United States General Accounting Office

GAO Fact Sheet for the Chairman,

Subcommittee on Employer-Employee

Relations, Committee on Economic and

Educational Opportunities, House of

Representatives

June 1995 HEALTH INSURANCE

REGULATION

Variation in Recent

State Small Employer

Health Insurance

Reforms

GAO/HEHS-95-161FS

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-261061 

June 12, 1995

The Honorable Harris W. Fawell

Chairman, Subcommittee on Employer-Employee

 Relations

Committee on Economic and Educational

 Opportunities

House of Representatives

Dear Mr. Chairman:

Most state governments have recently passed legislation designed to

improve portability, access, and rating practices for the small employer

health insurance market and, to some extent, for the individual health

insurance market. Currently, your Subcommittee is considering legislation

that includes provisions to reach the same goals within a consistent and

uniform national framework.

To assist your Subcommittee in its deliberations, you asked for an

overview of what states have adopted thus far and a description of

variations in ways states treated key components of their recently passed

legislation. Specifically, you asked us to identify variations in how states

define the types of small employers covered by their health insurance

laws, focusing in particular on how these changes affect self-employed

individuals and small employer insurance provided through group

purchasing memberships or associations. You further asked us to provide

detailed information on variations in state approaches to guaranteed issue

and renewal provisions, premium rate restrictions, limitations on

preexisting conditions, and renewability requirements as well as other key

differences in state approaches.

To develop this information, we identified states that passed small

employer health insurance reforms between 1990 and 1994. We reviewed

the legislation or other available state materials describing key elements of

these reforms. When necessary to clarify issues, we supplemented our

review through discussions with state officials involved in the

implementation of the reforms.

We used the National Association of Insurance Commissioners (NAIC)

Small Employer Health Insurance Availability Model Act (#118) that was in

effect in April 1993 as a benchmark for comparison of state plans. NAIC

made significant amendments to this model in March 1995, but we used

Page 1 GAO/HEHS-95-161FS State Insurance Reforms
B-261061 

the earlier version because it more closely characterized the NAIC position

at the time most states passed their legislation. The NAIC model itself

provides for substantial state flexibility in many of its specific provisions.1

We conducted our work from April to May 1995 in accordance with

generally accepted government auditing standards.

Background Earlier studies consistently point to the high and rising cost of insurance

as the key factor preventing small employers from offering coverage to

their workers.2

 Some insurance practices exacerbate the problem by

substantially increasing costs or denying coverage for some firms and

workers. Consequently, most states have recently adopted some type of

insurance market reforms designed to improve access and affordability of

insurance for this segment of the population. Reforms include measures to

help ensure that (1) employees who want health insurance coverage will

be accepted and renewed by insurers; (2) waiting periods for preexisting

conditions will be short, occur only once, and be based only on recent

medical history; (3) coverage will be continuous and portable, even when

an individual changes jobs or the employer changes insurers; and

(4) extremes in premium costs will be narrowed to fall within ranges

specified by the states.

States recognize the tough trade-offs involved in crafting reforms that may

improve availability of health insurance for some but that could also raise

average premiums. The reforms are intended to address a growing sense

of unfairness in an insurance market in which individuals who change jobs

or experience costly medical conditions can be excluded from coverage or

effectively priced out of the market. On the other hand, these restrictive

practices enable insurers to charge lower premiums to employers with

young and healthy workers. Consequently, reforms may cause insurers to

pass on the resulting costs to all consumers, thereby raising the average

level of premiums.

In extending greater protections to consumers through tighter regulation

of the insurance market, states also recognize the responsibility of

consumers and employers in the insurance market. State requirements for

1

To measure variation in state approaches, we used specific limitations in the NAIC model as

benchmarks for comparison. For example, the NAIC model provides that carriers generally use no

more than nine business classes for rate-setting purposes. We considered states that permitted fewer

than five business classes or that did not allow carriers to establish any classes as major variations

from the maximum of nine classes specified in the model.

2

See Access to Health Insurance: State Efforts to Assist Small Businesses (GAO/HRD-92-90, May 14,

1992).

Page 2 GAO/HEHS-95-161FS State Insurance Reforms
B-261061 

insurance carriers to guarantee coverage to individuals, for example, need

to be balanced against the potential for some individuals to avoid

obtaining coverage until they become sick. In requiring guarantees that

insurance coverage would be renewed at reasonable rates for all current

policyholders, states had to consider responsibilities of the employer to

file honest and accurate claims and to continue paying premiums

promptly. Defining and balancing the responsibilities of carriers, small

employers, and consumers in the health insurance market became the

source of much of the debate and variations among states in their reform

efforts.

Overview:

Comparison With the

NAIC Model

We identified 45 states that passed legislation regulating the small

employer health insurance market between 1990 and 1994. While most

laws address commonly perceived small employer health insurance

problems, including guaranteed issue and renewal, portability, limitations

on preexisting conditions, rating practices, and minimum participation

requirements, approaches adopted by the states vary, often substantially,

with no states following the NAIC model on all of the key provisions. (See

sec. 1.)

Defining Who Is

Covered by State

Laws

There is substantial variation among states in both the way they define

small employers and how they define which employees are eligible for

coverage. Differences in how a full-time worker is defined and whether

part-time or temporary workers are covered are among the sources of

state variation.

Whether to extend provisions of the state reforms to self-employed

individuals was among the most contentious issues the states faced. Only

20 states include the self-employed; moreover, all provisions of the state

reforms, most notably those requiring carriers to guarantee coverage, are

not always extended to the self-employed. We also identified 15 states that

passed separate legislation regulating health insurance plans that cover

individuals. Reflecting this state variation, NAIC recently amended its model

legislation by changing the definition of small employer to include

self-employed individuals and deleting any reference to a maximum

number of employees. Treatment of more complex insurance

arrangements through multiple employer welfare arrangements (MEWA)

and insured plans offered through fraternal organizations or trade

associations are often not clearly delineated in the state reforms. (See 

sec. 2.)

Page 3 GAO/HEHS-95-161FS State Insurance Reforms
B-261061 

Substantial Variation

in Specific Provisions

of State Laws

Provisions affecting guaranteed issue, guaranteed renewal, limitations on

preexisting conditions, portability, and premium rate restrictions are

included in most state reforms, but most states deviate, often

substantially, from at least one of these key provisions as defined in the

NAIC model. The provision least likely to be adopted by states is guaranteed

issue of insurance products. Even those including guaranteed issue

typically deviate from the NAIC model in at least one of the following

dimensions: definition of small employers, the number of plans that

carriers must guarantee issue, or the characteristics of guaranteed plans.

All but one state include guaranteed renewal of policies in their reforms.

Guaranteed renewal provisions tend to have only minor variations from

the NAIC model.

State reforms typically include limitations on preexisting condition

exclusions and portability requirements that waive any preexisting

conditions or waiting periods for individuals who change plans and can

demonstrate previous coverage under another plan. States, however, differ

in the waiting periods required for coverage to take effect.

