United States General Accounting Office 

GAO Report to Congressional Requester 

September 2003 PRIVATE HEALTH 

INSURANCE 

Federal and State 

Requirements 

Affecting Coverage 

Offered by Small 

Businesses 

GAO-03-1133 

Highlights of GAO-03-1133, a report to the 

Ranking Minority Member, Subcommittee 

on Oversight of Government 

Management, the Federal Workforce, and 

the District of Columbia, Committee on 

Governmental Affairs, U.S. Senate 

Most employees in the U.S. have 

health coverage through 

employers. Small businesses with 

fewer than 50 employees, however, 

are less likely to offer coverage 

than larger businesses. Many say 

they cannot afford it. When they 

do provide coverage, small 

businesses typically purchase 

insurance policies, while larger 

businesses are more likely to use 

their own funds to pay for some of 

their employees’ health care, a 

practice known as self-funding. 

One proposal to make health 

coverage more affordable for small 

businesses would establish 

Association Health Plans (AHP), 

which could offer coverage to 

small businesses subject to 

different federal and state 

requirements than currently exist. 

In light of this proposal, GAO was 

asked to summarize current federal 

and state requirements for health 

coverage offered by small 

businesses, including mandated 

benefits, premium-setting 

requirements, and requirements 

regarding availability of coverage. 

To identify these requirements, 

GAO reviewed federal and selected 

states’ laws and literature from the 

Department of Labor (DOL), 

National Association of Insurance 

Commissioners (NAIC), and other 

sources. For further detail on 

some states’ insurance 

requirements, GAO reviewed 8 

states with a range in the number 

of mandated benefits and 4 states 

with different types of premiumsetting requirements. 

www.gao.gov/cgi-bin/getrpt?GAO-03-1133. 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Kathryn G. 

Allen at (202) 512-7118. 

September 2003 

PRIVATE HEALTH INSURANCE 

Federal and State Requirements Affecting 

Coverage Offered by Small Businesses 

Federal law does not require private employers of any size to offer health 

coverage, nor does it require those that do offer coverage to include specific 

benefits. However, employers choosing to offer mental health, mastectomy, 

and maternity benefits generally must meet certain federal requirements. 

States, which have primary responsibility for regulating insurers, require 

health insurance policies offered by businesses of any size to include certain 

benefits, but the number, type, and scope of these requirements vary 

substantially among states. For example, 7 states each had 30 or more 

benefit mandates, while 5 states each had fewer than 10 benefit mandates. 

Federal requirements for premiums prohibit variation among similarly 

situated individuals in an employer group for businesses of any size based on 

health status, and these requirements apply whether the employer purchases 

health insurance or self-funds the health coverage. State requirements that 

limit premium variation among small businesses apply only to insurers, 

therefore affecting only employers that purchase health coverage from 

insurers. State requirements varied widely in the extent to which they 

restricted the amount that premiums may vary among small businesses and 

in the characteristics of the groups that may be used to set premiums. 

Differences among states in whether and how factors such as age, gender, 

and health status are considered can affect the extent to which small 

businesses with employees having higher risk factors pay more for coverage. 

For example, a small business with older, higher-risk employees and 

dependents in Texas could have been charged nearly four times as much as a 

small business of the same size with younger, healthier employees and 

dependents. In New York, the two small businesses would have been 

charged the same premium. Most states also had restrictions on how 

premiums may be adjusted at renewal. 

Federal laws require insurers selling coverage to small businesses to make 

all policies available and require that employers offer continuation of health 

coverage for a period of time for certain individuals who otherwise would 

lose group coverage. All but one state had laws that conformed with federal 

requirements for small businesses, and some states’ requirements exceeded 

the federal minimums. For example, 39 states extended the federal 

continuation of coverage requirements to policies covering groups with 

fewer than 20 employees. 

The DOL, NAIC, and 10 states provided technical comments on a draft of this 

report, which were incorporated as appropriate. NAIC also provided written 

comments emphasizing, among other things, the importance of states’ 

consumer protections. 
Contents 


Letter 

Results in Brief 


Background


Health Benefit Requirements 


Premium Requirements 


Requirements for Availability of Health Coverage 


Patient Protection Requirements Regarding Appeals of Denied


Claims and Access to Certain Health Care Services 

Fiduciary and Financial Requirements 

Comments from External Reviewers 

1 

3 

6 

8 

17 

22 

25 

27 

31 

Appendix I 	 State-Mandated Benefits for the Small Group 

Health Insurance Market in Eight States 

Appendix II Estimated Costs of State-Mandated Benefits 

Appendix III State Premium Requirements 

Appendix IV 	 States Exceeding Federal Availability of Coverage 

Requirements 

Appendix V 	 State External Review Programs and Patient 

Protections for Access to Health Care Providers 

Appendix VI State Financial Requirements 54 

Related GAO Products 57 

Page i GAO-03-1133 Small Business Health Coverage Requirements 

33 

38 

41 

44 

46 
Tables 

Table 1: Number of States with Premium-Setting Requirements for 

the Small Group Market, by Type of Rating, 2003 

Table 2: Average Annual per Enrollee Premium Quotations for 

Three Hypothetical Small Business Groups, with 

Increasing Risk Characteristics, in Selected Localities, 

2000 

Table 3: Health Care Benefit and Provider Mandates Applicable to 

the Small Group Market in Eight States, 2003 

Table 4: Variation in Scope of Selected Mandates for Small Group 

Market in Selected States 

Table 5: State Premium Requirements 

Table 6: Selected Availability of Coverage Protections, by State 

Table 7: Claims Denials Eligible for Review and Individual 

Accessibility to State External Review Programs 

Table 8: Independence of Reviewer and Time Limits on Completion 

of Review Process for State External Review Programs 

Table 9: Selected Patient Protections, by State, 2003 

Table 10: State Financial Requirements 

19 

21 

34 

37 

42 

44 

47 

49 

51 

55 

Figures 

Figure 1: Number of Benefit and Provider Mandates for Small 

Group, Large Group, and Individual Insurance Markets, by 

State, 2002 11 

Figure 2: Frequency of State Benefit Mandates for Small Group, 

Large Group, and Individual Insurance Markets, 2002 13 

Page ii GAO-03-1133 Small Business Health Coverage Requirements 
Abbreviations 

AHP Association Health Plan


BCBSA Blue Cross Blue Shield Association 


CBO Congressional Budget Office 


CMS Centers for Medicare & Medicaid Services 


COBRA Consolidated Omnibus Budget Reconciliation Act of 1985 


DOL Department of Labor 


DSM Diagnostic and Statistical Manual of Mental Disorders 


ER emergency room


ERISA Employee Retirement Income Security Act of 1974


HIPAA Health Insurance Portability and Accountability Act of 1996 


HIV human immunodeficiency virus 


NAIC National Association of Insurance Commissioners 


HMO health maintenance organization 


ICD International Classification of Diseases 


OB/GYN obstetrician/gynecologist


PKU phenylketonuria 


PPO preferred provider organization 


RBC risk-based capital 


This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page iii GAO-03-1133 Small Business Health Coverage Requirements 
United States General Accounting Office 

Washington, DC 20548 

September 30, 2003 

The Honorable Richard J. Durbin 

Ranking Minority Member 

Subcommittee on Oversight of Government Management, 

the Federal Workforce, and the District of Columbia 

Committee on Governmental Affairs 

United States Senate 

Dear Senator Durbin: 

Nearly three-fourths of employed individuals in the United States have 

health coverage that many employers offer voluntarily as an employee 

benefit. Many employees without coverage are employed by small 

businesses. In 2001, small businesses with fewer than 50 employees were 

about half as likely to offer health coverage to their employees than were 

larger businesses. The reason small businesses most often gave for not 

offering coverage is the high cost, which makes it difficult for small 

businesses to afford it. A key distinction between how small and larger 

businesses provide health coverage to their employees is that small 

businesses typically purchase health insurance policies sold by insurers,1 

while larger businesses are more likely to set aside their own funds to pay 

directly for at least some of their employees’ health care, a practice 

referred to as self-funding a plan. This distinction between purchasing 

health insurance policies and self-funding a plan affects which federal and 

state requirements the health coverage is subject to. All private employersponsored health coverage, regardless of whether it is a purchased health 

insurance policy or a self-funded plan, is subject to certain federal 

requirements, such as fiduciary obligations that require assets related to 

the health coverage to be managed prudently. Health coverage that is 

purchased from an insurer is subject to state regulatory requirements, 

which can include mandating coverage of certain benefits and providers 

and restricting how premiums may be set. As a result, most of the health 

coverage offered by small businesses is subject to both federal and state 

requirements, whereas self-funded plans offered by businesses—typically 

larger businesses—are subject only to federal requirements. 

1

For the purposes of this report, the term “insurers” is used to include insurance carriers 

that provide fee-for-service health insurance coverage and managed care organizations 

such as health maintenance organizations (HMO). In some cases, states may have 

somewhat different requirements for HMOs than for other insurers. 

Page 1 GAO-03-1133 Small Business Health Coverage Requirements 
In an effort to make health coverage more affordable for small businesses, 

Congress is considering allowing groups of businesses that are part of or 

join an association to offer health insurance policies that would not be 

subject to some state health insurance requirements.2

 This Association 

Health Plan (AHP) proposal would also establish additional federal 

requirements for health coverage offered through the AHPs. 

In light of the AHP proposal, you asked us to summarize current federal 

and state requirements for small business health coverage. Specifically, we 

identified existing federal and state requirements for (1) health benefits 

and available data on the costs of state-mandated benefits, (2) premium 

setting, (3) availability of coverage, (4) patient protections regarding 

denied claims and access to specialists, and (5) employers’ fiduciary and 

insurers’ financial responsibilities. 

To identify existing federal and state requirements,3

 we reviewed federal 

and selected states’ laws; information from the Department of Labor 

(DOL), the National Association of Insurance Commissioners (NAIC), the 

Blue Cross Blue Shield Association (BCBSA), and Georgetown 

University’s Institute for Health Care Research and Policy; other literature; 

and prior GAO reports.4

 The information available did not always 

distinguish between state requirements that apply to health insurance sold 

to small businesses (referred to as the small group market) and those that 

apply to insurance sold to larger businesses and individuals (the large 

group and individual insurance markets, respectively). To obtain more 

detailed information on how benefit mandates in the small group market 

differ across states, we reviewed states’ laws, regulations, and insurance 

department bulletins and contacted department of insurance officials in 

eight states (Alabama, Colorado, Georgia, Idaho, Illinois, Maryland, 

Nevada, and Vermont), which, based on a BCBSA report, exhibited a range 

in the number of state health insurance mandates. To obtain more detailed 

information on how premium-setting requirements differ across states, we 

reviewed the laws of four states (Colorado, Maine, Rhode Island, and 

Texas) that have adopted different approaches to regulating insurers’ 

2

The Small Business Health Fairness Act of 2003 (S. 545) was introduced on March 6, 2003. 

Similar legislation, also entitled the Small Business Health Fairness Act of 2003 (H.R. 660), 

passed the House of Representatives on June 19, 2003. 

3

Throughout the remainder of this report, unless otherwise noted, the District of Columbia 

is included as a state. 

4

A list of related GAO products is at the end of this report. 

Page 2 GAO-03-1133 Small Business Health Coverage Requirements 
Results in Brief 

premiums for coverage sold to small businesses. Our work was conducted 

from March through September 2003 according to generally accepted 

government auditing standards. 

Overall, employees working for small businesses could have substantially 

different benefits, premiums, and protections available to them, depending 

on the states in which their employers are located. While federal law 

generally requires all private employers offering health coverage to their 

employees to meet certain minimum requirements, states have primary 

responsibility for regulating health insurance policies sold by insurers. As 

a result, substantial variation exists across states in the extent to which 

they impose requirements on health insurance, such as mandating 

coverage of certain benefits or placing limits on premiums. 

Federal law does not require that any business offer health coverage or 

require coverage of specific benefits. However, federal law has minimum 

benefit requirements for businesses that choose to offer health coverage 

that includes certain benefits, whether it is purchased from an insurer or is 

a self-funded plan. For example, businesses of any size offering 

mastectomy coverage must also cover related reconstructive surgery and 

other mastectomy-related benefits. While all states have mandated that 

certain benefits be covered by health insurance policies, the number, type, 

and scope of the states’ requirements varied substantially. According to a 

BCBSA survey published in 2002, the total number of benefits mandated in 

the small group, large group, and individual markets varied among states 

from fewer than 10 in five states to more than 30 in seven states. The two 

most commonly mandated benefits—required by 43 or more states—were 

mammography screening and diabetic supplies. Less commonly mandated 

benefits—required by five or fewer states—included hair prostheses 

(wigs) for individuals with cancer or other diseases, blood lead screening, 

prescription drugs, and chemotherapy. In eight states where we reviewed 

mandated benefits applicable specifically to the small group market, we 

found that the specific terms and scope of certain mandates also varied. 

For example, four of the eight states mandated coverage for mental health 

services, but these states varied in the diagnoses for which coverage must 

be provided and the number of inpatient days and outpatient visits for 

which coverage was required. When estimating the costs associated with 

mandated benefits, few studies have taken into account the fact that many 

businesses would offer some similar benefits even absent a mandate. 

However, two studies estimated that the additional costs associated with 

state-mandated benefits represented about 3 to 5 percent of total premium 

costs. 

