oversight

Private Health Insurance: Federal and State Requirements Affecting Coverage Offered by Small Business

Published by the Government Accountability Office on 2003-09-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 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 

                                                September 2003


                                                PRIVATE HEALTH INSURANCE

                                                Federal and State Requirements Affecting
Highlights of GAO-03-1133, a report to the      Coverage Offered by Small Businesses
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                 Federal law does not require private employers of any size to offer health
health coverage through                         coverage, nor does it require those that do offer coverage to include specific
employers. Small businesses with                benefits. However, employers choosing to offer mental health, mastectomy,
fewer than 50 employees, however,               and maternity benefits generally must meet certain federal requirements.
are less likely to offer coverage               States, which have primary responsibility for regulating insurers, require
than larger businesses. Many say
they cannot afford it. When they
                                                health insurance policies offered by businesses of any size to include certain
do provide coverage, small                      benefits, but the number, type, and scope of these requirements vary
businesses typically purchase                   substantially among states. For example, 7 states each had 30 or more
insurance policies, while larger                benefit mandates, while 5 states each had fewer than 10 benefit mandates.
businesses are more likely to use
their own funds to pay for some of              Federal requirements for premiums prohibit variation among similarly
their employees’ health care, a                 situated individuals in an employer group for businesses of any size based on
practice known as self-funding.                 health status, and these requirements apply whether the employer purchases
                                                health insurance or self-funds the health coverage. State requirements that
One proposal to make health                     limit premium variation among small businesses apply only to insurers,
coverage more affordable for small              therefore affecting only employers that purchase health coverage from
businesses would establish
Association Health Plans (AHP),
                                                insurers. State requirements varied widely in the extent to which they
which could offer coverage to                   restricted the amount that premiums may vary among small businesses and
small businesses subject to                     in the characteristics of the groups that may be used to set premiums.
different federal and state                     Differences among states in whether and how factors such as age, gender,
requirements than currently exist.              and health status are considered can affect the extent to which small
In light of this proposal, GAO was              businesses with employees having higher risk factors pay more for coverage.
asked to summarize current federal              For example, a small business with older, higher-risk employees and
and state requirements for health               dependents in Texas could have been charged nearly four times as much as a
coverage offered by small                       small business of the same size with younger, healthier employees and
businesses, including mandated                  dependents. In New York, the two small businesses would have been
benefits, premium-setting                       charged the same premium. Most states also had restrictions on how
requirements, and requirements
regarding availability of coverage.
                                                premiums may be adjusted at renewal.

To identify these requirements,                 Federal laws require insurers selling coverage to small businesses to make
GAO reviewed federal and selected               all policies available and require that employers offer continuation of health
states’ laws and literature from the            coverage for a period of time for certain individuals who otherwise would
Department of Labor (DOL),                      lose group coverage. All but one state had laws that conformed with federal
National Association of Insurance               requirements for small businesses, and some states’ requirements exceeded
Commissioners (NAIC), and other                 the federal minimums. For example, 39 states extended the federal
sources. For further detail on                  continuation of coverage requirements to policies covering groups with
some states’ insurance                          fewer than 20 employees.
requirements, GAO reviewed 8
states with a range in the number
of mandated benefits and 4 states
                                                The DOL, NAIC, and 10 states provided technical comments on a draft of this
with different types of premium-                report, which were incorporated as appropriate. NAIC also provided written
setting requirements.                           comments emphasizing, among other things, the importance of states’
                                                consumer protections.
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.
Contents 



Letter                                                                                              1
                       Results in Brief 
                                                          3
                       Background
                                                                 6
                       Health Benefit Requirements 
                                               8
                       Premium Requirements 
                                                     17
                       Requirements for Availability of Health Coverage 
                         22
                       Patient Protection Requirements Regarding Appeals of Denied

                         Claims and Access to Certain Health Care Services                        25
                       Fiduciary and Financial Requirements                                       27
                       Comments from External Reviewers                                           31

Appendix I 	           State-Mandated Benefits for the Small Group
                       Health Insurance Market in Eight States                                    33



Appendix II            Estimated Costs of State-Mandated Benefits                                 38



Appendix III           State Premium Requirements                                                 41



Appendix IV 	          States Exceeding Federal Availability of Coverage
                       Requirements                                                               44



Appendix V 	           State External Review Programs and Patient
                       Protections for Access to Health Care Providers                            46



Appendix VI            State Financial Requirements                                               54



Related GAO Products                                                                              57




                       Page i                 GAO-03-1133 Small Business Health Coverage Requirements
Tables
          Table 1: Number of States with Premium-Setting Requirements for
                   the Small Group Market, by Type of Rating, 2003                   19
          Table 2: Average Annual per Enrollee Premium Quotations for
                   Three Hypothetical Small Business Groups, with
                   Increasing Risk Characteristics, in Selected Localities,
                   2000                                                              21
          Table 3: Health Care Benefit and Provider Mandates Applicable to
                   the Small Group Market in Eight States, 2003                      34
          Table 4: Variation in Scope of Selected Mandates for Small Group
                   Market in Selected States                                         37
          Table 5: State Premium Requirements                                        42
          Table 6: Selected Availability of Coverage Protections, by State           44
          Table 7: Claims Denials Eligible for Review and Individual
                   Accessibility to State External Review Programs                   47
          Table 8: Independence of Reviewer and Time Limits on Completion
                   of Review Process for State External Review Programs              49
          Table 9: Selected Patient Protections, by State, 2003                      51
          Table 10: State Financial Requirements                                     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 





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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 employer-
                                   sponsored 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
                   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
Results in Brief   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 state-
administered 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
             Most small businesses that offer health coverage to their employees
Background   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 self-
             funded plan. In contrast, the larger businesses are more likely to offer self-
             insured 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 employer-
             sponsored 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 employer-
sponsored 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.
10
 The 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.
11
     S. 545 and H.R. 660, 108th Congress.




