined on the

anniversary of the health benefit plan covering the employer.

4. If a small employer fails a carrier's panicipation or contribution requiremertts, cart 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 offer coverage to less than all of its

eligible employees?

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

on requiremertts, cart 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 offer coverage to less than all of its

eligible employees?

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. Note that, under §10705(g), an employer offering coverage to less than all of its

eligible employees could not demand guaranteed issue from a carrier. Also, §10705(!) 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 murketpluce und also 1hrough ihe

ibluntary Alliance Uniting Employers Purchasing Program ("Health Insurance Plan of

California") have to use the same geographical regions and panicipation 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 Managed

(previously, "Major") Risk Medical Insurance Board (which administers 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 Article 4 is in the context of

"rates", which must 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.

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ith the "open" small employer market specifically recognized in Article 4 is in the context of

"rates", which must 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.

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I. TIED PRODUCTS

l. May a carrier add "frills," such as glossy newsletters, free irifam car seats, health classes,

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

purchasing outside the association?

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

are thus part of the benefit plan design and must be provided to all purchasers of that benefit

plan dc3ign.

2.

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

permiued 10 offer a "lied producr" which concatns health and life?

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.

J. PPOs

1.

r:nn n PPO-bnsed plan be guaranteed issue only within its network area or must it be

guaranteed issue statewide even though its out-of-network coverage is inadequate?

RH-317 A, §2233. 90, exempts PPO-based plans from the statewide guaranteed-issue requirement

if they comply with the requirements of that section.

2. Are multiple uptiun plans - "poinc of service" or HMO/indemnity packages - where health

coverages are provided by d!fferent carriers but which are offered to employees together,

permitted under AB 1672?

Yes. We view a plan's "linkage" 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

ultiple uptiun plans - "poinc of service" or HMO/indemnity packages - where health

coverages are provided by d!fferent carriers but which are offered to employees together,

permitted under AB 1672?

Yes. We view a plan's "linkage" 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 linke-.rl pbn

K. DISCLOSURE AND SOLICITATION

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

among benefit plan designs be described, as variations from a basic plan design with

accompanying rate supplements ur facwrs for che eJ[ecc 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

11

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

"add-on" benefits.

L. GUARANTEED ASSOCIATIONS

I. What kinds of organizations can avail themselves of the rights granted to "guaranteed

associations" under ABJ 672?

"Guaranteed associations" are defined in §10700(y). Also, §10705.1 gives associations which

comply with all the criteria of 10700(y) except that their health benefit plans cover less than

1000 persons, a "window" in which they may assert the rights of guaranteed associations.

2.

Historically, the word "member" has been strictly construed in group eligibility laws ­

persons who were not formal association members were ineligible for the association's group

insurance coverage. ls that still the case under the "guaranteed association" amendments?

No

benefit plans cover less than

1000 persons, a "window" in which they may assert the rights of guaranteed associations.

2.

Historically, the word "member" has been strictly construed in group eligibility laws ­

persons who were not formal association members were ineligible for the association's group

insurance coverage. ls that still the case under the "guaranteed association" amendments?

No.

Many categories of persons who are merely associated with guaranteed association

members may be "members of a guaranteed association", pursuant to §10700(z), for the

purposes of ABl672.

Most of those categories are otherwise ineligible for health or life

insurance "association coverage" under other provisions of law and remain so for non-AB1672

insurance products. (For example, compare paragraphs (3) and (4) of §10270.S(a).) Note also,

that an association must elect in advance to make the non-member categories of covered persons

eligible for coverage under its plan.

3. Before the "guaranteed association" amendments, AB 1672 applied only to employees (and

their dependents) ofstrictly-defined "small employerJ ". Now, individuals and employees ofvery

small employers may be eligible for AB1672 rights and protections under §l0700(z). Do the

amendments provide carriers with arry additional defenses against the anti-selection which is

though! tu v.ist in rhe healrh Insurance market for such persons?

Yes.

Section 10708(e) permits a carrier to impose an additional 60 day waiting period for

coverage of applicants who would be ineligible for AB1672 coverage but for their relationship

with a guaranteed association. This is in addition to the limitations relating to pre-existing

conditions, late enrollees and participation otherwise authorized by AB 1672 for carriers of

guaranteed associations.