Most of the state laws also place some restrictions on insurer rating

practices—that is, the way insurers determine prices of the health

insurance products at initial issuance and/or at time of renewal. State

restrictions on rating practices used by insurers are probably the most

variable and controversial element of state reforms. While 28 states

employ the rate-banding approach in the NAIC model, most of them made

significant changes in how they use the relatively complex rate-banding

methodology.3

 Sixteen states took a different course, generally using an

adjusted community rating approach that allows no adjustments based on

the claims or health experience of the group covered.

State variations in approach are evident in many of the elements of rate

determination, including the premium rate adjustment factors allowed in

setting rates, premium variation permitted, number of business classes for

which carriers can define separate rates, and permitted increase in rates at

renewal. For example, some states added adjustment factors such as

nicotine use, participation in wellness programs, or unhealthy lifestyles to

the age, family size, geographic area, gender, industry, and group size case

factors specified by NAIC. (See sec. 3.) More detailed information

comparing each state’s reforms with the NAIC model is in appendix I.

3

The NAIC rate-banding approach limits the insurer to nine separate business classes for which it can

charge separate rates. The model also restricts the variation in premiums the insurer can charge to

firms that fall into one of these classes and further restricts the variation allowed among business

classes.

Page 4 GAO/HEHS-95-161FS State Insurance Reforms
B-261061 

This report provides some initial information on small employer health

insurance reform issues. You also expressed interest in more information

on the impact of these reforms. Since many of them were passed recently,

little evaluative information rooted in solid data is currently available. We

are continuing to investigate the effectiveness of these reforms.

As agreed with your office, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 30 days from the

date of this letter. At that time, we will send copies to interested parties

and make copies available to others upon request. Please contact me at

(202) 512-7119 if you have any questions. Major contributors to this report

are listed in appendix II.

Sincerely yours,

Sarah F. Jaggar

Director, Health Financing

 and Policy Issues

Page 5 GAO/HEHS-95-161FS State Insurance Reforms
Contents

Letter 1

Section 1 

Recent State Reforms:

Comparison With the

NAIC Model

8

The NAIC Small Employer Health Insurance Availability Model

Act

8

State Variation From NAIC Model 11

Section 2 

Defining Who Is

Covered by State

Small Employer

Health Insurance

Reforms

13

Defining Employers Covered by Reforms 13

Defining Eligible Employees 14

Self-Employed and Individual Coverage 14

Defining the Carrier 15

Multiple Employer Welfare Arrangements 15

Murkiness in State Definition and Treatment of Association Plans 16

Section 3 

Variations in State

Approaches:

Guaranteed Issue and

Renewal, Preexisting

Conditions,

Portability, and Rating

Reforms

18

Guaranteed Issue 18

Guaranteed Renewal 19

Preexisting Condition Limitations 19

Portability 20

Premium Rate Restrictions 20

Appendixes Appendix I: Structure of State Small Employer Health Insurance

Reforms

24

Appendix II: Major Contributors to This Fact Sheet 30

Tables Table 3.1: State Approaches to Premium Rate Restrictions 21

Table 3.2: States That Modified Key NAIC Rating Provisions 21

Table 3.3: States Using Specific Premium Rate Adjustment

Factors

22

Table I.1: Variation in State Adoption of NAIC Model 24

Table I.2: State Restrictions Related to Premium Rates 27

Page 6 GAO/HEHS-95-161FS State Insurance Reforms
Contents

Figure Figure 1.1: States Adopting NAIC Model Provisions 11

Abbreviations

ERISA Employee Retirement Income Security Act of 1974

MEWA multiple employer welfare arrangement

NAIC National Association of Insurance Commissioners

Page 7 GAO/HEHS-95-161FS State Insurance Reforms
Section 1 

Recent State Reforms: Comparison With the

NAIC Model

Growing concerns about the availability and affordability of health

insurance coverage for the workers of small employers led to a flurry of

state legislative activity in the early 1990s. Between 1990 and 1994, at least

45 states passed legislation that modified the terms and conditions under

which health insurance is offered to small employers. During the same

period, at least 15 states also passed legislation affecting the offerings of

insurance to individuals.

There are substantial variations in the way states approached small

employer health insurance reforms. This report identifies the most

common types of reforms introduced and delineates some of the

differences among states on key elements of those reforms.

The NAIC Small

Employer Health

Insurance Availability

Model Act

State insurance regulators established the National Association of

Insurance Commissioners (NAIC) to promote effective insurance regulation

and encourage uniformity in state approaches to regulation. NAIC has

developed legislative models for states to use in formulating licensing and

regulation requirements for all lines of insurance under the purview of

state insurance departments. Many states adopt NAIC models in whole or in

part, but NAIC has no authority to require states to adopt them.

NAIC has developed and refined its Small Employer Health Insurance

Availability Model Act, which serves as the basis of substantial portions of

many state reform laws. We used the NAIC model as a benchmark or

reference point for assessing the extent to which states vary in their

treatment of key components.4

 This section discusses key components of

the small employer health insurance reforms in the NAIC model. Later

sections take a more detailed look at how states deviate from the model.

Small Employer Definition The NAIC model addresses insurance policies for small employers with no

more than 25 eligible workers. (However, all of the model’s provisions do

not apply to all such employers.)

Applicability The NAIC model applies to any carrier-provided health benefit plan that

covers the eligible workers of a small employer in the state. Eligible

4

As a specific benchmark, we used NAIC model #118, which reflects NAIC recommendations as of

April 1993. This model most closely reflects the NAIC position at the time most states introduced their

reforms. In March 1995, NAIC amended the model to introduce adjusted community rating provisions,

to expand the definition of small employer, to require guaranteed issue of all products, and for other

purposes.

Page 8 GAO/HEHS-95-161FS State Insurance Reforms
Section 1 

Recent State Reforms: Comparison With the

NAIC Model

employees are defined as full-time (30 hours or more) workers and include

sole proprietors, a partner in a partnership, and independent contractors.

The model permits carriers to require a minimum number of eligible

employees to participate in a small employer’s health plan as long as the

carrier imposes the minimum consistently across all employers of the

same size.

A carrier is defined as any entity that provides health insurance that is

subject to state regulation, including insurance companies, prepaid

hospital or medical care plans (such as some Blue Cross and Blue Shield

plans), and health maintenance organizations. The model also applies to

multiple employer welfare arrangements (MEWA). It is more difficult to

assess the extent to which the model applies to other organizations that

may provide or serve as intermediaries for health plans (including

collectively bargained Taft-Hartley plans and fully insured plans offered by

fraternal benefit societies and trade associations). The model indicates

that it applies to any similar entity subject to state regulation.

Guaranteed Issue The NAIC model requires all carriers to actively offer at least two health

plans (a basic and a standard plan) to small employers within the state.

The model reserves to states substantial flexibility in defining the coverage

requirements for these plans, suggesting only that a state appoint a

commission composed of representatives of carriers, small employers and

employees, health care providers and producers to define the two types of

benefit packages. NAIC characterized the basic plan as a “bare bones”

package providing coverage at lower cost by excluding state-mandated

benefits or by requiring high deductibles, coinsurance, or low lifetime

maximums. NAIC characterized the standard benefit package as

representing average or typical plans in the state.