Page 3 GAO-03-1133 Small Business Health Coverage Requirements 
Federal requirements related to premiums apply to any size business and 

prohibit variation among individuals within the same employee category— 

which could include the same geographic location or employment status— 

on the basis of health-status related characteristics. Most states set limits 

on how premiums that insurers charge small businesses could vary, but 

states varied widely in the extent to which they allowed premiums to vary 

and the characteristics of the group that could be used to set or vary 

premiums, both initially and upon policy renewal. Differences among 

states in their premium requirements can substantially affect the extent to 

which small businesses that have employees with higher-cost risk factors 

would be charged more for coverage. For example, in New York, a small 

business covering older employees and dependents, including one in poor 

health, would have been charged the same premium as a small business of 

the same size with younger, healthier employees and dependents, while in 

Texas, the employer covering higher-risk employees and dependents could 

have been charged nearly four times as much as an employer of lower-risk 

people. 

With regard to availability of coverage, federal laws require that insurers 

offer small businesses with 2 to 50 employees the option to purchase 

coverage and that small businesses with 20 or more employees allow 

employees and their dependents to continue to purchase health coverage 

under certain circumstances, such as when individuals, with certain 

exceptions, lose their health coverage due to a loss of employment. States 

had requirements for availability of health insurance and continuation of 

coverage for individuals with coverage through small businesses that in 

some cases exceeded the federal requirements. For example, 39 states 

extended the federal continuation of coverage requirements to policies 

covering groups with fewer than 20 employees. 

With regard to patient protections, federal law requires that coverage 

offered through businesses of any size, whether it is through an insurance 

policy or a self-funded plan, have an internal review process for appeals of 

denied claims, and most states required an independent external review 

process for appeals of denied claims. Specifically, 43 states had laws in 

2002 establishing independent external review of denied claims for 

insurance policies, although states varied significantly in the kinds of 

appeals eligible for external review, individuals’ accessibility to the 

external review process, the independence of the reviewer, and the time 

allowed for completion of external review. In addition, in response to 

concerns about appropriate access to health care services, particularly 

regarding managed care, most states adopted protections that allowed 

Page 4 GAO-03-1133 Small Business Health Coverage Requirements 
patients direct access to certain health care providers and services, such 

as obstetricians/gynecologists and emergency services. 

Regarding employer fiduciary responsibilities and insurer financial 

requirements, federal law focuses on the responsibilities of fiduciaries— 

persons with discretionary authority over plan assets. Federal law requires 

that fiduciaries for any employer-sponsored health coverage act prudently 

and in the exclusive interest of the covered individuals. Federal 

requirements do not include specific financial requirements, such as 

protections against insolvency. In contrast, all states generally required 

that insurers maintain sufficient funds to cover unexpected losses and to 

invest conservatively in order to ensure that insurers were financially 

sound and able to pay the claims of policyholders. State requirements 

include oversight of insurers’ financial soundness, such as through 

periodic on-site financial exams. States with set requirements to protect 

against unexpected losses for health insurers required that insurers 

maintained a minimum of $150,000 to $3.6 million, with a median of 

$1.3 million. In addition, some states required certain insurers to maintain 

more than the minimum amount, depending on their financial risk. 

According to data from NAIC, the median amount insurers selling health 

coverage reported having to protect against unexpected losses in 2002 was 

$15 million. All states also required certain insurers to contribute to stateadministered guaranty funds, which are used to pay for claims if an insurer 

fails. 

We provided a draft of this report to DOL, NAIC, and 12 states whose 

benefit or premium requirements for the small group market were 

discussed in the report. DOL and 10 states provided technical comments, 

which we incorporated as appropriate; 2 states did not provide comments. 

In written comments, NAIC expressed agreement with several findings in 

our report and also stressed the important role that states play in 

providing protections to consumers with health insurance. NAIC also 

provided technical comments, which we incorporated as appropriate. 

Page 5 GAO-03-1133 Small Business Health Coverage Requirements 
Background Most small businesses that offer health coverage to their employees 

purchase health insurance policies from insurers, such as local Blue Cross 

and Blue Shield plans or other private insurers, or managed care 

organizations, such as health maintenance organizations. Few small 

businesses offer a self-funded plan—12 percent of the small businesses 

with fewer than 50 employees that offered coverage in 2001 had a selffunded plan. In contrast, the larger businesses are more likely to offer selfinsured plans, with nearly 60 percent of businesses with 50 or more 

employees self-funding at least one of the health plans they offered.5

 Many 

businesses that self-fund purchase stop-loss insurance to moderate their 

risk, as such insurance caps the amount of claims the business will pay 

directly for either an individual or the group. 

The Employee Retirement Income Security Act of 1974 (ERISA)6 

established certain federal requirements for benefits that employers offer 

their employees, retirees, and dependents including health coverage as 

well as pensions and other benefits. ERISA requirements generally apply 

to all private employer-sponsored health coverage regardless of the size of 

business or whether the coverage is through a health insurance policy or a 

self-funded plan. ERISA also preempts employer-sponsored health 

coverage from direct state regulation (but maintains states’ role in 

regulating insurance). ERISA establishes certain reporting requirements, 

disclosure requirements, fiduciary obligations, and claims-filing 

procedures that are enforceable by the Employee Benefits Security 

Administration of DOL. 

Since ERISA was enacted in 1974, it has been amended several times to 

establish additional federal requirements for employer-sponsored 

coverage. The Consolidated Omnibus Budget Reconciliation Act of 1985 

(COBRA)7

 requires employers to offer continued coverage for individuals, 

with certain exceptions, who would have otherwise lost employersponsored health coverage. COBRA allows individuals who change or lose 

5

About 76 percent of businesses with 500 or more employees offering health coverage 

offered at least one self-funded plan. See Agency for Healthcare Research and Quality, 2001 

Employer-Sponsored Health Insurance Data. Private-Sector Data by Firm Size, Industry 

Group, Ownership, Age of Firm, and Other Characteristics. (Rockville, Md.: September 

2003), http://www.meps.ahrq.gov/mepsdata/ic/2001/index101.htm (downloaded September 

22, 2003). 

6

Pub. L. No. 93-406, 88 Stat. 829. 

7

Pub. L. No. 99-272, 100 Stat. 82 (1986). 

Page 6 GAO-03-1133 Small Business Health Coverage Requirements 
their jobs to maintain coverage for a minimum of 18 months, but the 

individual may be required to pay the full premium. The Health Insurance 

Portability and Accountability Act of 1996 (HIPAA)8

 guarantees the 

availability of health insurance for small businesses that choose to 

purchase coverage and provides greater continuity in coverage for 

individuals who change health plans when they change employers or who 

change to an individually purchased insurance policy. Three subsequent 

laws established additional minimum requirements that businesses must 

meet if they offer coverage for mental health, maternity, or mastectomy 

benefits.9 

States have primary responsibility for regulating insurance. Therefore, 

health insurance sold within a state must meet federal and state 

requirements, but businesses’ self-funded plans are subject only to federal 

requirements because ERISA preempts states’ regulation of employersponsored health coverage.10 State requirements may apply to all health 

insurers, whether they are selling coverage to small or larger groups or to 

individuals, or they may be specific to coverage sold in the small group 

market. In addition, state requirements may be based on model laws, 

regulations, and guidelines developed by NAIC. 

Proposed federal legislation would establish new rules for health coverage 

sponsored by associations for the employees of member businesses.11 

These new rules would apply only to AHPs that obtain certification from 

DOL and would vary depending on whether the AHP coverage is through a 

self-funded plan or an insured policy. The proposed legislation would 

change current federal and state requirements for health coverage in 

several respects: (1) self-funded AHP plans would be subject to new 

federal financial requirements, (2) insured AHP policies could be approved 

in one state and sold in other states without meeting all the requirements 

for approval in the other states, and (3) all AHP coverage would be exempt 

8

Pub. L. No. 104-191, 110 Stat. 1936. 

9

These laws are the Mental Health Parity Act of 1996, Pub. L. No. 104-204, Title VII, 110 Stat. 

2874, 2944; the Newborns’ and Mothers’ Health Protection Act of 1996, Pub. L. No. 104-204, 

Title VI, 110 Stat. 2874, 2935; and the Women’s Health and Cancer Rights Act of 1998, Pub. 

L. No. 105-277, Title IX, 112 Stat. 2681, 2681-436. 

10The McCarran-Ferguson Act, March 9, 1945, Ch. 20, 59 Stat. 33, establishes the primary 

authority of the states to regulate the business of insurance, unless federal law provides 

otherwise. 

11S. 545 and H.R. 660, 108th Congress. 

Page 7 GAO-03-1133 Small Business Health Coverage Requirements 
Health Benefit 


Requirements 


from every states’ health benefit mandates and in some cases could be 

subject to premium-setting requirements that differ from current state 

requirements. As deliberations on this proposed legislation proceed, 

however, the specific proposals and requirements could be subject to 

change. 

While federal law does not require businesses to offer any specific health 

benefits, those that choose to cover maternity, mental health, or 

mastectomy benefits generally must meet minimum federal requirements. 

Every state mandated that certain health benefits be included in insurance 

policies sold within the state (in the small group, large group, or individual 

insurance markets); however, the number and type of benefits required 

varied significantly from state to state. In eight states where we reviewed 

mandated benefits applicable specifically to the small group market, we 

found that the specific terms and scope of certain mandates also varied. In 

estimating the costs associated with mandated benefits, few studies have 

taken into account the fact that many businesses would offer some similar 

benefits even without a mandate to do so. However, two studies estimated 

that the additional costs associated with mandates represented about 3 to 

5 percent of total premiums. 

Coverage for Certain 

Benefits Must Satisfy 

Minimum Federal 

Requirements 

Federal laws include minimum benefit requirements for businesses that 

choose to offer certain benefits: 

• 	 The Pregnancy Discrimination Act12 requires businesses with 15 or more 

employees to cover expenses for pregnancy and medical conditions 

related to pregnancy on the same basis as coverage for other medical 

conditions. 

• 	 The Newborns’ and Mothers’ Health Protection Act of 1996 requires that 

employer-sponsored health coverage that includes hospital stays in 

connection with childbirth must cover a minimum length of stay for 

mothers and newborns following delivery. For vaginal deliveries, the 

coverage provided cannot restrict hospital stays to less than 48 hours; for 

caesarean births, the coverage provided cannot restrict hospital stays to 

less than 96 hours. 

12Pub. L. No. 95-555, 92 Stat. 2076 (1978). 

Page 8 GAO-03-1133 Small Business Health Coverage Requirements 
• 	 The Mental Health Parity Act of 1996 requires that mental health benefits 

included in employer-sponsored health coverage cannot have annual or 

lifetime dollar limits on mental health benefits that are lower than any 

such dollar limits for medical and surgical benefits. The law does not apply 

to (1) coverage sponsored by a small business with 50 or fewer employees 

and (2) coverage sponsored by larger businesses that experience an 

increase in total claims costs of at least 1 percent as a result of complying 

with the act. The health coverage may still contain other limits, such as 

those on the number of days or visits covered.13 

• 	 The Women’s Health and Cancer Rights Act of 1998 requires that 

employer-sponsored health coverage that provides coverage for 

mastectomies also cover related reconstructive surgery and other 

mastectomy-related benefits, such as coverage for prostheses and physical 

complications (including lymphedemas). 

DOL is responsible for enforcing the minimum federal requirements for 

the Newborns’ and Mothers’ Health Protection Act, the Mental Health 

Parity Act, and the Women’s Health and Cancer Rights Act for self-funded 

plans.14 In cases where a state does not enforce these requirements for 

coverage purchased from an insurer, the Centers for Medicare & Medicaid 

Services (CMS) assumes the responsibility for enforcement. As of July 

2003, nearly all states were enforcing the federal requirements—only 

Colorado, Massachusetts, Wisconsin, and Rhode Island had not enacted 

fully conforming legislation and relied on CMS to enforce one or more of 

these federal requirements. 

Health Insurance All states mandated that certain benefits and providers be included or 

Mandates Vary offered in health policies sold in their states. State mandates may apply to 

Substantially among States insurance products sold in the small group, large group, or individual 

insurance markets; however, some states altered requirements specifically 

for insurance policies sold in the small group market. The most common 

types of mandates required health insurers to cover certain procedures or 

treatment of illnesses (mandated benefits) or to pay for covered services 

13U.S. General Accounting Office, Mental Health Parity Act: Despite New Federal 

Standards, Mental Health Benefits Remain Limited, GAO/HEHS-00-95 (Washington, D.C.: 

May 10, 2000). 

14The Equal Employment Opportunity Commission enforces the Pregnancy Discrimination 

Act. 

Page 9 GAO-03-1133 Small Business Health Coverage Requirements 
provided by certain physician specialists or nonphysician providers 

(provider mandates).15 

Number and Type of State 

Benefit and Provider 

Mandates for All Insurance 

Markets 

The total number of mandates applicable to all insurance markets—small 

group, large group, and individual—varied from state to state. (See fig. 1.) 

According to a 2002 survey by BCBSA, 7 states—Connecticut, Maryland, 

Massachusetts, Minnesota, Nevada, Texas, and Virginia—each had 30 or 

more mandates. Fifteen states had 15 or fewer mandates; 5 of these 

states—Alabama, Idaho, Iowa, Vermont, and the District of Columbia— 

each had fewer than 10. The median number of mandates required by 

states for all three insurance markets was 17. 