4.

Can a guaranteed association plan treat rPrrnin persons as "late enrollees" in a manner

similar to that permissible for a plan that covers just "small employers"?

Yes

lationship

with a guaranteed association. This is in addition to the limitations relating to pre-existing

conditions, late enrollees and participation otherwise authorized by AB 1672 for carriers of

guaranteed associations.

4.

Can a guaranteed association plan treat rPrrnin persons as "late enrollees" in a manner

similar to that permissible for a plan that covers just "small employers"?

Yes.

Sections 10700(1) and 10709 authorize limitations on late enrollees under guaranteed

association plans that are similar, but not identical, to those permitted for "small employer"

plans.

12

5. Do the "guaranteed association· amendments impose any additional requirements on carriers

or producers?

Yes. §10705. l requires that carriers which cover associations that would qualify as "guaranteed

associations", but for their size, notify those associations of their rights under the Section.

M. PRIVATELY PROMOTED "HIPCs"

May a privute urgurth.utiun, such us u gruup ofproducers, esrabllsh a "HfPC" similar to that

established and operated by the Managed Risk Medical Insurance Board pursuant to Article 4

of Chapter 8?

We believe that the entity created by Article 4 is unique and that AB 1672 does not authorize

the establishment of similar entities by private parties. Except for the HIPC, we believe that

Article 4 does not supersede existing law defining the entities which are eligible master

policyholders for group health insurance (Ins. C. §10270.5 et seq).

There is no magic in calling something a "HIPC".

Private, insured multiple-employer

purchasing arrangements have long been authorized by 10270.S(a)(l).

(Note the criteria

regarding the entitie.< that may P<tahli~h such arrangements.) All parties to such arrangements

must follow all laws relating to group purchase of insurance, including Ins C. §§10700 - 10717

of AB 1672

C. §10270.5 et seq).

There is no magic in calling something a "HIPC".

Private, insured multiple-employer

purchasing arrangements have long been authorized by 10270.S(a)(l).

(Note the criteria

regarding the entitie.< that may P<tahli~h such arrangements.) All parties to such arrangements

must follow all laws relating to group purchase of insurance, including Ins C. §§10700 - 10717

of AB 1672. Thus, such arrangements cannot be exclusive marketing vehicles for products

subject to AB 1672, standard employee risk rates must be the same whether or not products are

purchased through such arrangements (rates may vary only within the permissible rate bands),

rating plans must comply with AB 1672 requirements for guarantee periods for standard

employee risk rates and risk adjustment factors, ancl prmlucts must be fairly and affirmatively

marketed throughout the state unless there are provider network limitations.

IV. AB1672'S APPLICATION TO ALL HEALTH INSURANCE. See Bulletin 93-4, of

June 25, 1993, for details of AB 1672's provisions (§§10198.6 through 10198.8) which apply

to all "employment-related" health insurance through 1993.

As of January l, 1994, the

provisions on pre-existing conditions (including "portability") will be amended to apply to

virtually all "health" insurance marketed in California. (AB 1768, Chapter 1051, Statutes of

1993) We will issue shortly a new R1111Ptin 93-4A, to supersede Bulletin 93-4, reflecting these

new amendments.

V. INQUIRIES:

•

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

be directed to:

Consumer Services Division

California Department of Insurance

13

virtually all "health" insurance marketed in California. (AB 1768, Chapter 1051, Statutes of

1993) We will issue shortly a new R1111Ptin 93-4A, to supersede Bulletin 93-4, reflecting these

new amendments.

V. INQUIRIES:

•

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

be directed to:

Consumer Services Division

California Department of Insurance

13

300 South Spring Street

Los Angeles, CA 90013

Telephone 1-800-927-HELP

(Outside California: 213-897-8921)

•

About AB1672 as it applies to "health care service plans" should be directed to:

Health Care Service Plans Division

California Department of Corporations

1115 I Ith 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:

Managed Risk Medical Insurance Board

818 K Street, Second Floor

Sacramento, CA 95814

(916) 324-4695

JOHN GARAMENDI

Insurance Commissioner

bul93-3a