Guaranteed Renewal The NAIC model requires that all policies be renewed regardless of health

status or claims experience of plan participants with limited exceptions,

such as cases of fraud or failure to pay premiums.

Preexisting Condition

Limitations

The NAIC model permits carriers to deny coverage for preexisting

conditions for no more than 12 months after coverage is effective. A

preexisting condition is one that was diagnosed or treated during the 6

months immediately preceding the effective date of coverage.

Page 9 GAO/HEHS-95-161FS State Insurance Reforms
Section 1 

Recent State Reforms: Comparison With the

NAIC Model

Portability The NAIC model requires carriers to waive a preexisting condition period

for covered services if comparable services were previously covered under

another policy that was continuous to a date not more than 90 days prior

to the effective date of the new coverage.

Restrictions Related to

Premium Rates

Under the NAIC model, carriers are subject to a number of restrictions on

(1) the factors they can use in setting rates, (2) the number of business

classes for which they can charge different rates, (3) the variation allowed

in rates within a business class, (4) the variation allowed in rates among

business classes, and (5) the amount of increase in rates permitted at the

time of renewal. The restrictions are as follows:

• Premium rate adjustment factors—The NAIC model stipulates that carriers

“shall not use case characteristics other than age, gender, industry,

geographic area, family composition, and group [employer] size” in

determining rates. Other consistently applied case characteristics can be

employed only with approval of the state insurance commissioner. But the

model specifically lists claim experience, health status, and duration of

coverage as factors that cannot be used as case characteristics in rate

determination.

• Business classes—Small employer carriers may establish rates for up to

nine separate business classes for rating purposes to reflect substantial

differences in expected claims experience or administrative costs.

Additional business classes may be used only with approval of the state

insurance commissioner.

• Rate differences between classes—The difference between the “index” or

average premium rate for any business class should not exceed the index

for any other business class by more than 20 percent.

• Premium rate differences within a single business class—The lowest or

base rate charged should be no lower than 25 percent below the index

rate. The highest rate allowed within that same business class would be no

more than 25 percent above the index rate.

• Restrictions on premium rate increases at renewal—Increases in premium

rates for a new rating period cannot exceed more than 15 percent annually

because of the claims experience of the group. Additional increases are

permitted for any changes in coverage or case characteristics of the

covered population and for changes in premium levels charged to all

insured health plans.

Page 10 GAO/HEHS-95-161FS State Insurance Reforms
Section 1 

Recent State Reforms: Comparison With the

NAIC Model

State Variation From

NAIC Model

Important differences surface among states as to how a small employer is

defined and how a state determines applicability of the law to different

types of employers. There are even more substantial differences in the way

states treat individuals who wish to purchase health insurance.

Figure 1.1 shows the extent to which states adopted key reform strategies

and the extent to which they essentially followed or modified the NAIC

approach for five specific provisions we investigated. We found that all 45

states that passed reforms in the 1990s changed at least one of the key

provisions of the NAIC model.

Figure 1.1: States Adopting NAIC

Model Provisions States

0

5

10

15

20

25

30

35

40

45

Guaranteed Issue

Guaranteed Renewal

Preexisting Condition Limitations

Portability

Rating Restrictions

Provision Varies From NAIC Model

Provision Substantially Similar to NAIC Model

Page 11 GAO/HEHS-95-161FS State Insurance Reforms
Section 1 

Recent State Reforms: Comparison With the

NAIC Model

Thirty-five of 45 states passed guaranteed issue provisions, but in our

judgment only about half of them closely followed the NAIC model. They

typically varied from the model in the types or numbers of plans for which

guaranteed issue applied or in the characteristics of small employers to

which guaranteed issue applied. States were more likely to pass

guaranteed renewal legislation and more closely follow NAIC guidelines in

that area.

Both preexisting conditions and portability clauses were included in most

state laws. States tended to deviate from the NAIC model particularly with

respect to the length of time associated with these clauses.

Some type of rating restrictions were included in all 45 state laws, but the

states’ approaches to rating varied substantially.

Page 12 GAO/HEHS-95-161FS State Insurance Reforms
Section 2 

Defining Who Is Covered by State Small

Employer Health Insurance Reforms

Before examining variations in specific provisions of the small employer

health insurance reforms, it is essential to note that states adopted

different approaches toward defining a small employer, an eligible worker

of a small employer, a carrier, and associations that offer insurance to

small employers. States struggled with applicability of the law particularly

in regard to the self-employed or groups of one to three eligible employees

and in defining an approach to multiple employer plans. Indeed, several

states passed separate legislation governing provision of insurance to

individuals. NAIC is working on model legislation to cover state reforms in

the individual market.

Defining Employers

Covered by Reforms

The NAIC model defines a small employer as any person, firm, corporation,

partnership, or association that is actively engaged in business that, on at

least 50 percent of the working days during the preceding calendar

quarter, employed no more than 25 eligible employees, the majority of

whom were employed within the state. The guaranteed issue provisions

would apply only to firms with 3 to 25 workers.5

 This provision on

minimum employer size was included to protect small employer carriers

from adverse selection.

States vary from the NAIC model on both ends of the spectrum regarding

firm size. Most commonly, states extend the maximum to employers with

about 50 eligible workers (2 states set the limit at 100 eligible workers).

Differences at the lower end are more controversial. Some states exempt

employers with fewer than three workers not only from guaranteed issue

provisions, but also from all other provisions of the state reforms. Others

also extend guaranteed issue to employers with 1 (11 states) or 2 (14

states) eligible workers. Arizona’s guaranteed issue requirements currently

apply to employers with 25 to 40 eligible workers, while other provisions

apply to employers with 3 to 40 workers.

Several states phase in the requirements over time for different size

employers. California, for example, initially applied guaranteed issue

requirements to employers with 5 to 50 workers, but will apply the

requirements to employers with as few as 3 workers effective July 1, 1995.

States tend to follow the NAIC model in applying the law to the broadest

range of employer types. Some states include language to ensure that

particular types of employers would be included or excluded. For

5

The 1995 amendments to the NAIC model changed the size to include as few as 1 self-employed

individual and removed the upper limit of 25, leaving the maximum to the state’s discretion.

Page 13 GAO/HEHS-95-161FS State Insurance Reforms
Section 2 

Defining Who Is Covered by State Small

Employer Health Insurance Reforms

example, Wisconsin specifically includes a farm business and certain

village or town governments as employers covered by its legislation.

California does not require that small government units be protected

under its small employer health insurance legislation because they already

have the option of obtaining insurance through a state-sponsored health

purchasing alliance.6

Defining Eligible

Employees

The NAIC model defines an eligible employee as one who works on a

full-time basis with a normal work week of 30 hours or more. The term

includes a sole proprietor, a partner of a partnership, and an independent

contractor if this person is included as an employee under a small

employer’s health benefit plan. “Eligible employee” does not include an

employee who works on a part-time, temporary, or substitute basis. The

model permits carriers to impose a minimum employee participation

requirement on small employer plans as long as they do so consistently

across all employers of the same size.