15States also required that certain benefits be offered (mandated offers) in at least some 

policies but allow insurers to offer other products that do not include those benefits. 

Page 10 GAO-03-1133 Small Business Health Coverage Requirements 
Figure 1: Number of Benefit and Provider Mandates for Small Group, Large Group, and Individual Insurance Markets, by 

State, 2002 

Note: Includes benefit and provider mandates as identified by BCBSA. BCBSA also identified 

ambulance transportation and emergency service requirements as mandated benefits, but we 

classified these as patient protections because they involve access to health services. Additionally, 

we did not include state laws related to the federal requirements for breast reconstruction or minimum 

maternity stay. 

Page 11 GAO-03-1133 Small Business Health Coverage Requirements 
The types of mandates required varied from state to state, with some 

mandates required more often than others. Of the 59 different types of 

benefits that states required for all insurance markets, 8 were required by 

more than half the states. The two most commonly mandated benefits 

were mammography screening and diabetic supplies, with 43 or more 

states requiring coverage of each of these benefits. Other benefits were 

less frequently required—such as hair prostheses (wigs) for individuals 

being treated for cancer or other diseases (5 states), blood lead screening 

(4 states), prescription drugs (3 states), and chemotherapy (2 states). 

Further, 19 of the mandates were required by only 1 state, such as 

coverage for Alzheimer’s disease, treatment for morbid obesity, prenatal 

HIV testing, and wellness exams. (See fig. 2.) Common provider mandates 

included chiropractors (42 states), psychologists (41 states), and 

optometrists (36 states). 

Page 12 GAO-03-1133 Small Business Health Coverage Requirements 
Figure 2: Frequency of State Benefit Mandates for Small Group, Large Group, and Individual Insurance Markets, 2002 

a

Mandate goes beyond federal minimum requirement. 

b

Phenylketonuria (PKU) is an enzymatic disorder that affects the way the body processes protein. 

c

Mandate requires coverage of vaccines once approved by the Food and Drug Administration. 

Page 13 GAO-03-1133 Small Business Health Coverage Requirements 
Number, Type, and Scope 

of State Mandates in the 

Small Group Market 

The benefit requirements in eight states we reviewed—Alabama, Colorado, 

Georgia, Idaho, Illinois, Maryland, Nevada, and Vermont—illustrate the 

extent of variation in the number, type, and scope of state benefit 

requirements specifically for the small group health insurance market. The 

number of benefit mandates that applied to health insurance policies sold 

to small businesses in these states ranged from 5 in Idaho to 32 in 

Maryland. Four of the 5 mandates required in Idaho—coverage for 

congenital abnormalities, mammography screening, maternity care, and 

complications of pregnancy—were also required by some of the other 

states we reviewed. Similarly, 27 of Maryland’s mandates, such as diabetic 

supplies and mammography screenings, were also mandated by one or 

more of the other seven states, while 5 mandates, including bone density 

screenings and hearing aids for children, were not required in any of the 

other states we reviewed. (See table 3 in app. I for more detail on benefit 

and provider mandates in these eight states.) 

Among states that required health insurance to cover certain services, the 

scope of the benefit mandates often varied. For example, mandates varied 

in their terms and conditions (such as the diagnosis for which coverage 

must be provided) and the minimum level of benefits required (such as the 

number of inpatient days or outpatient visits). The following illustrates the 

variation in the scope of mandates for the small group market among the 

eight states we reviewed for four specific types of mandates: 

Well-child care: Five of the eight states—Colorado, Georgia, Illinois, 

Maryland, and Vermont—required that well-child care be covered, but 

varied as to the age of children and types of services for which coverage 

was required. For example, Colorado required coverage of preventive 

services and immunizations for children up to the age of 13, while Georgia 

required coverage for reviews of the physical and emotional status of a 

child through age 5. Maryland specified comprehensive requirements 

listed under the recommendations from the United States Preventive 

Services Task Force.16 Further, Georgia and Colorado exempted well-child 

care services from deductibles and dollar limits. 

16U.S. Preventive Services Task Force, Agency for Healthcare Research and Quality, Guide 

to Clinical Preventive Services, Third Edition: Periodic Updates (Rockville, Md.: March 

2003). The U.S. Preventive Task Force, convened by the Public Health Services, is an 

independent panel of experts in primary care and prevention that systematically reviews 

the evidence of effectiveness and develops recommendations for clinical preventive 

services. 

Page 14 GAO-03-1133 Small Business Health Coverage Requirements 
Mental health services: Five of the eight states—Colorado, Illinois, 

Maryland, Nevada, and Vermont—required insurance sold in the small 

group market to include mental health benefits, but the extent of the 

required coverage varied among the states.17 For example, Nevada required 

coverage for a minimum of 40 days of inpatient care and 40 days of 

outpatient care and limited this coverage to six “biologically based” 

conditions.18 Maryland required coverage for 60 inpatient days and, in 

addition to requiring the coverage of outpatient services, required insurers 

to pay at least 70 percent of the cost for outpatient services. Maryland also 

required coverage of residential crisis services. 

Parity in mental health and other medical/surgical services: Four of the 

eight states we reviewed—Colorado, Georgia, Maryland, and Vermont— 

had mental health parity requirements that applied to smaller businesses 

exempt from the federal Mental Health Parity Act, which applies only to 

employers with 51 or more employees. These states’ parity laws varied, 

however, in the diagnoses for which parity was required, whether separate 

cost-sharing amounts for mental health care were permitted, and whether 

parity extended to limits on the number of covered days or visits. For 

example, Colorado required that mental health benefits for six 

biologically-based conditions be no less extensive than those for physical 

illness. Vermont prohibited insurers from establishing any rate, term, or 

condition that placed a greater financial burden on the insured individual 

than that for the treatment of physical conditions, including parity 

regarding limits on the number of covered visits. 

Organ transplants: Two of the eight states—Illinois and Maryland—had 

provisions mandating coverage for organ transplants. Illinois generally 

required coverage for organ transplants with the exception of 

experimental and investigational procedures, while Maryland required 

17Georgia also mandated that mental health services be offered as a benefit, but insurers 

could also offer products without mental health services. Illinois mandated coverage of 

mental health services, but groups with fewer than 50 employees were exempt from the 

requirement. 

18The six biologically based conditions, as specified in the American Psychiatric 

Association’s Diagnostic and Statistical Manual of Mental Disorders, were schizophrenia, 

schizoaffective disorder, bipolar disorder, major depressive disorders, panic disorder, and 

obsessive-compulsive disorder. See American Psychiatric Association’s Diagnostic and 

Statistical Manual of Mental Disorders, Fourth Edition, Text Revision (Washington, D.C.: 

2000) 

Page 15 GAO-03-1133 Small Business Health Coverage Requirements 
coverage of bone marrow, cornea, kidney, liver, heart, lung, and pancreas 

transplants. 

Appendix I provides additional detail about these four types of mandated 

benefits in the eight states. 

Estimated Costs of StateMandated Benefits 

While the number, type, and scope of benefit and provider mandates in a 

state can affect the cost of insurance, the additional costs beyond what 

businesses would typically incur are estimated to be relatively small. Most 

studies that have addressed the costs of mandated benefits have not 

examined the additional (marginal) costs of mandates but have instead 

reported the total costs associated with benefit mandates, even though 

employers may have chosen to cover some or all of these benefits even in 

the absence of any mandate.19 Maryland—the state with the most 

mandated benefits—analyzed both the total and marginal costs of its 

mandated benefits. Whereas Maryland found that the total costs 

associated with its benefit mandates were about 14 percent, the marginal 

costs represented about 3 percent of premiums.20 In another study, the 

Congressional Budget Office estimated that the marginal costs of five state 

health insurance mandates were 0.28 to 1.15 percent, and estimated that 

mandated benefits in general could increase premiums by about 5 percent 

over what they would have been without mandates.21 (See app. II for 

additional information on the estimated cost of mandated benefits.) 

19Estimates of the total costs associated with state-mandated benefits vary widely, with 

studies by three states—Maryland, Texas, and Virginia—estimating that mandates in their 

states accounted for 14 percent, 6 percent, and 29 percent of premiums, respectively. 

20Mercer Human Resource Consulting, Mandated Health Insurance Services Evaluation, a 

report prepared at the request of the Maryland Health Care Commission, 2002. 

21The five state mandates were alcoholism treatment, drug abuse treatment, mental illness 

treatment, chiropractic services, and mandated continuation of health insurance for 

terminated employees and their dependents. See Congressional Budget Office, Increasing 

Small-Firm Health Insurance Coverage Through Association Health Plans and HealthMarts 

(Washington, D.C.: January 2000). 

Page 16 GAO-03-1133 Small Business Health Coverage Requirements 
Premium 


Requirements 


Federal premium requirements prohibit any employer-sponsored health 

coverage from charging employees a higher premium based on healthrelated factors than the premium charged to other similarly situated 

individuals. Employers may treat groups of individuals differently if the 

groups are based on an employment class (such as full-time or part-time) 

that is consistent with employers’ usual business practices. State premium 

requirements for insurance sold in the small group market limited how 

premiums were set and the amount by which they could vary for different 

small businesses. In 2003, almost all states had premium-setting 

requirements, but states varied widely in the degree to which they limited 

the individual characteristics that could be used to set premiums and how 

much the premiums could differ among small businesses buying the same 

insurance product. Also, for the small group market in 2002, many states 

limited how premiums were set for renewal policies but did not restrict 

how often premiums could be adjusted. 

Federal Requirements 

Restrict Variation in 

Premiums for Individuals 

with Employer-Sponsored 

Health Coverage 

Federal requirements do not address how premiums for employersponsored health coverage are set but rather HIPAA’s nondiscrimination 

provision prohibits, for businesses of all sizes, premiums from differing for 

similarly situated individuals on the basis of health-related factors.22 

Similarly situated employees might share the same geographic location or 

employment status. HIPAA does not prohibit health insurers or employers 

that self-fund from taking into account the health of the employees and 

their dependents when setting the group’s premiums, but it does prohibit 

them from charging employees or their dependents different amounts 

based on this health information. Further, HIPAA does not prohibit 

premiums from varying among employees for other reasons. For example, 

employees in different employment categories, such as those in different 

geographic locations or with different employment status, may be charged 

different amounts for health coverage. 

22HIPAA specifies that health-related factors include: (1) health status, (2) medical 

condition—including both physical and mental illness, (3) claims experience, (4) receipt of 

health care, (5) medical history, (6) genetic information, (7) evidence of insurability— 

including conditions arising out of acts of domestic violence, and (8) disability. 

Page 17 GAO-03-1133 Small Business Health Coverage Requirements 
Most States Limited How 

Insurers Could Vary 

Premiums for Different 

Small Businesses 

In 2003, nearly all states (47) had some restrictions on how premiums 

were set for insurance sold in the small group market. These requirements 

focused on limiting the extent to which premiums offered to small 

employers purchasing the same coverage could differ. State requirements 

varied in the extent to which they restricted the amount premiums could 

reflect the heath and other demographic characteristics of the group’s 

employees and dependents. Further, while states tended to adopt one of 

three types of premium-setting requirements for coverage sold to small 

businesses—pure community rating, modified community rating, or rating 

bands—the specific restrictions varied widely with some states adopting 

aspects of more than one type of requirement. (See app. III for a summary 

of state premium requirements.) In general, pure community rating 

requirements were the most restrictive, allowing insurers to vary 

premiums among small businesses of the same size purchasing the same 

coverage for geographic area and family size only. Variation for health or 

other demographic characteristics of the group’s employees and 

dependents such as age or gender was prohibited. Modified community 

rating requirements prohibited insurers from varying premiums among 

small businesses on the basis of health but allowed some variation for 

other factors in addition to geographic area and family size, such as age 

and gender of the employees and dependents. The most common 

approach used was rating bands, which allowed insurers to vary premiums 

on the basis of the employees’ and dependents’ health as well as other 

factors (such as age, type of industry of the business, or size of the group) 

but set some restrictions on the variation allowed. Premium-setting 

requirements in rating band states, however, may have included aspects of 

other types of premium-setting requirements as well. For example, we 

classified Rhode Island as a rating band state because premiums could 

vary on the basis of the group’s health, but it also had elements of 

modified community rating because insurers developed a community rate 

from which adjustments could be made. (See table 1.) 

Page 18 GAO-03-1133 Small Business Health Coverage Requirements 
Table 1: Number of States with Premium-Setting Requirements for the Small Group 

Market, by Type of Rating, 2003 

Type of rating Number of states Description of requirements 

Pure community 2 Prohibits use of health status and other 

rating factors such as age, group size, and 

gender. Premiums can vary among small 

businesses only for geographic area and 

family size. 

Modified community 10 Prohibits use of health status. Premiums 

rating can vary among small businesses for 

geographic area and family size and for 

other factors within limits, such as age 

and gender. 

Rating bands 35 	 Premiums can vary among small 

businesses for health and other factors, 

such as age, group size, and industry, 

within limits. 

No restrictions 4	 No limits on factors that can be used or 

amount premiums can vary among small 

businesses. 

Source: GAO analysis of data from BCBSA, NAIC, and selected state requirements. 

