Group Health Plans

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Group Health Plan Coverage

Health coverage is packaged for sale to both individuals and groups. Most people in the United States get their coverage in a group package. And most of the group plans are sold to companies and their employees.

Business health care spending increased more than sixfold between 1965 and 1994. With medical costs on the rise through the 1980s and 1990s, various management surveys show that healthcare expenditures remain the single most important concern for U.S. employers.

Although group and an individual health insurance policies share many of the same policy provisions, there are significant differences. In an individual policy; the contract is between you and your insurance, company' In a group policy; the contract is between the company and your employer, union, trust other sponsoring organization.

A caveat: Your family members may be covered under both group and individual policies. But you should determine how they will be covered before signing on to either kind of policy.

While group policies may have fewer limitations, they do have one important drawback. If you change jobs, you may no longer be covered under your last employer's group policy. However, individual health insurance contracts continue regardless of change of employment.

The Group Insurance Contract

A group insurance policy; or master policy is issued to the policy owner-usually your employer, association, union, or trust, etc. And if you are covered under the group policy you are issued a certificate of insurance. The certificate lists what the policy covers, and explains such things as how to file a claim, the term of insurance, and the right to convert from group coverage to an individual policy.

Group health insurance is generally subject to experience rating, under which the premium modification factor is determined by the experience of the group as a whole. In contrast, individual policies may be subject to community rating, under which the insurance company's overall experience is adjusted in different areas to reflect variations in local costs for doctor and hospital services.

Employee Group

An employee group policy may be issued to an employer (or to the trustee of a fund established by an employer) where insurance is secured for the benefit of the employees, or for persons other than the employer.

Usually, this classification will include all full-time employees (including the employer). Further, the classification can also specify full-time, salaried, non-union employees. By classifying the employee group in this manner,

The employee is the policy owner, and establishes the eligible Class of employees to be covered under the group policy the employer is legally able to exclude certain groups of employees (part-time, union, etc.) from the eligible class of covered employees. The eligible class of employees may also include retired employees.

Union or Association Group An association, including a labor union, must have the following characteristics to be considered an authorized group:

• have a constitution and bylaws
• be organized and maintained for purposes other than obtaining insurance ,
• have insurance for the purpose of covering members or employees for the benefit of persons other than the association or its officers or trustees (in this context, the term "employee" may include retired employees)

Trustee Group

A policy may be issued to the trustees of a "trust group" if the fund has been:

• established by two or more employers in the same or related field
• established by one or more labor unions or associations (this is also known as a "Taft-Hartley Trust")

Disability Income

Group disability income coverage provides for loss of income benefits due to a disability caused by an accident or sickness. The amount of benefits paid is usually a percentage of your weekly or monthly compensation, such as 60 percent or 70 percent. This is intended to encourage you-the disabled employee-to recover and return to work. If 100 percent of compensation were provided, there would be no such incentive for you to return to work.

Benefits are payable following the policy’s elimination period (EP). The EP is a waiting period. during which you must be to fully disabled as defined by the policy. An EP can be 7, 15, 30 days or longer.

Group benefits may be short-term or long-term. Short term benefits are usually payable for up to one or two years though usually one year. Short-term policies usually have short elimination periods such as 15 or 30 days.

Long-term disability (LID) benefits are usua.1ly paid out for longer benefit periods such as five years or until you turn 65. Generally, LTD policies will have longer elimination periods, such as 90 or 180 days.

Accidental Death and Dismemberment

Accidental death and dismemberment coverage pays specified amounts for specific injuries or for death. Benefits are only payable if the injury or death is caused by accident. Injuries must result in specific losses such as loss of sight, arms, legs or feet. This coverage can be written as a separate policy or as part of a policy providing other group health insurance benefits.

Medical Expense

Basic group medical expense policies usually provide benefits for inpatient services such as hospital room and board costs, surgical expenses and miscellaneous charges.

Outpatient (out of the hospital) expenses are usually not covered.

Basic group plans have limitations. Usually; benefits are limited to a specified amount. Room and board charges may be limited to $300 or $400 per day for example. Surgical benefits are usually factors of a surgical schedule which specifies the maximum surgical benefit to be paid.