Several states modified requirements pertaining to eligible employees. At

least six states reduced the required normal work week to 17.5 through 25

hours. For example, Minnesota legislation includes employees with a

normal work week of 20 hours. States generally do not extend the

provision to part-time, temporary, or substitute employees. However, at

least eight states do not define “eligible employee” and two states

explicitly give employers the option of including part-time employees. For

example, carriers in New Hampshire would have to guarantee issue and

follow other provisions of the act for any small employer who chooses to

offer insurance benefits to part-time workers. Finally, at least eight states

also impose restrictions on carriers’ use of minimum participation

requirements. Four states permit carriers to impose a requirement of no

more than 75 percent, four states impose a 75- through 90-percent

minimum participation requirement on carriers or employers, and one

state does not permit carriers to use any minimum participation

requirement for groups of four or more.

Self-Employed and

Individual Coverage

States that extend guaranteed issue and other provisions of their small

employer health insurance reforms to firms with one eligible employee

(that is, self-employed individual with no employees) typically require that

the person covered have sufficient documentation to verify his or her

6

See Health Insurance: California Public Employees’ Alliance Has Reduced Recent Premium Growth

(GAO/HEHS-94-40, Nov. 22, 1993).

Page 14 GAO/HEHS-95-161FS State Insurance Reforms
Section 2 

Defining Who Is Covered by State Small

Employer Health Insurance Reforms

status as self-employed. Individuals who are not self-employed are

generally not protected by the small employer reforms. States that attempt

to extend rating protections or guarantees of coverage to individuals who

are not self-employed generally do so through separate individual market

reform legislation.

We have identified at least 15 states that have passed some type of

individual market reform. At least 10 of the states closely follow most of

the provisions in their small employer reforms. In four of the states, the

individual reforms only include insurance rating restrictions.

NAIC is currently drafting model legislation for states regarding health

insurance for individuals. Initially, NAIC attempted to develop model

legislation that included both individual and small employer coverage but

recognized the different insurance market characteristics of employed

individuals and those who are not attached to the workforce.

Defining the Carrier Most states follow the NAIC model definition of an insurance carrier as any

entity that provides health insurance in the state. Carriers are defined to

include insurance companies, prepaid hospital or medical care plans such

as some Blue Cross and Blue Shield, health maintenance organizations,

and any other entity providing a plan of health insurance or health benefits

subject to state regulation.

States have the most trouble in dealing with entities that provide coverage

to a number of small employers or individuals through some type of group

purchasing process. These organizations argue that they are not carriers,

that small employer insurance reforms do not apply to them because they

cover large groups, or that they are exempt from state regulation under the

federal Employee Retirement Income Security Act of 1974 (ERISA, P.L.

93-406). Some of the differences in how these types of group purchasing

associations are treated are discussed next.

Multiple Employer

Welfare Arrangements

ERISA defines MEWAs as employee welfare benefit plans or similar

arrangements, including health plans, established or maintained for the

purpose of offering or providing benefits typically provided by an

employee welfare benefit plan to employees of two or more employers.

The term does not, however, include such arrangements when they are

established under a collective bargaining agreement or by a rural electric

cooperative. Generally, ERISA broadly preempts states from regulating

Page 15 GAO/HEHS-95-161FS State Insurance Reforms
Section 2 

Defining Who Is Covered by State Small

Employer Health Insurance Reforms

employee welfare benefit plans but allows them to retain greater authority

to regulate MEWAs whether or not they are employee welfare benefit plans.

Under ERISA, any MEWA that is an employee welfare benefit plan and fully

insured is subject to certain state insurance laws and regulations that a

state may impose. In addition, self-insured MEWAs are subject to any state

insurance laws that are not inconsistent with ERISA.

Furthermore, the 1982 amendments to ERISA that created the MEWA

provisions leave MEWAs that are not employee welfare benefit plans fully

subject to state regulation.

A drafting note to the NAIC model suggests that states include MEWAs within

the list of carriers covered by state provisions if a state licenses MEWAs.

NAIC further suggests that states that do not have separate licensing for

self-funded MEWAs should treat them as unauthorized insurers. Some states

chose to specifically include MEWAs in their legislation. Others did not, but

it is not always clear whether MEWAs were intended to be excluded or

whether the states expected them to be covered under the clause covering

“any other entity providing a plan of health insurance or health benefits

subject to state insurance regulation.”

Murkiness in State

Definition and

Treatment of

Association Plans

Fraternal organizations, trade associations, and unions are entities that

may offer health plans to small employers and individuals. Whether the

state’s small employer health insurance laws apply to such entities is often

unclear, differs among states, and reflects sharp differences in how states

define and regulate these types of entities.

• Fraternal organization plans—A drafting note to the NAIC model suggests

that states enact language that would include plans offered by fraternal

benefit societies. Several states have done so, but many have not expressly

included fraternal benefit organizations within their legislation. In our

discussions with state officials, those from at least two states indicated

that separate legislation covered fraternal benefit plans operating in their

states. Since these plans are not explicitly included in the states’ small

employer reform legislation, the officials were uncertain whether any of

the reform provisions are applicable to the fraternal benefit plans.

• Association plans—A number of small businesses and individuals obtain

health insurance coverage through trade or other association plans. The

NAIC model is silent on association plans that potentially insure a

Page 16 GAO/HEHS-95-161FS State Insurance Reforms
Section 2 

Defining Who Is Covered by State Small

Employer Health Insurance Reforms

substantial share of the small employer market,7 but states have taken a

variety of approaches to deal with them. Montana, for example, exempts

association plans if they guarantee issue to their members. Vermont and

New Hampshire allow association plans to use their own community rate.

California took the approach of defining guaranteed associations by

expanding the definition of small employer to include any “guaranteed

association” acting on behalf of individuals or employers meeting the

association’s membership criteria to purchase health insurance. Any

association that meets the definitional requirements in California law

would be afforded the protections of the state’s small employer health

insurance reforms, including but not limited to guaranteed renewal of the

plan for all of its individual and employer members.8

• Taft-Hartley plans—Taft-Hartley plans are essentially union-organized

plans that provide, for example, health coverage under collectively

bargained agreements. The NAIC model provides that a state require such

plans to seek written approval from the insurance commissioner for

waiver of the insurance rating provisions of the state’s reform law. Some

states included this requirement. However, an official in one state said it

was unnecessary to include it because Taft-Hartley plans are exempt from

state regulation under ERISA, which preempts all state laws related to

employee benefit plans. Recognizing that ERISA preempts state regulation

of Taft-Hartley plans, NAIC deleted the language at issue from the most

recent version of the model.