Other than the two states that required pure community rating (New York 

and Vermont), states differed greatly in their specific restrictions even if 

they had the same type of premium-setting requirement. All states with 

modified community rating prohibited consideration of individual 

employees’ health but differed in the other factors they allowed insurers to 

consider in setting premiums. For example: 

• 	 Colorado allowed premiums to vary among small businesses for three 

factors—age, geographic area, and family size—based on actuarial data 

but did not otherwise set limits on the amount that premiums could vary 

for any of these factors. 

• 	 Maine allowed premiums to vary among small businesses for seven 

factors—age, employees’ occupation or employer’s industry, geographic 

area, group size, smoking status, participation in wellness programs, and 

family size—but limited to 20 percent the total amount premiums could 

vary above or below the community rate for age, occupation or industry, 

and geographic area. 

Page 19 GAO-03-1133 Small Business Health Coverage Requirements 
Similarly, states with premium rating bands allowed premiums to vary 

based on health but differed in their restrictions on other factors that 

could be used in setting premiums. For example: 

• 	 Rhode Island allowed premiums to vary among small businesses from the 

community rate for health, age, gender, and four types of family 

composition: (1) enrollee, (2) enrollee and spouse, (3) enrollee, spouse, 

and children, or (4) enrollee and children. Of these factors, premium 

variation among small employers was not limited for age or gender, 

whereas variation from the community rate for health was limited to 

10 percent, and variation among employer groups was limited to 400 

percent of the lowest premium rate for the same type of family 

composition. 

• 	 Texas required insurers to set premiums using two steps. First, the insurer 

could determine a base premium using criteria including geographic area, 

age, gender, industry, and group size. Variation was limited for only 

industry and group size; specifically, the highest factor for industry and 

group size could not exceed the lowest factor by more than 15 percent and 

20 percent, respectively. Second, the insurer could adjust the amount of 

the base premium by as much as 67 percent on the basis of health status, 

duration of coverage, or other characteristics related to the health status 

or experience of a small group or of any member of a small group. 

Differences among states in their premium requirements can substantially 

affect the amount that premiums varied among small businesses with 

employees and dependents with different risk factors. For example, in 

New York, a small business whose employees and dependents had higherrisk characteristics would have been charged the same amount as a small 

business with younger, healthier employees and dependents; in Texas, the 

small business with higher-risk employees and dependents could have 

been charged several thousand dollars more per year than the small 

business with younger, healthier employees and dependents. (See table 2.) 

Page 20 GAO-03-1133 Small Business Health Coverage Requirements 
Table 2: Average Annual per Enrollee Premium Quotations for Three Hypothetical Small Business Groups, with Increasing 

Risk Characteristics, in Selected Localities, 2000 

Premium-setting 


requirement Location 


Group 1— 

Lower risk: 

Primarily 

young, with no 

health 

conditions and 

few high-risk 

characteristics 

Annual 

premium 

Group 2—Medium risk: 


similar to Group 1 but 1 


adult has a serious health 


condition (juvenile-onset 


diabetes) 


Percentage 


Annual increase 


premium from Group 1


. Group 3—Higher risk: 


same serious health 


condition as Group 2,


but other enrollees have 


other increased-risk 


characteristics, 


including older, male 


and smoker, and the 


business was a higher-


risk industry


Percentage 


Annual increase from


premium Group 1


Pure community Albany, New Yorka 

rating $2,580 $2,580 0% $2,580 0% 

Modified community Baltimore, Marylandb 

rating 2,113 2,113 0% 3,977 88% 

Rating band Sacramento, California c 2,513 2,513 0% 3,614 44% 

Rating band Springfield, Illinoisd 1,259 1,504 19% 2,946 134% 

Rating band Austin, Texase 1,810 2,934 62% 7,051 290% 

Sources: U.S. General Accounting Office, Private Health Insurance: Small Employers Continue to Face Challenges in Providing Coverage (GAO-02-8, Oct. 31, 2001), and unpublished premium 

quotations. 

Notes: Amounts reflect average annual per enrollee premiums for 10 enrollees: 5 employees 

purchasing single coverage and 2 employees purchasing family coverage for a total of 3 dependents. 

a

Premium for preferred provider organization (PPO) coverage that has a $500 out-of-network 

deductible and $10 in-network copayment for office visits. 

b

Premium for PPO coverage that has a $750 out-of-network deductible and $10 in-network 

copayment for office visits. 

c

Premium for PPO coverage that has a $300 out-of-network deductible and $10 in-network 

copayment for office visits. 

d

Premium for PPO coverage that has a $1,000 out-of-network deductible and $25 in-network 

copayment for office visits. 

e

Premium for PPO coverage that has a $300 out-of-network deductible and $10 in-network 

copayment for office visits. 

Most states set additional requirements for the small group market in how 

premiums could be adjusted upon renewal but did not limit the total 

amount that premiums could increase in the small group market or how 

often premiums could increase. According to information from NAIC, in 

2002 many of the 44 states with renewal requirements had requirements 

that were based on or similar to those in the NAIC model regulation, 

which allowed insurers to adjust premiums up to the sum of (1) the 

Page 21 GAO-03-1133 Small Business Health Coverage Requirements 
percentage that premiums have increased for new business, 

(2) adjustments not exceeding 15 percent for claims experience, health 

status, and duration of coverage of a particular small business, and 

(3) adjustments, as determined by the insurer’s rating manual, for changes 

in coverage or individual characteristics (other than claims experience, 

health status, and duration of coverage).23 Further, according to 

information from NAIC, only 8 states in 2002 limited the frequency with 

which insurers could adjust small businesses’ premiums for insurance 

policies that had already been purchased. These states tended to require 

that premiums remain unchanged for at least 1 year unless certain factors, 

such as the composition of the group or the benefits of the plan, changed. 

Requirements for Federal laws—HIPAA and COBRA—have established requirements to 

ensure the availability of health coverage for small businesses and for

Availability of Health employees, with certain exceptions, who lose group coverage. All states 

Coverage except Missouri had laws that conformed with the federal minimum 

requirements for the availability of health coverage for small businesses, 

and some states had requirements that exceeded the federal minimums. 

Federal Requirements for 

Availability of Coverage for 

Small Businesses 

Represent the Minimum 

for State Requirements 

• 

• 

Federal laws require that insurers in the small group market offer small 

businesses with 2 to 50 employees the option to purchase coverage and 

that employees in businesses with at least 20 employees be allowed to 

continue to purchase health coverage for themselves and their dependents 

under certain circumstances, such as when individuals lose their health 

coverage due to loss of employment. Specifically, for small businesses, 

HIPAA requires that insurers make all policies available and issue 

coverage to any small business that applies (a standard known as 

guaranteed issue). For small or large businesses, HIPA requires that: 

all health coverage must be renewable upon expiration of the policy term 

(guaranteed renewal) with limited exceptions, such as if an employee does 

not pay required premiums or an insurer leaves a geographic area; 

the maximum length of time that coverage can be excluded for preexisting 

conditions is 12 months from enrollment for most individuals and 18 

23This information is based on NAIC model number 115. NAIC model number 118 also 

addresses premium setting for small employer health insurance using an adjusted 

community rating approach and, according to an NAIC official, has been adopted by some 

states. 

Page 22 GAO-03-1133 Small Business Health Coverage Requirements 
months for individuals who enrolled late,24 and 6 months is the maximum 

time an insurer or other group health plan can “look back” to determine 

whether a condition was preexisting; and 

• 	 a health plan must credit an individual’s period of prior group coverage 

against the plan’s preexisting condition exclusion period (group-to-group 

portability).25 

COBRA generally requires that employers with 20 or more employees 

allow individuals who lose their health coverage for specified reasons, 

such as changes in employment, to continue their coverage.26 The 

individual is responsible for paying up to 102 percent of the group 

premium for COBRA continuation coverage, which can generally last for 

up to 18 months.27 

24For a new enrollee, the enrollment date is the first day of coverage, or if there is a waiting 

period before coverage takes effect, the first day of the waiting period. An individual is 

considered to be a late enrollee if he or she enrolls in a group plan at a time other than 

when he or she is first eligible or during a special enrollment period. 

25In order for a period of prior coverage to be considered creditable coverage, there must 

have been no significant break in coverage. In general, breaks of more than 63 days are 

considered significant. Individuals with creditable prior coverage would not need to meet a 

new employer plan’s exclusion period or would have the period shortened. For example, an 

individual who was covered for 6 months who changes employers may be eligible to have 

the subsequent employer plan’s 12-month exclusion period for preexisting conditions 

reduced by 6 months. Time spent in a health plan’s waiting period may not count as part of 

a break in coverage. 

26Employees or their covered spouses are not eligible for continuation of coverage under 

COBRA if they were terminated for “gross misconduct.” 

27COBRA continuation coverage can be extended an additional 11 months for most 

individuals who qualify for disability under the Social Security Act; however, they may be 

charged up to 150 percent of the group cost. Also, under certain circumstances unrelated to 

job loss, such as the case of a covered employee’s death, spouses and dependent children 

are able to continue group coverage under COBRA for up to 36 months. 

Page 23 GAO-03-1133 Small Business Health Coverage Requirements 
Some States Exceeded 

Federal Minimum 

Requirements for 

Availability of Health 

Coverage for Small 

Businesses 

All but one state—Missouri—met or exceeded the federal minimum 

requirements for the availability of health coverage through small 

businesses. States had responsibility for enforcing these regulations, while 

CMS had responsibility for enforcing the federal requirements for insurers 

in states that did not establish conforming requirements.28 CMS determined 

that all but one state—Missouri—had enacted requirements that conform 

with HIPAA’s requirements.29 

Some states had requirements for the availability of insurance that 

exceeded the federal minimums. In these instances, insurers were required 

to meet the more stringent state requirements. For example, according to 

NAIC, as of 2002, 14 states required insurers to have a shorter period of 

time to exclude coverage for preexisting conditions for newly enrolled 

individuals than the federal maximum of 12 months. Specifically, 10 states 

limited exclusionary periods to between 3 and 9 months, and 4 states 

prohibited exclusions for preexisting conditions entirely. 

Some states had requirements that exceeded federal COBRA continuation 

requirements. The majority of states (39) extended the federal COBRA 

requirements to individuals covered by businesses that had fewer than 20 

employees. For example, in a previous study examining state programs to 

provide health insurance for unemployed individuals, we found that each 

of the six states we reviewed had health insurance continuation of 

coverage laws for employers that had fewer than 20 employees and thus 

were not subject to federal COBRA requirements.30 The states varied in the 

eligibility requirements and the maximum length of continuation coverage 

provided. New Jersey provided up to 12 months of continuation coverage 

and required that the individual have coverage on his or her last day of 

employment prior to losing group coverage. Colorado, North Carolina, 

Ohio, Oregon, and Utah provided from 6 to 18 months of continuation 

coverage and required that eligible individuals had to have been insured 

28DOL is also responsible for ensuring that private employers that offer group health 

coverage comply with HIPAA’s portability and nondiscrimination requirements. 

29For example, Missouri’s requirements for availability of health insurance defined a small 

employer as having 3 to 25 employees, necessitating CMS to enforce the HIPAA 

requirements for insurance sold to Missouri employers with 2 or 26 to 50 employees. See 

U.S. General Accounting Office, Private Health Insurance: Federal Role in Enforcing New 

Standards Continues to Evolve, GAO-01-652R (Washington, D.C.: May 7, 2001). 

30U.S. General Accounting Office, Health Insurance: States’ Protections and Programs 

Benefit Some Unemployed Individuals, GAO-03-193 (Washington, D.C.: Oct. 25, 2002). 

Page 24 GAO-03-1133 Small Business Health Coverage Requirements 
Patient Protection 

Requirements 

Regarding Appeals of 

Denied Claims and 

Access to Certain 

Health Care Services 

for 3 to 6 months prior to losing group coverage.31 (App. IV provides more 

detail on states that exceed the federal requirements regarding preexisting 

condition exclusions and that have continuation of coverage requirements 

for small businesses with fewer than 20 employees that are not covered by 

COBRA requirements.) 

Federal law requires employer-sponsored health coverage for businesses 

of any size to have an internal review process for individuals who appeal a 

denied benefit claim. Most states had established requirements for 

independent external review processes for health insurers, although these 

review processes varied substantially among states in their specifics. In 

addition, most states had patient protections that allowed patients direct 

access (without prior approval) to certain health care providers and 

services, such as emergency services and obstetricians/gynecologists. 

Federal Requirements 

Establish Internal Review 

Procedures for Appeals of 

Denied Claims 

Federal requirements include provisions for internal claims review in 

settling appeals regarding denied claims. Under ERISA, health insurers or 

employers’ self-funded plans must maintain procedures for an internal 

review process for considering individuals’ appeals of any denied claims. 

DOL’s regulatory requirement generally allows the plan administrator 

flexibility in designing its process.32 However, under the regulation, plan 

administrators generally must specify reasons for claims denial within 

90 days after a claim has been filed. In the case of a claim involving urgent 

care, the plan administrator must notify an individual of the plan’s 

decision no later than 72 hours after the plan administrator receives the 

claim, unless the individual has not provided sufficient information to 

make a decision. 

31In addition, California allows individuals 60 years or older and with 5 years of previous 

employer-sponsored group coverage to maintain continuous coverage until reaching 

Medicare eligibility at age 65. 

3229 C.F.R. pt. 2560 (2002). 

Page 25 GAO-03-1133 Small Business Health Coverage Requirements 
Most States Established 

External Review 

Procedures for Appeals of 

Denied Insurance Claims 

and Provided Other Patient 

Protections 

• 

• 

Most states had a requirement that some or all insurers establish a process 


for independent external review of appeals of denied claims, but the 


states’ programs varied substantially in the kinds of denials eligible for 


external review, individuals’ accessibility to the program, independence of


the reviewer, and the time allowed for completion of external review. 