Miscellaneous benefits (private duty nurses, bandages, medication, in-hospital x-rays, lab work, etc.) are usually limited by an amount equal to 10 or 20 times the daily room and board rate.

Because of these limitations, basic medical expense plans usually do not cover your medical expenses in full. As a result, you will be responsible for certain out-of-pocket expenses.

In contrast the basic group medical plans, group major medical policies provide more comprehensive benefits. Group major medical will "limit" benefits normally to what is reasonable and customary as opposed to a specific dollar amount. In essence, you are provided with a sum of money to cover medical expenses. Most insurers require 75 percent or more of the eligible members to participate. Under a noncontributory plan, the employer pays the entire premium. The insurance companies in this case require 100 percent participation.

The minimum participation requirement is to help guard against adverse selection. If a free choice were given, many people in good health might not choose the insurance, whereas many in poor health most certainly would.

When a group policy is rated, the premium may be higher or lower than individual coverage because everyone in the group is paying for every other group member. If the ages of the participants are relatively high, the premiums will be high. A single person, age 21, will consequently pay a relatively higher premium (due to the age of the group) than he or she might pay on an individual policy basis. An individual policy is rated on the age and insurability of the applicant, not an entire group.

On the other hand, a married person with several children would probably find that the group premium would be less than an individual family premium. On an individual basis, this person must "pay by the head" -must pay a premium for each covered family member. Usually, a group policy will charge a family rate regardless of the number of dependents the participant may have. This is a good deal for people with families.

Credit Health Coverage

Not all forms of group health insurance are cost effective. Credit health insurance is usually written as a group disability income contract although it could also be an individual policy. The purpose of credit health is to provide payment of your debt if you are disabled due to accident or sickness.

The creditor is the policy owner-or your employer and you are the debtor. Disability benefits equal to your debt are paid directly to the creditor in the event that you become disabled in accordance with policy provisions. These benefits are usually paid on a monthly basis as long as the debt remains, and you are sick. By most reckoning, credit health coverage even purchased on a group basis-'-is not a very cost-effective kind of insurance.

Self-insured Plans

If claim costs are fairly consistent, your employer may consider a self-funded health care plan. With a self-funded plan your employer, not an insurance company, provides the funds to make claim payments for company employees and their dependents. . In the event that claims are higher than predicted, a self funded health insurance plan can be backed-up by a stop-loss contract. The stop-loss contract is designed to limit your employer's liability for claims.

Generally, there are two variations of this coverage. Specific stop-loss coverage begins to apply after your medical expenses exceed a predetermined threshold such as $5,000. Aggregate stop-loss coverage applies when your employer's liability for group insurance claims exceeds a specified amount. The insurance company will pay all claims once the specified amount is reached.

An insurance company may also be used for a self-funded employer to help out with needed administrative services. Under this arrangement, the insurance company will provide claims forms, administer claims, and make payments to health, care providers, but the employer will provide the funds to make claims payments.

Self-insurance has four major advantages:

• The company can save money if actual losses are less than those predicted.
• The expense of carrying insurance may be reduced because of the elimination of administrative costs, agent commissions, brokerage fees, and premium tax.
• Because the company has assumed the entire risk, there may be a greater effort on its part to seek ways to reduce claims, and encourage employees to actively participate in "wellness" programs and improved lifestyles.
• The company has use of the money that would normally be held by the insurance company.

The main disadvantages of self-insurance include the following:

• Actual losses may be, more than predicted, causing the unexpected loss of funds that were to be used for other purposes.
• Expenses could be higher than expected if additional ~ personnel have to be hired to administer claims, manage risk or offer employee information.
• Income taxes could be higher because the company will not be able to take premiums paid as a deduction. Only the claims paid, and operating expenses may be taken as a tax deduction.

With self-insured health plans, certain federal laws may apply. If a plan is not state regulated, you may want to talk to an attorney specializing in health law before getting involved.