State officials we contacted had differing interpretations concerning the

role of states in regulation of both fraternal organization and association

plans. One interpretation is that association plans are intermediaries

offering insured products; thus, any state regulation should be directed

toward the insuring entity. Another state official contended that

associations domiciled in other states assert that any other state’s laws do

not apply. Some plans may be inappropriately claiming they are not

subject to the state laws because they are exempt under ERISA. States

maintain that they often cannot identify such plans until an already serious

problem is brought to the attention of the insurance commissioner’s office.

7

Information on the extensiveness of association plan coverage is limited. One state official estimated

that about one-fourth of the small employer market in that state was probably covered by association

plans. A recent article estimated that about 17 percent of small firms nationally obtain insurance

through association plans. Definitions and structure of association plans vary widely. We are

conducting further work for your Subcommittee on the role of association plans in the small employer

insurance market.

8

The California law requires that the guaranteed association plan cover at least 1,000 people with each

carrier with which it contracts.

Page 17 GAO/HEHS-95-161FS State Insurance Reforms
Section 3 

Variations in State Approaches: Guaranteed

Issue and Renewal, Preexisting Conditions,

Portability, and Rating Reforms

Most states included guaranteed issue, guaranteed renewal, preexisting

condition limitations, and portability provisions in their small employer

health insurance reform legislation.9

 Except for guaranteed renewal, most

states deviated, often in substantial ways, from the NAIC model.

Guaranteed issue was frequently modified and, in several instances,

omitted from state reforms altogether. While premium rate restrictions are

more commonly included in state reforms, there is less adherence to the

more complex provisions of the NAIC model. Most states also included

preexisting conditions and portability in their small employer statutes.

Nearly half of them essentially followed the NAIC model with respect to

preexisting condition limitations, and about one-fifth did so with respect

to portability. (See fig. 1.1.)

Guaranteed Issue At least nine states did not include guaranteed issue provisions in their

reforms: Arkansas, Georgia, Illinois, Indiana, Louisiana, New Mexico,

South Dakota, Utah, and West Virginia.

Among the 35 states where guaranteed issue was included, there were

often significant variations in the number or types of plans an individual

carrier was required to offer to all small employers. In 10 states, insurers

were required to guarantee issue all plans that they offered in the small

employer market. Guaranteed issue of only one plan was required in six

states. One state required carriers to offer five guaranteed issue products.

Only 18 states followed the NAIC model in offering 2 plans. These states

typically offered something akin to the NAIC standard and basic plans (the

latter was sometimes labeled “bare bones” or “minimum” plan in state

legislation).

Even the states that offered the two plans suggested by NAIC often deviated

from the NAIC model in other important ways. The most notable variation

was in the size of the employer subject to guaranteed issue provisions. As

noted previously, several states extended guaranteed issue to

self-employed individuals and employers with only two eligible workers,

while others extended guaranteed issue to larger employers.

The actual benefit structure of the basic and standard plans is a potential

source of even more variation in state reform legislation. While most states

followed NAIC suggestions to have a state board or commission define

these benefit packages, composition of the boards coupled with

9

Washington passed the comprehensive Health Services Act in 1993 that included all of these

provisions. However, since the reform was not specifically designed for the small employer market,

Washington is not included in the following discussion.

Page 18 GAO/HEHS-95-161FS State Insurance Reforms
Section 3 

Variations in State Approaches: Guaranteed

Issue and Renewal, Preexisting Conditions,

Portability, and Rating Reforms

differences in health industry and structure in the states further

contributed to differences in the product subject to guaranteed issue.

Among the issues debated within states are size of deductibles or

copayments and whether specific services like mental health are covered.

We did not try to assess the full range of differences in benefit structure.

Guaranteed Renewal Every state we examined except Georgia included guaranteed renewal

within recent reform legislation. Most states followed NAIC provisions by

limiting cases where an insurer can refuse to renew coverage to incidents

of fraud or failure to make required payments. It is interesting to note that

8 of the 43 states that included guaranteed renewal did not have

guaranteed issue provisions.

Preexisting Condition

Limitations

Only 4 of the 44 states had no provision limiting the use of preexisting

conditions to deny coverage for specific illnesses. The NAIC model

stipulates that an insurer may deny, exclude, or limit benefits for a covered

individual’s losses incurred no more than 12 months following the

effective date of coverage because of a preexisting condition. Preexisting

conditions should not be more restrictively defined than

• a condition that would have caused an ordinarily prudent person to seek

medical advice, diagnosis, care, or treatment during the 6 months

immediately preceding the effective date of coverage;

• a condition for which medical advice, diagnosis, care, or treatment was

recommended or received during the 6 months immediately preceding the

effective date of coverage; or

• a pregnancy existing on the effective date of coverage.

About half of the states follow the NAIC provisions with respect to both the

6-month period before coverage as the appropriate length of time for

defining preexisting conditions and the maximum 12-month waiting period

after the coverage is effective.

The two most common changes to NAIC’s guidelines were (1) to extend the

definition of “preexisting condition” from a condition diagnosed or treated

6 months before the effective date of coverage to one diagnosed or treated

12 months before (11 states) and (2) to shorten the waiting period before a

preexisting condition is covered to 6 months (6 states). Four states

deviated further from the time periods suggested in the NAIC model. At one

extreme, Maryland eliminated preexisting conditions entirely as a basis for

Page 19 GAO/HEHS-95-161FS State Insurance Reforms
Section 3 

Variations in State Approaches: Guaranteed

Issue and Renewal, Preexisting Conditions,

Portability, and Rating Reforms

limiting coverage for any illness or condition. In sharp contrast, Montana’s

reform legislation built on previous legislation that permits insurers to

limit coverage for preexisting conditions that arose up to 5 years before

coverage became effective.

We identified at least three states that did not include a specific statement

regarding pregnancy on the effective date of coverage and had a 6-month

period for defining preexisting conditions, leaving uncertainty as to

whether some preexisting pregnancies would be covered.

Portability Thirty-eight states included a portability provision in their small employer

health insurance legislation. Portability provisions require carriers to

waive any preexisting condition or waiting period before an individual is

covered. Portability applies to individuals who had previous health

insurance coverage that was continuous to a date not more than 90 days

prior to the effective date of the new coverage. Nine states used the 90-day

waiting period, while 29 states changed that period, generally reducing it

to either 30 or 60 days.

Portability becomes a more complicated issue when an employer switches

to a policy that has different limitations on services or conditions covered.

For example, if a person switches from a plan that does not include

coverage for mental health services to one that does, a question arises as

to whether the carrier would be required to waive preexisting condition

limitations for this service. Most states follow the NAIC model, which does

not require carriers to do so. However, we identified 15 of the states with

portability provisions that do not have any specific linkage requirement

between coverages in current and prior policies. In these cases,

preexisting conditions for all services covered under the new policy would

presumably be waived.

Premium Rate

Restrictions

At least 44 states included premium rate restrictions as part of reforms

passed between 1990 and 1994. Most followed a variation of NAIC’s

rate-banding approach or used other approaches, such as adjusted

community rating. (See table 3.1.) Premium rate restrictions include many

complex and technical provisions. Some of the key sources of differences

among state approaches are highlighted here with the understanding that

interaction among specific state provisions and additional detailed

provisions also contribute to state variation.