Based on information from a May 2002 report prepared by the Institute for 


Health Care Research and Policy at Georgetown University, 43 states had 


laws related to external grievance reviews.33 Most states limited the types 


of denials, such as those based on medical necessity, that are eligible for 


external review. Nearly all states required individuals to first exhaust their 


federally required internal appeals process before seeking the state-


established external review. Further, in 27 states, an individual had less 


than 180 days in which to request an external review following the 


insurer’s final adverse determination. Requirements for the independence 


of the external review also varied—some states selected the external 


review entity themselves, others allowed the insurer or individual to select 


the reviewer. Twelve states also specified a maximum time of 30 or fewer 


business days for completion of the external review. Other states allowed


90 days or more. Tables 7 and 8 in appendix V compare states’ 


requirements for external review programs. 


States also had other patient protection requirements, which came about 


in response to concerns about access to health care services, particularly 


regarding managed care, but that apply to other health insurance products


as well. These included requirements for open communication between 


providers and patients as well as access to certain providers and services. 


For example, according to BCBSA, in 2002:34


Forty-seven states prohibited “gag clauses” (restrictions on certain 


communications) in insurers’ contracts with health care providers. These 


laws enable physicians to speak openly with their patients about treatment 


options not covered by the health insurance policy. 


Forty-two states required insurers to cover emergency services, defined on


the basis of what a prudent layperson (that is, a nonmedically trained 


person) would reasonably assume to be an emergency, to prevent a 


33See Karen Pollitz et al., Georgetown University, Institute for Health Care Research and 

Policy, Assessing State External Review Programs and the Effects of Pending Federal 

Patients’ Rights Legislation, prepared for The Henry J. Kaiser Family Foundation 

(Washington, D.C.: May 2002). Officials we contacted in Illinois, Maine, and Vermont also 

provided additional information regarding external reviews in their states. 

34BCBSA did not include information on the District of Columbia. 

Page 26 GAO-03-1133 Small Business Health Coverage Requirements 
patient from being denied coverage when the individual believes 

emergency treatment is necessary. 

• Forty-one states required that insurers allow individuals direct access to 

Fiduciary and 

Financial 

Requirements 

obstetricians and gynecologists (OB/GYN). Some state requirements 

allowed women to designate an OB/GYN as their primary care physician, 

while other states prohibited insurers from requiring prior authorization or 

referral for coverage of certain obstetric or gynecologic services. 

Table 9 in appendix V provides certain patient protection requirements for 

all states. 

Federal requirements establish responsibilities for fiduciaries; specifically, 

that individuals with discretionary authority over assets related to any 

employer-sponsored health coverage must act prudently and in the 

exclusive interest of enrolled individuals. In contrast, states established 

financial requirements for insurance policies sold in the small or large 

group market. The state requirements aimed at ensuring the solvency of 

insurers, including requirements that insurers set aside money for the 

payment of future expected and unexpected claims and expenses and 

follow guidelines on investment activities. All states also had requirements 

whereby certain insurers would have to contribute to a state-administered 

guaranty fund to pay for outstanding claims if an insurer became 

insolvent. Also, as part of their oversight activities, states monitored the 

financial soundness of insurers by conducting financial analyses and 

periodic on-site financial examinations. 

Federal Requirements 

Limited to Fiduciary 

Responsibilities, Not 

Solvency or Other 

Financial Protections 

Federal requirements for employer-sponsored health coverage do not 

specify solvency or other financial requirements for that coverage. Rather, 

ERISA requires that fiduciaries—persons who have control or authority 

over assets related to the health coverage—act prudently and in the 

exclusive interest of enrolled individuals. These fiduciary responsibilities, 

however, are limited; unlike private pension plans where in most cases 

assets are held in a trust, most employers do not prefund their health 

coverage and instead operate on a pay-as-you-go basis, using assets from 

general funds and employee contributions. Also, since most coverage 

offered by small businesses is through an insurance policy, fiduciary 

responsibilities primarily relate to the payment of premiums. DOL can and 

does take legal action to enforce fiduciary duties when, for example, 

fiduciaries fail to forward employee contributions for health premiums to 

an insurer. In such cases, DOL may obtain voluntary compliance, have the 

fiduciaries reimburse all losses and pay penalty amounts (when 

Page 27 GAO-03-1133 Small Business Health Coverage Requirements 
applicable), or permanently bar them from serving as fiduciaries in the 

future. 

Federal requirements do not include mechanisms such as guaranty funds 

to ensure that individuals’ outstanding claims will be paid if an insurer 

becomes insolvent or a self-funded plan becomes bankrupt and ceases to 

exist. When a self-funded plan fails and its sponsor (such as the employer) 

goes bankrupt, individuals with unpaid health claims must file a proof of 

claim with the bankruptcy court requesting that, when the assets of the 

employer are liquidated to pay its creditors, these outstanding claims be 

considered for payment. However, since bankruptcy courts establish 

priority arrangements for paying an employer’s liabilities, some claims 

may not be paid. 

State Financial 

Requirements for Insurers 

in the Small or Large 

Group Market Include 

Insolvency Protections, 

Reporting Rules, and 

Oversight Activities 

State financial requirements for insurers selling in the small or large group 

market focused on ensuring that the insurers were financially sound and 

likely to be able to pay claims.

35 According to NAIC officials, all states 

required insurers to maintain adequate reserves (funds set aside to pay for 

outstanding claims). These reserve requirements focused on ensuring that 

insurers can meet pending claims and benefits, based largely on incurred 

liabilities, prior experience, and projections that assume moderately 

adverse conditions. According to information from NAIC, 36 states had 

requirements that insurers selling health insurance in 2003 maintain 

certain minimum levels of reserves. Most of these 36 states based their 

requirements on NAIC’s model regulation, which specified minimum 

standards for the estimation of reserves.36 In general, NAIC’s model 

required that reserves be sufficient to cover three types of liabilities— 

claims that have been incurred but not paid, premiums that were paid 

beyond the period for which coverage has been provided, and contractual 

benefits that are anticipated to exceed the value of premiums. The NAIC 

model also required that reserves be calculated using specified morbidity, 

35State financial requirements may be different for different types of insurers. For example, 

all states had requirements for aspects of HMO operations. According to information from 

NAIC, in 2003, 31 states’ requirements were similar to their Model Health Maintenance 

Organization Act. Included in this model were financial requirements for the maintenance 

of reserves for unearned premiums and unpaid claims as well as an initial net worth—that 

is, a financial cushion similar to capital and surplus for insurers to ensure they can 

withstand unexpected losses—of $1.5 million dollars. 

36States with requirements applying only to individual policies were not included in this 

count. 

Page 28 GAO-03-1133 Small Business Health Coverage Requirements 
mortality, and interest rates. Based on filings with NAIC, the median 

reserve levels kept by insurers selling health insurance nationwide in 2002 

was $5.9 million, with levels ranging from $490,000 for the quarter of 

companies with the lowest to $35.7 million for the quarter of companies 

with the highest amount of reserves.37 

State requirements for capital and surplus levels generally called for 

insurers to maintain a set minimum amount or an amount based on the 

insurer’s level of financial risk. Capital and surplus requirements aim to 

ensure that insurers have a sufficient financial cushion to withstand 

unexpected losses that were the result of events more extreme than those 

that reserve requirements are meant to protected against. In 2002, every 

state had set minimum capital and surplus requirements—amounts that 

did not vary according to the size, risk, or experience of the insurer—for 

life or health insurers. According to NAIC, 29 states had set minimum 

requirements for life insurers (including those that also sell health 

insurance) or other types of insurers, while 22 states had minimum capital 

and surplus requirements specifically for health insurers. In 2002, these set 

minimum requirements for insurers ranged from $150,000 to $10 million, 

with states most often requiring minimums of $1 million to $2 million.38 

Among states with specific requirements for health insurance, the median 

set minimum requirement was $1.3 million, with requirements ranging 

from $150,000 to $3.6 million. (See app. VI for a summary of states’ 

financial requirements.) 

Following several insolvencies among multistate insurers in the late 1980s 

and early 1990s, states added risk-based capital (RBC) requirements 

whereby the minimum amount of capital and surplus an insurer must 

maintain varies according to the level of financial risk of the company. 

RBC also attempted to provide regulators with an early warning 

mechanism to identify companies that are weakly capitalized and 

37GAO analysis of unpublished NAIC data. This analysis included data reported by life 

insurers that also sold health insurance, health insurers, Blue Cross Blue Shield plans, and 

HMOs for four types of reserves: unpaid claims, claims adjustment expenses, aggregate 

policy reserves, and aggregate claims reserves. The analysis excluded property and 

casualty insurers and companies that offered only limited benefits, such as vision or dental 

coverage. 

38Amounts reflect initial requirements for insurers that were publicly traded, for-profit 

companies; the amount that must be maintained after the initial requirements were met 

was lower in some states. Also, requirements for mutual insurers (companies that operate 

for the benefit of the contract holders and their beneficiaries) may be different. 

Page 29 GAO-03-1133 Small Business Health Coverage Requirements 
therefore at risk of becoming insolvent in the future. NAIC developed 

different RBC formulas depending on the line of insurance sold. These 

RBC formulas include one for insurance sold by life insurers, including 

health insurance (Life RBC), and one for health insurance sold by Blue 

Cross Blue Shield companies or HMOs (Health RBC). According to NAIC, 

all states had Life RBC requirements, while less than half of states (22) had 

Health RBC requirements in 2003. Thus, all health insurance sold by life 

and property/casualty insurers was subject to RBC requirements. Whether 

insurance policies sold by Blue Cross Blue Shield companies and HMOs 

were subject to RBC requirements, however, depended on where the 

company was headquartered. Based on filings with NAIC, the median 

amount of capital and surplus retained by insurers nationwide in 2002 was 

$15 million, with levels ranging from $4.4 million for the quarter of 

companies with the least to $66.8 million for the quarter of companies with 

the highest amount of capital and surplus.39 

Other state requirements to promote solvency included limits on insurers’ 

investment activities. According to NAIC, in 2003, all states had 

requirements for insurer investments. Twenty-three of these states based 

their requirements on NAIC models, which included rules for the kinds of 

investments that insurers were permitted to make or the amount that 

could be invested in any one entity or type of investment. For example, 

funds for reserves or capital may be required to be invested in 

conservative and secure investments such as government bonds and 

mortgages. 

According to NAIC officials, states required that insurers submit quarterly 

and annual reports and conducted financial analyses and periodical on-site 

financial exams to verify information on the annual statements. In 2003, 

states typically had requirements that on-site financial exams of insurers 

headquartered in the state occur every 3 to 5 years. For multistate 

insurers, on-site exams were conducted under the supervision of the state 

in which the insurer was headquartered and representatives from the 

other states in which the insurer sells could request to participate. 

39GAO analysis of unpublished NAIC data. This analysis included data reported by life 

insurers that also sell health insurance, health insurers, Blue Cross Blue Shield plans, and 

HMOs. The analysis excluded property and casualty insurers and companies that offered 

only limited benefits, such as vision or dental coverage. 

Page 30 GAO-03-1133 Small Business Health Coverage Requirements 
All states had provisions related to the payment of outstanding claims for 

policyholders whose insurer became insolvent, but few states had similar 

requirements for HMOs. In cases where a failing insurer’s funds were 

insufficient, each state had provisions to assure payment for certain 

incurred claims up to a specified amount through guaranty funds. Solvent 

insurers were required to contribute to these guaranty funds, usually on an 

as-needed basis and according to prescribed limits. According to NAIC, 

the maximum amount an insurer could be assessed for a guaranty fund 

varied among the states from 1 percent to 4 percent of the premiums 

charged in the state in 2003, with the majority of states (49) setting the 

limit at no more than 2 percent. Also, some states allowed insurers to 

recover the amount they had been assessed for a guaranty fund through 

reductions in their state premium taxes. According to information from 

NAIC, most states did not extend their health insurance guaranty fund 

requirements to HMOs40 and 6 states had requirements allowing for the 

establishment of a fund specifically for HMOs in 2003. 

Comments from 

External Reviewers 

We provided a draft of this report to DOL, NAIC, and 12 states whose 

benefit or premium requirements for the small group market were 

discussed in the report. DOL and 10 states provided technical comments 

that we incorporated as appropriate; 2 states did not provide comments. 

In written comments, NAIC highlighted several of the report’s findings. 

Specifically, NAIC agreed with our finding that the costs associated with 

benefit and provider mandates over what businesses would normally incur 

are estimated to be relatively small. NAIC also commented that mandates 

provide important protections for consumers and help prevent insurers 

from limiting their risk by denying coverage for certain benefits or limiting 

access to certain providers. NAIC further noted that such mandates have 

been carefully considered and adopted by state legislators. NAIC also 

emphasized that federal law does not include solvency requirements or 

financial protections for consumers in self-funded health plans and that, in 

its view, these responsibilities are best left to the states. Finally, NAIC 

highlighted the states’ long-standing role in providing consumer 

protections for health insurance, such as small group market reforms for 

premium rates and eligibility practices, internal and external review 

requirements, marketing standards, and fraud prevention. As we noted in 

the report, states have primary responsibility for regulating health 

40In 15 states, Blue Cross Blue Shield plans were not included in the guaranty fund. 