As a rule, partners and sole proprietors are considered self-employed individuals, not employees, so the rules for personally-owned health insurance apply. Government allows anyone who is self-employed to deduct a portion of their health insurance premiums. The deduction was 30 percent for tax years 1994 through 1996. Under new tax laws this deduction will be gradually increased to 80 percent by the year 2002.

Self-insured plans are typically offered by financially strong companies who are able to deposit adequate sums of money to cover employees' medical expenses. Generally employers who install self-insured plans will use the administrative services of an insurer or a third-party administrator (TPA).

Third-party Administrators

A third-party administrator is a firm which provides administrative services for your employer or other associations having group insurance policies. The third-party administrator acts as a liaison between the insurance company and your employer in matters such as certifying eligibility, preparing reports required by the state and processing claims.

Small Employers

Small employers (usually defined as those with fewer than 20-25 employees) have been especially hard hit by increases in health care insurance premiums. Because many group plans are experience rated, small employers see an immediate premium increase whenever claims are particularly high. If the average age of the participants is particularly high, or if claims experience is high, or if there has been even one long or catastrophic illness in a small employer plan, it can have a devastating effect, making health insurance unaffordable for the whole group.

Recent surveys by the Health Insurance Association of America (HIAA) indicate a substantial decline in the number of small firms that are able to offer health coverage to their employees.

Several states have acted to ensure that health insurance coverage’s are available at a reasonable cost and under reasonable conditions for small employers. Among the new requirements:

• standard benefit plans that must be offered to small employers
• . maximum waiting periods for pre-existing conditions
• the insurance company may not exclude particular individuals or medical conditions from coverage
• insurance companies may only cancel small employer plans for nonpayment of premium, fraud, misrepresentation or noncompliance with plan provisions

Cafeteria Plans

With a cafeteria plan, you select health benefits from a variety of options, based on your individual and family needs. Cafeteria plans tend to be more complex (and more expensive) than traditional plans, especially with regard to plan administration, and usually make the most sense for larger employers.

Benefits are elected in advance of the year in which they will be used (benefits to be used in 1996 will be elected at the end of 1995). Taxation of cafeteria plans is regulated by Section 125 of the Internal Revenue Code.

Medical Savings Account

A medical savings account (MSA) is an employer-funded account linked to a high deductible medical indemnity plan. Usually; your employer raises the existing plan deductible (usually by 300 percent to 400 percent) and in turn returns a portion of the premium savings to you as contributions to the medical savings account. You can use these contributions to pay for health care expenses throughout the year, and at the end of the year, you may withdraw whatever remains in the account as (taxable) cash.

Multiple Employer Trusts

Multiple employer trusts provide health insurance benefits to small businesses through a series of trusts usually established based on specific industries such as manufacturing, sales and service, real estate, etc. Most states have group size eligibility requirements for employer groups to qualify for group insurance.

Generally, states may require a minimum of' five to ten participants for a group to be eligible for group benefits. MET’s typically have no such requirements and in reality a group off one could be eligible for group benefits. METs are formed by insurance companies or third-party administrators who are called sponsors. The sponsor develops the plan, sets the underwriting rules and administers the plan.

To help prevent the possibility of adverse selection, the underwriter must make sure that the sponsor's underwriting rules are adequate and that he or she adheres to them. This is necessary because an employer with only two, three or five employees could elect to join an MET because they know of the poor health condition of one of the employees. The underwriting standards must be able to prevent this from happening.

If state law allows, MET’s may be noninsured. A noninsured plan is a self-funded plan. It is a plan that operates without the services and funds of an insurance company. The trustee has charge of the funds and the policies and all activities occur through the trust.

As with a traditional group insurance plan, a master policy is issued under a trust agreement~, The master contract has it’s own policy effective date and; renewal dates which the insurance company may use for changing rates on the MET's entire block of business. Also, every employer :finder the MET has its own effective date and anniversary dates. Rates are generally changed on an employer's anniversary date but usually not more than once a year.

Multiple Employer Welfare Arrangements

Multiple Employer Welfare Arrangements (MEWAs) are employer funds and trusts providing health care benefits (among other benefits) to employees of two or more employers.