Page 20 GAO/HEHS-95-161FS State Insurance Reforms
Section 3 

Variations in State Approaches: Guaranteed

Issue and Renewal, Preexisting Conditions,

Portability, and Rating Reforms

Table 3.1: State Approaches to

Premium Rate Restrictions Approach States

NAIC rate banding 7

Modified NAIC 21

Adjusted community rating or other 16

The approach to premium rating NAIC used in its model prior to the 1995

amendments permitted insurers to define up to nine business classes and

to allow claims experience as an adjustment factor for determining rates

at the group level but not for determining any individual employee’s rate.

Earlier this year, NAIC amended the rating methodology by abandoning the

separate rate classes and eliminating any adjustments for claims

experience. This simpler rating methodology comes closer to an adjusted

community rating methodology.

Indeed, NAIC’s recent model amendments reflect recognition that many

states did not use the banding approach because it was too complex. Some

states also considered the earlier NAIC approach too lax in the restrictions

placed on carriers’ rating flexibility. Thus, a number of states opted for

narrower rating bands or chose an adjusted community rating

methodology.

NAIC officials characterized the organization’s recent decision to build

adjusted community rating into its model as a highly contentious one. As a

compromise, adjusted community rating was included in the amended

model but was followed by a drafting note stating that NAIC does not

endorse this or any particular approach to premium rate restrictions.

Changes in the model reflect the constantly changing and dynamic nature

of health insurance markets.

At least 21 states modified the NAIC rate-banding approach. States most

commonly modified provisions relating to the number of allowable rating

factors and business classes carriers may use in setting rates, the degree of

permitted variation in index rates among business classes, and the degree

of permitted premium rate variation within a class. (See table 3.2.)

Table 3.2: States That Modified Key

NAIC Rating Provisions NAIC rating provision modified States

Allowable premium rate adjustment factors 17

Allowable business classes 13

Index rate variation among classes 7

Premium rate variation within classes 10

Page 21 GAO/HEHS-95-161FS State Insurance Reforms
Section 3 

Variations in State Approaches: Guaranteed

Issue and Renewal, Preexisting Conditions,

Portability, and Rating Reforms

The modifications made by 11 states are limited to the number of premium

rate adjustment factors or business classes carriers may use. For example,

Iowa places no explicit limit on the number of allowable business classes

and removes industry and gender as allowable rate adjustment factors.

Montana does not enumerate the allowable rate adjustment factors but

otherwise follows the NAIC approach fully. More significantly, 10 states

modified the permitted rate variations within or among business classes.

For example, North Dakota permits index rates among classes to vary by

no more than 15 percent (NAIC permits 20 percent) and premium rates

within a class to vary from the index rate by no more than 20 percent (NAIC

permits 25 percent). In Ohio, premium rates within a class may vary from

the index rate by as much as 35 percent with exceptions that permit even

further variation, and no limits are placed on index rate variation among

business classes.

While at least 28 states use NAIC’s rate-banding approach or a variant, 16

states use some other approach to rate restrictions—generally a form of

adjusted community rating. States using adjusted community rating permit

adjustments in the community rate for various factors and impose various

limits on the extent to which rates, after adjustments, may vary. For

example, in New Hampshire, premium rates may be adjusted only for age

in a range of 50 percent above or below the community rate for

policyholders with similar family compositions. Maine permits several

additional adjustment factors to be used but limits rate variation to a range

of 33 percent above or below the community rate.

Table 3.3 shows the allowable premium rate adjustment factors in states

using a rate-banding approach and an adjusted community rating

approach.

Table 3.3: States Using Specific

Premium Rate Adjustment Factors

Adjustment factor

NAIC rate-banding

approach or variation

Adjusted community

rating and other

Age 15 13

Family size 14 12

Geography 15 12

Gender 13 6

Industry 12 4

Group (employer) size 12 3

Smoking practices 2 2

Not specified 12 1

Other 2 5

Page 22 GAO/HEHS-95-161FS State Insurance Reforms
Section 3 

Variations in State Approaches: Guaranteed

Issue and Renewal, Preexisting Conditions,

Portability, and Rating Reforms

The NAIC model does not specify allowable ranges or limitations on

specific premium rate adjustment factors beyond a limitation that

adjustments for industry not vary by more than 15 percent. Some states

specify how individual factors are to be used. Treatment of age, for

example, differs widely. Many states permit carriers to use any age ranges

they wish to determine premium rates, while other states permit carriers

to use only certain age categories. For example, California permits the use

of only seven age categories—younger than 30, 30 to 49, 40 to 49, 50 to 54,

55 to 59, 60 to 64, and 65 and older. Finally, in addition to rate banding or

adjusted community rating restrictions, at least four states also impose a

minimum loss ratio10 requirement on carriers of between 70 and

75 percent.

10Loss ratio is usually defined as the ratio of paid claims plus changes in funds set aside for future

health claims to earned premiums.

Page 23 GAO/HEHS-95-161FS State Insurance Reforms
Appendix I 

Structure of State Small Employer Health

Insurance Reforms

Table I.1: Variation in State Adoption of NAIC Model

State

Employer size

(no. of

employees)

Guaranteed

issue (no. of

plans/applicable

employer size)

Guaranteed

renewal Portability

Preexisting

condition

exclusions

Restrictions

related to

premium rates

Alabama — — — — — —

Alaska 2-25 2 plans/2-25 X X X Variation

Arizona 3-40 1 plan/25-40a X 31b 12/12 Variation

Arkansas X — X — — Variation

California 4-50c All plans/4-50d X 30b,e 6/6 Other

Colorado 2-50f 2 plansg/2-50 X X 6/6 Adjusted

community rating

Connecticut Less than 50 All plans/less

than 50

X 30 X Other

Delaware 1-50 2 plans/2-50 X 60 X Variation

Florida 50 or less All plans/1-50 X 30b X Adjusted

community rating

Georgia 1-50 — — — — Other

Hawaiih — — — — — —

Idaho 1-49 2 plans/2-49 X 30 X Variation

Illinois 3-25 — X 30 12/12 Variation

Indiana 3-25 — Xi — — Variation

Iowa 2-50 2 plans/2-50 X X X Variation

Kansas 1-50 2 plans/1-50 X 31 6/90 days X

Kentuckyj 100 or less 1 plan/

100 or less

X 60b 6/6 Adjusted

community rating

Louisiana 3-35 — X 60b 12/12 Variation

Maine Less than 25 All plans/less

than 25

X Xk 12/12 Adjusted

community rating

Maryland 2-50 1 plan/2-50 X N/Al None Adjusted

community rating

Massachusetts X All plans/1-25m X 30 6/6 Adjusted

community rating

Michigan — — — — — —

Minnesota 2-29n All plans/2-29 X 30b X Other

Mississippi 1-35 1 plan/1-25 X 30 12/12 Variation

Missouri 3-25 X X 30 X X

Montana 3-25 X X 30 5 years/

12 months

Variation

Nebraska 3-25 X X X X X

Nevada — — — — — —

(continued)