Page 31 GAO-03-1133 Small Business Health Coverage Requirements 
insurance, but substantial variation exists across states in the extent to 

which they impose certain requirements. NAIC also provided technical 

comments that we incorporated as appropriate. 

As agreed with your office, unless you publicly announce this report’s 


contents earlier, we will not distribute it until 30 days after its date. At that 


time, we will send copies to the Secretary of Labor, interested 


congressional committees, and other parties. We will also make copies 


available to others on request. Copies of this report will also be available 


at no charge on GAO’s Web site at http://www.gao.gov. 


Please call me at (202) 512-7118 or John E. Dicken at (202) 512-7043 if you 


have any questions. Major contributors to this report include JoAnne 


Bailey, Romy Gelb, and Pamela Roberto. 


Sincerely yours, 


Kathryn G. Allen 


Director, Health Care—Medicaid 


and Private Health Insurance Issues 


Page 32 GAO-03-1133 Small Business Health Coverage Requirements 
Appendix I: State-Mandated Benefits for the 

Small Group Health Insurance Market in 

Eight States 

To obtain more detailed information on benefit and provider mandates 

applicable to the small group market, we conducted a review of eight 

states—Alabama, Colorado, Georgia, Idaho, Illinois, Maryland, Nevada, 

and Vermont. We selected these states because they represented a range in 

the number of mandates. 

Table 3 identifies certain health care benefits and provider mandates for 

the small group health insurance market and whether they were mandated 

in each of the eight states for 2003. Of these states, Maryland had the 

largest number of mandates (32) applying to the small group market, 

which included five types of benefits, such as bone density screenings and 

hearing aids for minors, not offered by the other states we reviewed. Idaho 

had the fewest mandates (5), with four of the five found in other states we 

reviewed. 

Page 33 GAO-03-1133 Small Business Health Coverage Requirements 
Appendix I: State-Mandated Benefits for the 

Small Group Health Insurance Market in 

Eight States 

Table 3: Health Care Benefit and Provider Mandates Applicable to the Small Group Market in Eight States, 2003 


Maryland Georgia Illinois Colorado Nevada Vermont Alabama Idaho 

Benefits 

Alcoholism treatment 9 9 9 9

Asthma treatment 9a 

Autism treatment 9a 9a 

Blood products 9 9

Bone density screening 9

Breast implant removal 9

Cervical cancer screening 9 9 9 9

Chemotherapy or related treatments 9

Chlamydia screening 9 9

Cleft palate/congenital abnormality 


treatment 9 9 9 9

Clinical trials 9 9 9

Colorectal screening 9 9 9 9a 

Complications of pregnancy 9 9a 9 9 9 9a 

Contraceptives 9 9a 9a 9a 

Craniofacial disorders treatment 9

Dental anesthesia 9 9 9 9

Diabetic supplies/education 9 9 9 9 9 9

Drug abuse treatment 9 9 9

Family planning 9

Formula for metabolic disorders 9 9a 9 9

Hearing aids for minors 9

Home health care 9 9

Hormone replacement therapy 9a


Hospice care 9 9

Infertility treatment 9 9 9

Mammography screening 9 9 9 9 9 9 9 9a


Maternity care 9 9b 9b 9 9 9

Mental health services 9 9b 9 9 9

Mental health parity 9 9 9 9

Minimum mastectomy stay 9 9 9

Off-label drug use 9 9a 9a 9

Organ transplants 9 9

Orthotics/prosthetics 9c 9

Ovarian cancer screening 9

Page 34 GAO-03-1133 Small Business Health Coverage Requirements 

9
Appendix I: State-Mandated Benefits for the 

Small Group Health Insurance Market in 

Eight States 

Maryland Georgia Illinois Colorado Nevada Vermont Alabama Idaho 

Prenatal HIV testing 9

Prostate cancer screening 9 9 9 9

Rehabilitation services 9 9b 

Residential crisis services 9

Second opinion 9

Temporomandibular joint disorders 


treatment 9 9 9 9

Well-child care 9 9 9b 9 9

Providers 

Acupuncturist 9

Athletic trainer 9

Chiropractor 9 9 9 9 9

Dentist 9 9 9

Marriage therapist 9 9

Nurse 9 9

Nurse, registered first assistant

d 9

Nurse midwife 9

Optometrist 9 9 9 9

Osteopath 9

Physician/surgical assistant 9

Podiatrist 9 9 9

Professional counselor 9 9

Psychologist 9 9 9 9 9

Public and other facilitiese 9

Social worker 9 9 9

Total state mandates (benefits and 


providers) 32f 27 26 23 21 15 8 5


Source: GAO interviews with state officials, July 2003. 

Note: Provider mandates only apply if the policy covers the services that the provider is qualified to 

provide. 

a

These mandates set minimum requirements that apply only if policy covers a specified benefit. 

b

Applies only to HMO plans. 

c

Excludes coverage of orthotics. 

d

The registered nurse first assistant is responsible for providing technical assistance under the direct 

supervision and direction of an operating surgeon. 

e

Requires coverage for care provided in state institutions or by the department of health and welfare. 

Page 35 GAO-03-1133 Small Business Health Coverage Requirements 
Appendix I: State-Mandated Benefits for the 

Small Group Health Insurance Market in 

Eight States 

f

Maryland small group regulations do not list mandated providers by specialty, but require that the 

insurer cover benefits covered under the contract if (1) the services are provided by a health care 

provider licensed under the Health Occupations Article and (2) the provider is acting within the scope 

of his or her license. 

Table 4 illustrates the variation among the eight states in terms of the 

scope of the requirements for four categories of mandates (well-child care, 

mental health coverage, mental health parity, and organ transplants) for 

the small group market. The mental health coverage category included 

states that required insurers to provide some level of mental health care 

benefits. A state was considered to have a mental health parity mandate if 

its requirements for equivalence of benefits between mental health care 

and physical health care applied to the small group market. (The federal 

Mental Health Parity Act exempts business with 50 or fewer employees.) 

Mandates for organ transplants required coverage of specific organs or 

specified guidelines under which transplantation could be denied, and 

well-child care pertained to the preventative services insurers were 

required to cover for minor children. Although several states mandated 

coverage for the same benefit, their requirements varied substantially in 

the range of treatment or services covered and the minimum level of 

benefits required. For example, Colorado mandated coverage of well-child 

care services through age 13, while Georgia restricted coverage to children 

under the age of 5. 

Page 36 GAO-03-1133 Small Business Health Coverage Requirements 
Appendix I: State-Mandated Benefits for the 

Small Group Health Insurance Market in 

Eight States 

Table 4: Variation in Scope of Selected Mandates for Small Group Market in Selected States 

State Key Features 

Well-child care (5 of 8 states reviewed) 

Well-child care mandates varied in the states we reviewed as to the scope of services required as well as to the age of children 

covered under the mandate. 

Colorado • Immunizations and preventive services through age 13 

• Exempt from deductibles/dollar limits 

Georgia • Physical/emotional exam through age 5 

• Insurer may not require deductible 

Illinois • Appropriate preventive services/immunizations 

• Only applies to HMOs 

Maryland • Preventive services recommended by U.S. Preventive Services Task Force 

• 	 Includes audiology screening for newborns limited to one screen and one 

confirming screen 

• 	 Insurer may not require deductible for well-child care visits for children 

under age 2 and immunization visits for children under age 13 

Vermont • 31 days of newborn coverage without additional premiums 

• May not reduce coverage for pediatric vaccines below May 1, 1993, levels 

Mental health coverage (4 of 8 states reviewed) 

Mental health mandates varied in the diagnoses for which coverage was required; the types of services (inpatient, outpatient, and 

residential) that were covered; and the number of inpatient and outpatient visits. 

Colorado • Autism excluded from definition of mental illness 

• Minimum annual coverage: 45 days inpatient 

• Coverage for outpatient services required 

Illinois • Minimum annual coverage: 10 inpatient days, 20 outpatient visits 

• Only applies to HMOs 

Maryland • Minimum annual coverage: 60 inpatient days 

• For outpatient care, 70% coverage 

• Coverage of residential crisis services required 

Nevada • Mental illness defined as 6 biologically based conditionsa 

• Minimum annual coverage: 40 inpatient days, 40 outpatient visits 

• 	 Does not apply to groups whose premiums rise more than 2% as a result of 

mandate 

Vermont • 	 Coverage of conditions or disorders involving mental illness or alcohol or 

substance abuse listed in the mental disorders section of the ICDb 

Page 37 GAO-03-1133 Small Business Health Coverage Requirements 
Appendix II: Estimated Costs of StateMandated Benefits 

State Key Features 

Mental health parity (4 of 8 states reviewed applying parity to the small group market) 

State parity laws varied in the diagnoses for which parity was required as well as whether parity extended to the number of services 

(days or visits) and/or the cost-sharing amounts. 

Georgiac • Coverage to same extent as physical illness for ICD/DSMd

 conditions 

• 	 May impose mental health cost-sharing that does not apply to other 

benefits but deductible may not exceed deductible for medical/surgical 

benefits 

Colorado • 	 Biologically-based mental illness may not be less extensive or have more 

restrictive prior authorization requirements than physical illness 

• 	 Deductible same as for physical health benefits; copayment may not 

exceed 50% 

Maryland • 	 No separate lifetime maximums, out-of-pocket limits, or separate 

deductible/copayment amounts for mental health benefits 

Vermont • 	 No rate/term/condition that places greater financial burden on insured than 

treatment of physical conditions 

• 	 Out-of-pocket limits/deductible must be comprehensive for both mental and 

physical conditions 

• Number of covered visits may not differ for mental and physical conditions 

Organ transplants (2 of 8 states reviewed) 

Organ transplant mandates varied in the states we reviewed as to the types of procedures for which the mandates applied. 

Illinois • 	 Organ transplants must be covered with the exception of experimental and 

investigational procedures 

Maryland • 	 Bone-marrow, cornea, kidney, liver, heart, lung, heart/lung, pancreas, and 

pancreas/kidney transplants 

Source: GAO interviews with state officials, July 2003. 

a

The six biologically based conditions were schizophrenia, schizoaffective disorder, bipolar disorder, 

major depressive disorders, panic disorder, and obsessive-compulsive disorder. 

b

The International Classification of Diseases. 

c

Georgia requires insurers to offer coverage for treatment of mental disorders. 

d

Diagnostic and Statistical Manual of Mental Disorders. 

Estimates vary widely regarding the costs of state-mandated health 

benefits, depending in part on the assumptions made to develop the 

estimates. Adding mandates to employer-based health coverage raises 

total costs only to the extent that employers would not have otherwise 

offered the benefits. However, few studies have examined the additional 

costs—referred to as marginal costs—of adding mandated benefits to a 

health insurance policy. Several studies have estimated the total costs 

Page 38 GAO-03-1133 Small Business Health Coverage Requirements 
Appendix II: Estimated Costs of StateMandated Benefits 

associated with mandated benefits even though many businesses may 

have offered these benefits without the mandate.1 

Two studies that evaluated the marginal costs of adding mandated 

benefits—accounting for the extent to which employers otherwise may 

have included similar benefits—estimated relatively small cost increases. 

In 2000, the Congressional Budget Office (CBO) developed an estimate 

based on an earlier study that examined the frequency with which health 

insurance policies covered five benefits even though the state in which the 

policy operated did not require such coverage.2

 Because many policies 

would have covered some of the benefits even in the absence of a legal 

mandate, CBO concluded that the effective marginal cost of these state 

mandates was in the range of 0.28 to 1.15 percent. CBO estimated that 

benefit mandates in general might increase premiums by about 5 percent. 

Maryland conducts an annual evaluation of the costs for each of its 

mandates.3

 In addition to estimating the total costs associated with the 

mandates, Maryland estimates a marginal cost, defined as the difference 

between the total cost of the benefit and the cost of the services that 

would be covered in the absence of the mandate. In 2001, the marginal 

cost of mandates in Maryland’s small group market represented 

3.4 percent of premiums, whereas the total cost accounted for 

14.1 percent. In determining the marginal cost, Maryland considered the 

likelihood of coverage for certain benefits in the absence of state 

1

However, the benefits mandated may still increase costs if the benefits already being 

offered by the employer are less comprehensive than the minimums required by the 

mandate. 

2

The five benefits CBO included in its study—alcoholism treatment, drug abuse treatment, 

mental illness treatment, chiropractic services, and mandated continuation of health 

insurance for terminated employees and their dependents—were those identified by 

Jonathan Gruber in State Mandated Benefits and Employer Provided Health Insurance 

(National Bureau of Economic Research Working Paper, Cambridge, Mass: December 

1992). See Congressional Budget Office, “Increasing Small-Firm Health Insurance Coverage 

Through Association Health Plans and HealthMarts,” (Washington, D.C.: January 2000). 

3

Mercer Human Resource Consulting, Mandated Health Insurance Services Evaluation, a 

report prepared for the Maryland Health Care Commission (2002). 