ERISA, the federal Employee Retirement Income Security Act which is designed to protect you if you are in a group health insurance plan, restricts states' ability to regulate employee welfare benefit plans while preserving state insurance laws having to do with reserve requirements. A state may regulate insurance, but mayor may not consider an employee welfare benefit plan an "insurance plan" for the purpose of regulation.

Regulators are attempting to resolve the question of jurisdiction. Meanwhile, in most states MEWAs need to obtain a Certificate of Authority in order to transact insurance business, and must be fully insured by a licensed insurance company. Usually, agents and brokers are prohibited from assisting MEWAs to transact insurance until and unless the agent or broker files a report with the department of Insurance outlining the MEWRs organization, insurance contracts, benefit plan description, and the designated third party administrator.

Deductible, Co-payment, and Reimbursement .

Insured employees with dependent coverage must meet the deductible before expenses will be covered. But, plans typically include some type of family deductible in order to limit a family's exposure for health care expenses.

Co-insurance is a feature typically found in group health plans. It sets the percentage of covered expenses that the employees and the health plan will pay. The most common coinsurance level is one in which the employee pays 20 percent of the expenses and the insurance company pays 80 percent.

A covered expense is an eligible expense under a group health insurance plan. It is an expense that will be reimbursed in whole or in part: An example: Most health plans consider doctors' visits a covered expense-that is, any doctor's fee you incur up to the amount provided by your plan.

However, just because an expense is covered does not mean that the coverage is unlimited. Both basic and comprehensive plans have limits on the amount of expenses for which they will reimburse. In addition, you usually have to pay some form of deductible and co-insurance before they will reimburse the expenses.

Dental, Vision, and Prescription Drug Plans

Dental care is usually considered a budge table expense, so it's usually not included in group health plans. However, you can usually obtain dental care from your employer in the form of employee benefits.

Some health plans do include dental coverage as part of the medical plan. Others include it as a separate add-on plan. Also, many plans do provide coverage for non cosmetic dental work resulting from an accident.

Your employer may also offer direct reimbursement for dental care-this is- a noninsured dental coverage plan typically used by smaller employers-in which your employer agrees to pay for a percentage or amount of the expenses. Small employers usually go this route to avoid both the costs associated with an insured plan and the administrative complexity of going through an insurance company. In addition, the risk is considerably smaller because dental expenses, unlike medical expenses, tend to be more predictable and seldom involve catastrophic expenses.

Vision coverage is similar to dental, in that it is a relatively new benefit, usually offered by employers that can afford to , add certain fringe benefits typically considered budgetable.

Most health plans provide coverage for medical care related to eye injury or disease, but not for costs associated with periodic eye examinations or corrective lenses. Vision care is typically covered on a scheduled basis that pays a fixed dollar amount for examinations, lenses and frames.

Most often, only prescription drugs that are for treatment 6f an illness or injury are covered by a health plan'-subject to applicable deductibles and co-insurance.

Example: Your insurance company might not cover your contraceptive prescription drugs, or the nicotine chewing gum you need to help you quit smoking.

Different insurance companies offer different types of drug plans, but the basic types of prescription medication plans, include' open panel, closed panel, mail order and prescription drug card plans.

Summary

Group health insurance dominates the market because it receives a number of critical subsidies from the federal government. Most of the subsidies come in the form of tax breaks.

An employer can deduct all premiums paid for group or franchise health insurance on employees as a business expense, provided the employer is not the beneficiary of the policy (benefits are payable to the employees, not the employer). The value of the coverage provided by the employer is not considered taxable income to the employee.

Effective in 1997, long-term care insurance provided on a group basis enjoys the same tax status as group life and health insurance, meaning premiums paid by the employer are tax deductible and benefits are received tax free up to specified limits. Medical expense benefits are generally considered to be reimbursements for medical expenses already incurred, and therefore are not taxable as income.

A taxpayer purposes that have been company. This is true paid for by an employer or with all of these tax breaks, it's little wonder that so many people get their health coverage through group policies at work. The only question: Will the federal government ever end the subsidies it gives employers-as part of some larger health insurance reform plan or otherwise?