Page 24 GAO/HEHS-95-161FS State Insurance Reforms
Appendix I 

Structure of State Small Employer Health

Insurance Reforms

State

Employer size

(no. of

employees)

Guaranteed

issue (no. of

plans/applicable

employer size)

Guaranteed

renewal Portability

Preexisting

condition

exclusions

Restrictions

related to

premium rates

New Hampshire 1-100 All plans/1-100 X Not NAICo 3/3/9p Adjusted

community rating

New Jersey 2-49 5 plans/2-49 X X 6/6q Adjusted

community rating

New Mexico 2-50 —r X 31 6/6 Variation

New York 3-50 All plans/3-50 X 60 X Adjusted

community rating

North Carolina 1-49 2 plans/1-49 X 60b 12/12 Adjusted

community rating

North Dakota X 2 plans/1-25 X X X Variation

Ohio 2-50 2 plans/2-50 X 30b X Variation

Oklahoma 50 or less 2 plans/2-50 X 0s X X

Oregon 3-25 1 plan/3-25 X 30b X Other

Pennsylvania — — — — — —

Rhode Island 50 or less 2 plans/3-50 X 30 X X

South Carolina 50 or less 2 plans/2-50 X 30 12/12 Variation

South Dakota X — X — — Variation

Tennessee 3-25 X X 30b 12/12 Variation

Texas 3-50 All plans/3-50 X 60b X X

Utah 1-50 — X X X X

Vermont 1-49 All plans/1-49 N/At 0u 12/12 Adjusted

community rating

Virginia 2-49 2 plans/2-25 X 30b 12/12 Variation

Washingtonv — — — — — —

West Virginia 2-60 — X 30b 12/12 Variation

Wisconsin 2-25 1 plan/2-25 X 30 X Variation

Wyoming 2-25 2 plans/

2 or more

X X X Variation

Legend

— = No provision exists.

X = Provision is substantially similar to the NAIC provision.

N/A = Not applicable.

aThis provision will be applicable to groups of 3-40 beginning on 7/1/96.

bThe act does not specify that services covered previously must have been comparable to

current coverage.

Page 25 GAO/HEHS-95-161FS State Insurance Reforms
Appendix I 

Structure of State Small Employer Health

Insurance Reforms

cOn 7/1/95, the definition of small employer will be changed to 3-50.

dAfter 7/1/95, this provision applies to groups with 3 or more.

eThis may be extended to 180 days in cases where an individual changes employers but still

maintains employer-related coverage.

f

As of 1/1/96, the small group definition will include a business group of 1.

gAs of 1/1/96, this provision will also apply to a business group of 1.

hHawaii was the first state to attempt universal coverage with its passage of the Prepaid Health

Care Act in 1974. With the act’s employer mandate and public programs to ensure coverage, the

state comes closer to having universal coverage in place than any other state. Because this act

was passed before the federal ERISA law, Hawaii is the only state granted an exemption under

ERISA.

i

Expressly refers to and limits cancellations.

j

These reforms will be effective 7/15/95.

k

The services covered under the portability provision differ based on whether an employee

changes jobs or an employer changes coverage.

l

Preexisting condition limitations are generally prohibited.

mA carrier has the option to deny issue to a group of 5 or fewer eligible persons if the group does

not enroll through an intermediary.

nAs of 7/1/95, the definition of small employer will be changed to 2-49.

oTime an individual was covered under a prior health plan must be credited toward any

preexisting condition exclusion period of the new plan if there was no lapse in coverage.

However, if a lapse in coverage resulted because of unemployment, carriers must treat the

unemployment period as continuous coverage.

pA waiting period for preexisting conditions may be no more than 3 months if individuals incur no

medical treatment expense in connection with the preexisting condition during those 3 months.

Otherwise, the waiting period may be no longer than 9 months for a preexisting condition

diagnosed or treated up to 3 months prior to the effective date of coverage.

qPreexisting condition limitations apply only to groups of five or fewer eligible employees and may

not be imposed on larger groups.

r

Related provision exists under state Health Alliance Act.

s

Time an individual was covered under a prior health plan must be credited toward any

preexisting condition exclusion period of the new plan if there was no lapse in coverage. The act

does not specify that previously covered services must have been comparable to current

coverage.

t

State has continuous open enrollment.

uPreexisting condition period must be waived if substantially similar coverage under a prior policy

was in effect for the previous 9 months. Does not provide for a lapse in coverage.

Page 26 GAO/HEHS-95-161FS State Insurance Reforms
Appendix I 

Structure of State Small Employer Health

Insurance Reforms

v

Washington passed the Health Services Act in 1993 to create a universal coverage program for

all residents through an employer mandate. This act included provisions to ensure the availability

and affordability of health coverage to all residents of the state. Although the state did not pass

separate small employer health insurance reform, the comprehensive act contains provisions that

would ensure guaranteed issue (all plans), guaranteed renewal, limitations on preexisting

condition waiting periods (3/3), portability of coverage (90 days), and adjusted community rating.

Table I.2: State Restrictions Related to Premium Rates

State Restrictions

Alabama No provision exists.

Alaska Variation—Premium rates may vary within a range of 35% (2:1) of applicable index rate. No limit on the variation

of index rates among business classes. No limit on the number of allowable classes.

Arizona Variation—Accountable Health Plans cannot vary premium rates by more than 60% (4:1) from the applicable

index rate. No limit on the variation of index rates among business classes. The act does not specify allowable

demographic characteristics but excludes some factors. No limit on the number of classes, and the only

allowable rating factors are family composition, geographic area, and demographic characteristics.

Arkansas Variation—The act does not explicitly limit the number of business classes. Case characteristics are not specified

but may not include claims experience, health status, or duration of coverage.

California Other—Eligible employees are placed in a risk category based on age, geographic region, and family

composition. Carriers assign a standard risk rate to each category with no limits imposed on the allowable

variation in standard risk rates between categories. Within a category, premium rates may vary from the standard

risk rate for individual employees by no more than 20% (1.5:1) for actual or anticipated claims experience. After

7/96, premium rate variation within a category is limited to 10% (1.2:1).

Colorado Adjusted community rating—Adjustments limited to age, family size, and geographic area. For new business

premium rates, the act allows an additional variation of 20% (1.5:1) for industry and class of business but not for

health status. Beginning in 1998, no adjustments will be allowed.

Connecticut Other—Premium rate variation limited to 120% of the base rate by year-end 1994 and will be phased out by 7/95

for groups of 1 to 25. After that, community rating with adjustments for age, gender, geographic area, industry,

group size, and family composition for groups of 1 to 50.

Delaware Variation—Within a class, a premium rate variation of 35% (2:1) of the applicable index rate is allowed with an

additional combination variation of no more than 10% for age, family composition, and geography. Unhealthy

lifestyles and industry are also allowable case characteristics. Unhealthy lifestyles include smoking or

maintaining excessive weight, blood pressure, or cholesterol other than because of organic causes.

Florida Adjusted community rating—Adjustments for gender, age, family composition, tobacco use, or geographic area.