Page 39 GAO-03-1133 Small Business Health Coverage Requirements 
Appendix II: Estimated Costs of StateMandated Benefits 

mandates based on a survey of self-funded employers exempt from benefit 

mandates.4 

Some other states, including Texas and Virginia, have assessed the cost of 

state benefit mandates, but did not measure the marginal costs associated 

with mandates. In 2000, Texas contracted with the actuarial firm Milliman 

& Robertson to estimate the cost of 13 specific mandated benefits.5 

Assuming that none of the benefits would be covered by a policy in the 

absence of a mandate, the 13 benefits accounted for 6.3 percent of the 

average small group premium.6 

Virginia requires all insurers, health service plans, and health maintenance 

organizations to report cost and utilization information for each of the 

state’s mandated benefits and providers. Based on actual claims 

experience, insurers calculate the share of the overall average premium 

attributable to each mandate. Without taking into account whether 

benefits would be covered without a mandate, in 2000 the total costs 

associated with Virginia’s mandates represented 26.87 percent and 

29.28 percent of the overall premiums for individual and family group 

policies, respectively.7

 The study also did not distinguish total costs 

between the small and large group markets. 

4

Maryland’s estimate represents what benefits self-funded businesses voluntarily cover, but 

because few small businesses self-fund and larger businesses may be more comprehensive 

in the benefits they voluntarily cover, this does not directly represent what small employers 

might choose to cover without mandates. 

5

Benefits included chemical dependency, complications of pregnancy, oral contraceptives, 

congenital defects, HIV/AIDS, mammography, prostate testing, serious mental illness, 

minimum maternity stay, minimum mastectomy stay, reconstructive surgery for 

mastectomy, handicapped dependents, and childhood immunizations. See Milliman & 

Robertson, Cost Impact Study of Mandated Benefits in Texas, (2000). 

6

This cost estimate accounts for indirect health care costs, such as follow-up screenings, 

and offsetting cost savings, such as lower future costs due to earlier detection and 

treatment of a disease, associated with the mandates. 

7

Commonwealth of Virginia, Annual Report of the State Corporation Commission on the 

Financial Impact of Mandated Health Insurance Benefits and Providers, (Richmond: 2002). 

Page 40 GAO-03-1133 Small Business Health Coverage Requirements 
Appendix III: State Premium Requirements 


State requirements varied widely in the extent to which they restricted the 

amount that premiums could vary among different small businesses 

purchasing the same coverage and the characteristics of the group that 

could be used to set or vary premiums, both initially and upon renewal. In 

2003, 47 states had premium-setting requirements which generally 

followed one of three types of premium-setting requirements for coverage 

sold to small businesses—pure community rating, modified community 

rating, or rating bands—however, the specific restrictions varied widely 

and states may have adopted aspects of more than one type of 

requirement. 

• 	 Pure community rating allowed insurers to vary premiums among small 

businesses of the same size for geographic area and family size only, 

prohibiting variation for health or other demographic characteristics of the 

group’s employees and dependents, such as age or gender. 

• 	 Modified community rating prohibited insurers from varying premiums 

among small businesses based on health but allowed some variation for 

other factors, such as age and gender. 

• 	 Rating bands allowed insurers to vary premiums based on the health of the 

small group’s employees and dependents as well as other factors, such as 

age, type of industry of the business, or the size of the group, but set some 

restrictions on the variation. 

Also, in 2002, 44 states set requirements for how premiums are adjusted 

upon renewal. 

Table 5 summarizes state premium-setting requirements for initial policies 

and for policies being renewed. 

Page 41 GAO-03-1133 Small Business Health Coverage Requirements 
Appendix III: State Premium Requirements 

Table 5: State Premium Requirements 

Type of premium setting Sets limits on premiumState requirement (2003) setting for renewals (2002) 

Alabama Rating band 

Alaska Rating band 

Arizona Rating band 

Arkansas Rating band 

California Rating band 

Colorado Modified community rating 

Connecticut Modified community rating 

Delaware Rating band 

District of Columbia None 

Florida Rating band 

Georgia Rating band 

Hawaii None 

Idaho Rating band 

Illinois Rating band 

Indiana Rating band 

Iowa Rating band 

Kansas Rating band 9

Kentucky Rating band 9

Louisiana Rating band 9

Maine Modified community rating 9

Maryland Modified community rating 9

Massachusetts Modified community rating 9

Michigan None 


Minnesota Rating band 9

Mississippi Rating band 9

Missouri Rating band 9

Montana Rating band 9

Nebraska Rating band 9

Nevada Rating band 9

New Hampshire Modified community rating 9

New Jersey Modified community rating 9

New Mexico Rating band 9

New York Pure community rating 9

North Carolina Modified community rating 9

Page 42 GAO-03-1133 Small Business Health Coverage Requirements 

9

9

9

9

9

9

9

9

9

9

9

9

9
Appendix III: State Premium Requirements 

Type of premium setting Sets limits on premiumState requirement (2003) setting for renewals (2002) 

North Dakota Rating band 9

Ohio Rating band 

Oklahoma Rating band 

Oregon Modified community rating 

Pennsylvania None 

Rhode Island Rating band 

South Carolina Rating band 

South Dakota Rating band 

Tennessee Rating band 

Texas Rating band 

Utah Rating band 

Vermont Pure community rating 

Virginia Rating band 

Washington Modified community rating 

West Virginia Rating band 

Wisconsin Rating band 

Wyoming Rating band 

Source: GAO analysis of data from Blue Cross Blue Shield Association, National Association of Insurance Commissioners, and 

selected state requirements. 

Page 43 GAO-03-1133 Small Business Health Coverage Requirements 

9

9

9

9

9

9

9

9

9

9

9

9

9
Appendix IV: States Exceeding Federal 


Availability of Coverage Requirements 


Some states have extended federal requirements that increase the 

availability of health coverage for small employers and for certain 

employees who lose group coverage. Forty states extended continuation 

coverage to employer groups with fewer than 20 employees (and therefore 

not covered by COBRA) for certain employees who lose their health 

coverage. Similarly, 13 states had more stringent requirements than the 

federal maximum of 12 months for the amount of time insurers can 

exclude coverage for preexisting conditions for newly enrolled individuals. 

See table 6. 

Table 6: Selected Availability of Coverage Protections, by State 

Continuation of coverage to Exclusion of coverage for 


employers with fewer than preexisting condition for less 


State 20 employees (2003) than 12 months (2002)


Alabama 

Alaska 

Arizona 

Arkansas 9

California 9

Colorado 9

Connecticut 9

Delaware 

District of Columbia 9

Florida 9

Georgia 9

Hawaii 

Idaho 

Illinois 9

Indiana 

Iowa 9

Kansas 9 9

Kentucky 9

Louisiana 9

Maine 9

Maryland 9 9

Massachusetts 9 9

Michigan 


Minnesota 9

Mississippi 9

Page 44 GAO-03-1133 Small Business Health Coverage Requirements 

9

9

9

9

9
Appendix IV: States Exceeding Federal 

Availability of Coverage Requirements 

Continuation of coverage to Exclusion of coverage for 


employers with fewer than preexisting condition for less 


State 20 employees (2003) than 12 months (2002)


Missouri 9

Montana 9

Nebraska 9

Nevada 9

New Hampshire 9

New Jersey 9

New Mexico 9

New York 9

North Carolina 9

North Dakota 9

Ohio 

Oklahoma 

Oregon 9

Pennsylvania 

Rhode Island 9

South Carolina 9

South Dakota 9

Tennessee 9

Texas 9

Utah 9

Vermont 9

Virginia 9

Washington 9 9

West Virginia 9

Wisconsin 9

Wyoming 9

Total 40 13


Sources: Blue Cross Blue Shield Association, January 2003, and National Association of Insurance Commissioners, 2002. 

Note: State continuation of coverage information current as of January 2003, except information for 

the District of Columbia, which was current as of December 2002. 

Page 45 GAO-03-1133 Small Business Health Coverage Requirements 

9

9

9

9

9
Appendix V: State External Review Programs 

and Patient Protections for Access to Health 

Care Providers 

Tables 7 and 8 compare state requirements for insurers’ external review 

programs in terms of the kinds of denials eligible for the review, consumer 

accessibility to the program, independence of the reviewer, and the time 

allowed for completion of external review. Nine states did not limit the 

types of denials eligible for external review program while 32 states 

limited external reviews to denials based on medical necessity 

determinations or other clinically-based reasons. Forty states required 

individuals to first exhaust their health policy’s internal appeals and 

grievance process before seeking external review. In 27 states, the 

individual had 180 days following the insurer’s final adverse determination 

to request an external review. 

Page 46 GAO-03-1133 Small Business Health Coverage Requirements 
Appendix V: State External Review Programs 

and Patient Protections for Access to Health 

Care Providers 

Table 7: Claims Denials Eligible for Review and Individual Accessibility to State External Review Programs 

Only denials based on Individual must file a 


medical necessity or Internal plan appeals request for an external 


Any type of denial other clinically-based process must be review within 180 days of 


eligible for external reasons eligible for exhausted prior to start of insurer’s adverse 


State review external review external review process determinationa


Alabama 

Alaska 9 9

Arizona 9 9

Arkansas 

California 9 9

Colorado 9 9

Connecticut 9 9

Delaware 9 9

District of Columbia 9 9

Florida 9 9

Georgia 9 9

Hawaii 9 9

Idaho 

Illinois 9 9

Indiana 9 9

Iowa 9 9

Kansas 9 9 9

Kentucky 9 9 9

Louisiana 9 9 9

Maine 9 9b


Maryland 9 9 9

Massachusetts 9 9 9

Michigan 9 9 9

Minnesota 9 9

Mississippi 


Missouri 9

Montana 9 9

Nebraska


Nevada 


New Hampshire 9 9

New Jersey 9 9 9

New Mexico 9 9 9

Page 47 GAO-03-1133 Small Business Health Coverage Requirements 

9

9

9

9

9

9

9

9
Appendix V: State External Review Programs 

and Patient Protections for Access to Health 

Care Providers 

Only denials based on Individual must file a 

medical necessity or Internal plan appeals request for an external 

Any type of denial other clinically-based process must be review within 180 days of 

eligible for external reasons eligible for exhausted prior to start of insurer’s adverse 

State review external review external review process determinationa 

New York 9 9

North Carolina 

North Dakota 

Ohio 9 9

Oklahoma 9 9

Oregon 9 9

Pennsylvania 9 9

Rhode Island 9 9

South Carolina 9 9

South Dakota 

Tennessee 9 9

Texas 9 9

Utah 9 9

Vermont 9 9 9c 

Virginia 9 9

Washington 9 9

West Virginia 9 9

Wisconsin 9 9 9

Wyoming 

Total 9 32 40 27 

Source: Karen Pollitz et al., Georgetown University, Institute for Health Care Research and Policy, Assessing State External Review Programs and the Effects of Pending Federal Patients’ Rights 

Legislation, prepared for The Henry J. Kaiser Family Foundation (Washington, D.C.: May 2002) and select state officials. 

Note: Eight states (Alabama, Idaho, Mississippi, Nebraska, Nevada, North Dakota, South Dakota, 

and Wyoming) did not have external review requirements. 

The categories in the table columns are not exhaustive of all of the specific terms of these external 

review programs. Therefore, states with external review programs but without checkmarks for 

specific categories may have other provisions for the types of denials eligible for review or consumer 

accessibility. For example, Missouri requires an individual to receive an adverse determination letter 

from an insurer prior to starting the external review process. 

The Henry J. Kaiser Family Foundation study did not specify which types of insurers were subject to 

the external review requirements. Some states may only apply external review requirements to 

certain types of insurers. For example, Illinois’ external review requirements were for HMOs only. 

a

Within the time following insurer’s final adverse determination. 

b

Under certain circumstances, the internal appeals process does not have to be exhausted prior to 

the start of the external review process. 

c

Applies to nonmental health. 

Page 48 GAO-03-1133 Small Business Health Coverage Requirements 

9

9

9

9

9

9

9

9

9
Appendix V: State External Review Programs 

and Patient Protections for Access to Health 

Care Providers 

Table 8 shows that in 27 states, the state selects the external review entity 

while, in 7 states, the insurer selects this entity.1

 Twelve states specify a 

maximum time of 30 or fewer business days for completion of the external 

review. 

Table 8: Independence of Reviewer and Time Limits on Completion of Review 

Process for State External Review Programs 

External review must 


State selects Insurer selects be completed within 


external review internal review 30 business days or 


State entity entity less


Alabama 

Alaska 9

Arizona 9

Arkansas 

California 9

Colorado 9

Connecticut 9

Delaware 9

District of Columbia 9

Florida 9

Georgia 9

Hawaii 9

Idaho 

Illinois 

Indiana 9

Iowa 


Kansas 9

Kentucky 9

Louisiana 9

Maine 9 9

Maryland 9

Massachusetts 9

Michigan 9 9

1

Wisconsin allowed individuals to select the review entity, and Rhode Island allowed 

individuals to select the entity when the individual (rather than the physician) appealed the 

denial. 

Page 49 GAO-03-1133 Small Business Health Coverage Requirements 

9

9
Appendix V: State External Review Programs 

and Patient Protections for Access to Health 

Care Providers 

External review must 


State selects Insurer selects be completed within 


external review internal review 30 business days or 


State entity entity less


Minnesota 9

Mississippi 

Missouri 9

Montana 

Nebraska 

Nevada 

New Hampshire 9

New Jersey 9

New Mexico 9

New York 9

North Carolina 

North Dakota 

Ohio 

Oklahoma 

Oregon 9

Pennsylvania 9

Rhode Island 

South Carolina 9

South Dakota 


Tennessee 9 9a


Texas 9 9

Utah 9 9b


Vermont 9 9

Virginia 9

Washington 9 9c


West Virginia 9

Wisconsin 


Wyoming 


Total 27 7 12


Source: Karen Pollitz et al., Georgetown University, Institute for Health Care Research and Policy, Assessing State External Review 

Programs and the Effects of Pending Federal Patients’ Rights Legislation, prepared for The Henry J. Kaiser Family Foundation 

(Washington, D.C.: May 2002), and select state officials. 

Note: Eight states (Alabama, Idaho, Mississippi, Nebraska, Nevada, North Dakota, South Dakota, 

and Wyoming) did not have external review requirements. 

Page 50 GAO-03-1133 Small Business Health Coverage Requirements 

9

9

9
Appendix V: State External Review Programs 

and Patient Protections for Access to Health 

Care Providers 

The categories in the table columns are not exhaustive of all of the specific terms of these external 

review programs. Therefore, states with external review programs but without checkmarks for 

specific categories may have other provisions for independence or the time allowed for completion. 

For example, New Jersey specifies a maximum time of 90 days for completion of the external review. 

The Henry J. Kaiser Family Foundation study did not specify which types of insurers were subject to 

the external review requirements. Some states may only apply external review requirements to 

certain types of insurers. For example, Illinois’ external review requirements were for HMOs only. 

a

The time limit is applicable if initiated by Department of Insurance. 

b

For preservice cases (instances where treatment or service has not been sought). 

c

25 calendar days plus 3 business days. 

Table 9 summarizes states’ requirements for select patient protections for 

access to certain health care providers. Overall: 

• 	 Forty-seven states prohibited “gag” clauses (restrictions on certain 

communications between physicians and their patients). 

• 	 Forty-two states required coverage of emergency room (ER) care services 

based on what a prudent layperson would assume to be an emergency. 

• 	 Forty-one states required direct access (access without a referral) to 

obstetricians and gynecologists (OB/GYN). 

Table 9: Selected Patient Protections, by State, 2003 


ER care covered per Direct access to 

State No “gag” clause prudent layperson OB/GYN 

Alabama 9

Alaska 9 9

Arizona 9

Arkansas 9

California 9 9

Colorado 9 9

Connecticut 9 9

Delaware 9 9

Florida 9 9

Georgia 9 9 9

Hawaii 9 9

Idaho 9 9 9

Illinois 9 9 9

Indiana 9 9 9

Iowa 9 9

Kansas 9

Page 51 GAO-03-1133 Small Business Health Coverage Requirements 

9

9

9

9

9

9
Appendix V: State External Review Programs 

and Patient Protections for Access to Health 

Care Providers 

ER care covered per Direct access to 

State No “gag” clause prudent layperson OB/GYN 

Kentucky 9 9 9

Louisiana 9 9

Maine 9 9

Maryland 9 9

Massachusetts 9 9

a Michigan 9

Minnesota 9 9

Mississippi 

Missouri 9 9

a

Montana 9

Nebraska 9 9

Nevada 9 9

New Hampshire 9 9

New Jersey 9

New Mexico 9 9

New York 9 9

North Carolina 9 9

North Dakota 9 9

Ohio 9 9 9

Oklahoma 9 9

Oregon 9 9 9

Pennsylvania 9 9 9

Rhode Island 9 9 9

South Carolina 9 9 9

South Dakota 9 9

Tennessee 9 9 9

Texas 9 9 9

Utah 9 9 9

Vermont 9 9 9

Virginia 9 9 9

Washington 9 9 9

West Virginia 9 9 9

Wisconsin 9 9 9

Wyoming 9

Total 47 42 41


Source: Blue Cross Blue Shield Association (BCBSA), January 2003. 

Page 52 GAO-03-1133 Small Business Health Coverage Requirements 

9

9

9

9

9

9

9

9

9

9

9

9

9

9

9

9
Appendix V: State External Review Programs 

and Patient Protections for Access to Health 

Care Providers 

Note: BCBSA did not include information on the District of Columbia. 

a

Prior authorization not required for medically necessary emergency services. 

Page 53 GAO-03-1133 Small Business Health Coverage Requirements 
Appendix VI: State Financial Requirements 


State financial requirements for health insurance sold to small employers 

focus on the solvency of insurers—that they are financially sound and 

likely able to pay the claims of policyholders.1

 States had differing 

requirements for the minimum amounts of capital and surplus that 

insurers must maintain and all states had guaranty funds to pay incurred 

claims for certain insolvent insurers. Specifically: 

• 	 All states had set minimum capital and surplus amounts—requirements 

that aimed to ensure that insurers have a sufficient financial cushion to 

withstand unexpected losses that are the result of more extreme events— 

however; only 22 states had specific requirements for health insurance. 

• 	 Since the early 1990s, all states have added a requirement for risk-based 

capital (RBC)—an approach that varied the minimum amount of capital 

and surplus a life insurer, including those that sell health or other lines of 

insurance, must keep according to its characteristics, which included the 

size, financial risk, and experience of the insurer. Twenty-two states had 

RBC requirements specifically for insurers whose primary business is 

health insurance, such as health maintenance organizations (HMO) or 

Blue Cross Blue Shield plans (health risk-based capital). 

• 	 The median amount of capital and surplus that insurers selling health 

insurance (including life insurers, health insurers, HMO plans, and Blue 

Cross Blue Shield plans) maintained and reported to NAIC varied among 

the states from $2.7 million to $198 million. 

• 	 While all states had provisions related to the payment of outstanding 

claims for policyholders whose insurers became insolvent, few states had 

similar requirements for HMOs. The maximum amount an insurer could be 

assessed for a guaranty fund varied among the states from 1 percent to 4 

percent of premiums; 49 states limited assessments to no more than 2 

percent. 

Table 10 summarizes these features of state financial requirements. 

1

State financial requirements may be different for different types of insurers. For example, 

all states had requirements for aspects of HMO operations. According to information from 

NAIC, 31 states had laws in 2003 similar to NAIC’s Model Health Maintenance Organization 

Act, which included requirements for the maintenance of reserves as well as an initial net 

worth—that is, a financial cushion similar to capital and surplus for insurers—of $1.5 

million dollars. 

Page 54 GAO-03-1133 Small Business Health Coverage Requirements 
Appendix VI: State Financial Requirements 

Table 10: State Financial Requirements 

Median capital and Maximum percent of 


Initial minimum capital Health risk-based surplus amount reported premium insurers assessed


State and surplus amounta capital by insurersb for guaranty fund


Alabama 2,500,000 7,417,714 

c Alaska 2,000,000 

Arizona 650,000 9 7,041,211 

Arkansas 862,500 9 12,924,359 

California 5,200,000 14,997,981 

Colorado 1,500,000 9 24,762,714 

Connecticut 1,000,000 9 25,118,329 

Delaware 450,000 2,771,037 

District of Columbia 1,500,000 9 15,484,145 

Florida 2,500,000 10,901,659 

Georgia 1,500,000 9 23,220,427 

Hawaii 900,000 6,165,906 

Idaho 2,000,000 15,047,046 

Illinois 2,000,000 9 6,975,443 

Indiana 2,000,000 9,910,472 

Iowa 10,000,000 9 198,360,000 

Kansas 1,200,000 9 16,567,092 2


Kentucky 3,000,000 9 21,960,695 2


Louisiana 2,000,000 14,809,038 2


Maine 2,000,000 9 27,162,235 2


Maryland 1,875,000 9 7,698,500 2


Massachusetts 300,000 17,663,021 2


Michigan 7,000,000 8,520,273 2


Minnesota 1,500,000 40,242,239 2


Mississippi 1,000,000 6,188,361 2


Missouri 1,600,000 12,780,191 2


Montana 600,000 2,838,613 2


Nebraska 2,000,000 9 33,754,924 2


Nevada 1,500,000 6,473,093 2


New Hampshire 1,500,000 9 8,678,075 2


New Jersey 3,550,000 7,109,223 2


New Mexico 1,000,000 2,743,572 2


New York 150,000 16,752,364 2


North Carolina 1,500,000 9 6,627,896 2


Page 55 GAO-03-1133 Small Business Health Coverage Requirements 

1 

2 

2 

2 

1 

1 

2 

2 

2 

1 

2 

2 

2 

2 

2 

2 
Appendix VI: State Financial Requirements 

Median capital and Maximum percent of 

Initial minimum capital Health risk-based surplus amount reported premium insurers assessed 

State and surplus amounta capital by insurersb for guaranty fund 

North Dakota 1,000,000 9 6,409,980 

Ohio 2,500,000 10,597,782 

Oklahoma 1,500,000 7,702,198 

Oregon 3,000,000 11,897,051 

Pennsylvania 1,125,000 9 20,219,606 

Rhode Island 3,000,000 50,546,340 

South Carolina 1,200,000 17,053,445 

South Dakota 500,000 6,508,404 

Tennessee 2,000,000 17,490,787 

Texas 1,400,000 9 4,219,443 

Utah 700,000 9 17,016,615 

Vermont 5,000,000 116,130,000 

Virginia 4,000,000 9 12,408,548 

Washington 4,000,000 9 21,657,387 

West Virginia 2,000,000 23,079,209 

Wisconsin 3,000,000 22,189,369 

Wyoming 1,500,000 c 

Source: NAIC’s Compendium of State Laws on Insurance Topics, 2002 and 2003; NAIC’s Model Laws Regulations and Guidelines, 2003; and unpublished data from NAIC. 

a

Requirements for new stock (publicly traded) insurers in 2002—amount of surplus that must be 

maintained for other types of insurers or insurers that are not new may be lower in some states. The 

amounts for the following states include requirements for life or other insurers because amounts for 

health insurance were not specified: Alabama, Arizona, California, Colorado, District of Columbia, 

Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Michigan, Montana, Nebraska, 

New Hampshire, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, Tennessee, Vermont, 

Virginia, Washington, West Virginia, Wisconsin, and Wyoming. Requirements in the remaining states 

are specific for insurers selling health insurance. 

b

GAO analysis of NAIC unpublished insurer filings data, 2002. Includes data reported by life insurers 

that also sell health insurance, health insurers, Blue Cross Blue Shield plans, and HMOs for 4 types 

of reserves: unpaid claims, claims adjustment expenses, aggregate policy reserves, and aggregate 

claims reserves. Excludes property and casualty insurers and insurers which sell only limited benefits, 

such as dental or vision only coverage. The amounts for the following states include requirements for 

life insurers that report earning premiums from health coverage since minimum capital and surplus 

data provided earlier in table did not have specific amounts for health insurers: Alabama, Arizona, 

California, Colorado, District of Columbia, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, 

Kentucky, Michigan, Montana, Nebraska, New Hampshire, North Dakota, Ohio, Oklahoma, Oregon, 

Rhode Island, Tennessee, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. 

In the remaining states, data include health insurers only, such as HMOs and Blue Cross Blue Shield 

plans, that completed NAIC’s health form. 

c

Median amount not reported for states that had data from fewer than four insurers. 

Page 56 GAO-03-1133 Small Business Health Coverage Requirements 

2 

2 

2 

2 

2 

3 

4 

2 

2 

1 

2 

2 

2 

2 

2 

2 

2 
Related GAO Products 


Private Health Insurance: Small Employers Continue to Face Challenges in 

Providing Coverage. GAO-02-8. Washington, D.C.: October 31, 2001. 

Private Health Insurance: Federal Role in Enforcing New Standards 

Continues to Evolve. GAO-01-652R. Washington, D.C.: May 7, 2001. 

Mental Health Parity Act: Despite New Federal Standards, Mental Health 

Benefits Remain Limited. GAO/HEHS-00-95. Washington, D.C.: May 10, 

2000. 

Implementation of HIPAA: Progress Slow in Enforcing Federal Standards 

in Nonconforming States. GAO/HEHS-00-85. Washington, D.C.: March 31, 

2000. 

Private Health Insurance: Cooperatives Offer Small Employers Plan 

Choice and Market Prices. GAO/HEHS-00-49. Washington, D.C.: March 31, 

2000. 

Health Insurance Standards: New Federal Law Creates Challenges for 

Consumers, Insurers, Regulators. GAO/HEHS-98-67. Washington, D.C.: 

February 25, 1998. 

Health Insurance Regulation: Varying State Requirements Affect Cost of 

Insurance. GAO/HEHS-96-161. Washington, D.C.: August 19, 1996. 

Employer-Based Health Plans: Issues, Trends, and Challenges Posed by 

ERISA. GAO/HEHS-95-167. Washington, D.C.: July 25, 1995. 

(290274) Page 57 GAO-03-1133 Small Business Health Coverage Requirements 
GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional responsibilities 

and to help improve the performance and accountability of the federal 

government for the American people. GAO examines the use of public funds; 

evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO’s commitment to good government 

is reflected in its core values of accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail 

this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail 

alerts” under the “Order GAO Products” heading. 

Order by Mail or Phone 	 The first copy of each printed report is free. Additional copies are $2 each. A 

check or money order should be made out to the Superintendent of Documents. 

GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a 

single address are discounted 25 percent. Orders should be sent to: 

U.S. General Accounting Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: 	 Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

To Report Fraud,	

Contact: 

W Web site: www.gao.gov/fraudnet/fraudnet.htm aste, and Abuse in E-mail: fraudnet@gao.gov 

Federal Programs Automated answering system: (800) 424-5454 or (202) 512-7470 

Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800 Public Affairs 	 U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548