Georgia Other—Pool rating with adjustments allowable for age, sex, size, area, industry, occupational, and avocational

factors. Based on these adjustments, the total premium may vary by not more than 25% (1.67:1) of the pool rate.

Hawaii Reform is comprehensive, not specific to small employer insurance.

Idaho Variation—Age and gender are the only allowable case characteristics.

Illinois Variation—Case characteristics are not specified but may not include claims experience, health status, or

duration of coverage.

Indiana Variation—Premium rates cannot vary from the applicable index rate by more than 35% (2:1). Case

characteristics are not specified but may not include claims experience, health status, or duration of coverage.

Iowa Variation—No limit on the number of allowable classes, and industry and gender are not allowable case

characteristics. Basic benefit coverage policies must return a cumulative loss ratio of at least 70%.

Kansas Substantially similar to NAIC provision.

(continued)

Page 27 GAO/HEHS-95-161FS State Insurance Reforms
Appendix I 

Structure of State Small Employer Health

Insurance Reforms

State Restrictions

Kentucky Adjusted community rating—Adjustments for age, geography, family status, plan design, cost containment,

participation in the alliance, and some discounts for healthy lifestyles. Healthy lifestyles have not yet been

defined.

Louisiana Variation—Premium rates within a class may not vary by more than 20% (1.5:1) of the applicable index rate until

1/1/96, then reduced to 10% (1.2:1). The allowable number of classes is essentially limited to 6. Case

characteristics are not specified but may not include health status, claims experience, or duration of coverage.

Maine Adjusted community rating—Adjustments for age, smoking, industry, geographic area, wellness programs,

group size, and family status with an allowable variation of 33% (2:1). Allowable premium rate variation is

annually decreased and will be phased out by 7/15/97.

Maryland Adjusted community rating—Adjustments for age, geographic area, and family composition, with an allowable

variation of 50% (3:1) until 6/30/95. This variation will gradually be decreased to 16% (1.38:1) after 7/1/97.

Massachusetts Adjusted community rating—Premium rates must be set within a range of 2:1 with variation allowed for age, sex,

industry, group size, and participation rate.

Michigan No provision exists.

Minnesota Other—Pure community rating after 7/1/97. Currently, adjustments for age 50% (3:1), geographic area 20%

(1.5:1), and a general premium variation of 25% (1.67:1) that is based on health status, claims experience, and

occupation. The general premium variation is to be decreased to 12.5% on 7/1/95.

Mississippi Variation—Case characteristics are not specified but may not include claims experience, health status, or

duration of coverage.

Missouri Substantially similar to NAIC provision.

Montana Variation—Allowable case characteristics are not specified but may not include claims experience, health status,

or duration of coverage.

Nebraska Substantially similar to NAIC provision.

Nevada No provision exists.

New Hampshire Adjusted community rating—Adjustments are permitted only for age within a range of 4:1 for the first year (1994)

and 3:1 thereafter and for family size. Annual increases are limited to 25% plus increases related to industry

trends and the age composition of the group generally.

New Jersey Adjusted community rating—Adjustments are allowed only for age, gender, and geography, and rates can vary

by no more than 300%. Also, the act imposes a minimum loss ratio of 75%.

New Mexico Variation—The number of allowable business classes is limited to 2, and allowable case characteristics are

limited to age, gender, geographic area, and smoking practices. Premium increases at renewal are generally

limited to 10% for claims experience, health status, or duration of coverage, in addition to any increases related

to overall industry trends such as medical cost inflation. Effective 7/1/98, community rating with an adjustment

allowed only for 2 age categories—under 19 or over 19 years of age.

New York Adjusted community rating—Adjustments permitted only for family composition and geographic area. Premium

rate increases must be approved by the Commissioner unless carrier meets an anticipated minimum loss ratio

requirement of 75%.

North Carolina Adjusted community rating—Adjustments permitted only for age, gender, family composition, and geographic

area.

North Dakota Variation—Index rates may not vary among classes by more than 15% (1.35:1). Premium rates within a class may

not vary by more than 20% (1.5:1) of the applicable index rate.

Ohio Variation—There is no limit on index rate variation among classes of business. Premium rates within a class that

vary by more than 35% (2:1) of the applicable index rate are subject to additional rate increase limitations. There

is no explicit limit on the allowable number of classes. Allowable case characteristics are not specified but may

not include health status, claims experience, and duration of coverage.

Oklahoma Substantially similar to NAIC provision.

(continued)

Page 28 GAO/HEHS-95-161FS State Insurance Reforms
Appendix I 

Structure of State Small Employer Health

Insurance Reforms

State Restrictions

Oregon Other—Premium rates may not vary from the average rate in a geographic area by more than 33% (2:1), with

adjustments allowed for family composition. Period-to-period increases may not exceed 15% plus any overall

increases related to industry trends such as medical cost inflation.

Pennsylvania No provision exists.

Rhode Island Substantially similar to NAIC provision.

South Carolina Variation—The act does not explicitly limit the allowable number of business classes.

South Dakota Variation—The act does not specify the allowable case characteristics, but they may not include claims

experience, health status, and duration of coverage. The act does not place an explicit limit on the allowable

number of business classes.

Tennessee Variation—Index rates may not vary among classes by more than 25% (1.67:1). Premium rates within a class may

not vary by more than 35% (2:1) of the applicable index rate. The allowable numbers of business classes and

case characteristics are not specified, but case characteristics may not include claims experience, health status,

or duration of coverage.

Texas Substantially similar to NAIC provision.

Utah Substantially similar to NAIC provision.

Vermont Adjusted community rating—Limited adjustments that may produce rates that vary by no more than 20% (1.5:1)

from the community rate.

Virginia Variation—There is no limit on index rate variation among classes. Premium rates within a class may vary by no

more than 20% (1.5:1) of the applicable index rate. There is no explicit limit on the number of allowable business

classes, and case characteristics are not specified but may not include claims experience, health status, and

duration of coverage.

Washington Reform is comprehensive, not specific to small employer insurance.

West Virginia Variation—Case characteristics are not specified but may not include claims experience, health status, or

duration of coverage. The allowable number of business classes is limited to 4. In order to increase rates at

renewal, carriers must meet an anticipated minimum loss ratio requirement of 73%.

Wisconsin Variation—No limit on variation of index rates among business classes. Premium rates cannot vary from the

applicable index rate by more than 30% (1.86:1). Case characteristics are not explicitly specified but may not

include claims experience, health status, or duration of coverage.

Wyoming Variation—The act does not specifically limit the allowable number of business classes.

Page 29 GAO/HEHS-95-161FS State Insurance Reforms
Appendix II 

Major Contributors to This Fact Sheet

Michael Gutowski, Assistant Director, (202) 512-7114

Randy DiRosa, Senior Evaluator, (312) 220-7671

Susan Thillman, Evaluator

Craig Winslow, Senior Attorney

Leslie Albin, Reports Analyst

(108224) Page 30 GAO/HEHS-95-161FS State Insurance Reforms
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