Page 7                           GAO-03-1133 Small Business Health Coverage 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
Health Benefit 
             benefits, those that choose to cover maternity, mental health, or
Requirements 
               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         Federal laws include minimum benefit requirements for businesses that
Benefits Must Satisfy        choose to offer certain benefits:
Minimum Federal
                        •	  The Pregnancy Discrimination Act12 requires businesses with 15 or more
Requirements                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.




                             12
                                  Pub. 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




                              13
                               U.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).
                              14
                               The 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     The total number of mandates applicable to all insurance markets—small
Benefit and Provider         group, large group, and individual—varied from state to state. (See fig. 1.)
Mandates for All Insurance   According to a 2002 survey by BCBSA, 7 states—Connecticut, Maryland,
                             Massachusetts, Minnesota, Nevada, Texas, and Virginia—each had 30 or
Markets                      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.




                             15
                              States 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    The benefit requirements in eight states we reviewed—Alabama, Colorado,
of State Mandates in the   Georgia, Idaho, Illinois, Maryland, Nevada, and Vermont—illustrate the
Small Group Market         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.




                           16
                             U.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




17
 Georgia 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.
18
 The 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 State-   While the number, type, and scope of benefit and provider mandates in a
Mandated Benefits           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.)




                            19
                              Estimates 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.
                            20
                             Mercer Human Resource Consulting, Mandated Health Insurance Services Evaluation, a
                            report prepared at the request of the Maryland Health Care Commission, 2002.
                            21
                              The 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
                           Federal premium requirements prohibit any employer-sponsored health
Premium 
                  coverage from charging employees a higher premium based on health-
Requirements 
             related 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       Federal requirements do not address how premiums for employer-
Restrict Variation in      sponsored health coverage are set but rather HIPAA’s nondiscrimination
Premiums for Individuals   provision prohibits, for businesses of all sizes, premiums from differing for
                           similarly situated individuals on the basis of health-related factors.22
with Employer-Sponsored    Similarly situated employees might share the same geographic location or
Health Coverage            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.




                           22
                             HIPAA 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   In 2003, nearly all states (47) had some restrictions on how premiums
Insurers Could Vary       were set for insurance sold in the small group market. These requirements
Premiums for Different    focused on limiting the extent to which premiums offered to small
                          employers purchasing the same coverage could differ. State requirements
Small Businesses          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 higher-
     risk 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

                                                                                                                                                     .     Group 3—Higher risk: 

                                                                                                                                                             same serious health 

                                                                                     Group 1—                                                              condition as Group 2,

                                                                                    Lower risk:                                                          but other enrollees have 

                                                                                      Primarily                                                              other increased-risk 

                                                                                young, with no               Group 2—Medium risk: 
                               characteristics, 

                                                                                         health              similar to Group 1 but 1 
                     including older, male 

                                                                                conditions and             adult has a serious health 
                      and smoker, and the 

                                                                                  few high-risk             condition (juvenile-onset 
                   business was a higher-

                                                                                characteristics                             diabetes) 
                              risk industry

                                                                                                                        Percentage 
                                        Percentage 

 Premium-setting 
                                                                      Annual                  Annual    increase 
                       Annual        increase from

 requirement                      Location                    
                       premium                 premium from Group 1
                      premium               Group 1

 Pure community                   Albany, New Yorka
 rating                                                                                 $2,580                   $2,580                       0%            $2,580                        0%
                                                                  b
 Modified community               Baltimore, Maryland
 rating                                                                                   2,113                    2,113                      0%             3,977                        88%
                                                                          c
 Rating band                      Sacramento, California                                  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.


                               Federal laws—HIPAA and COBRA—have established requirements to
Requirements for               ensure the availability of health coverage for small businesses and for
Availability of Health         employees, with certain exceptions, who lose group coverage. All states
                               except Missouri had laws that conformed with the federal minimum
Coverage                       requirements for the availability of health coverage for small businesses,
                               and some states had requirements that exceeded the federal minimums.


Federal Requirements for       Federal laws require that insurers in the small group market offer small
Availability of Coverage for   businesses with 2 to 50 employees the option to purchase coverage and
Small Businesses               that employees in businesses with at least 20 employees be allowed to
                               continue to purchase health coverage for themselves and their dependents
Represent the Minimum          under certain circumstances, such as when individuals lose their health
for State Requirements         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



                               23
                                 This 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




   24
      For 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.
   25
      In 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.
   26
    Employees or their covered spouses are not eligible for continuation of coverage under
   COBRA if they were terminated for “gross misconduct.”
   27
     COBRA 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     All but one state—Missouri—met or exceeded the federal minimum
Federal Minimum          requirements for the availability of health coverage through small
Requirements for         businesses. States had responsibility for enforcing these regulations, while
                         CMS had responsibility for enforcing the federal requirements for insurers
Availability of Health   in states that did not establish conforming requirements.28 CMS determined
Coverage for Small       that all but one state—Missouri—had enacted requirements that conform
Businesses               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



                         28
                          DOL is also responsible for ensuring that private employers that offer group health
                         coverage comply with HIPAA’s portability and nondiscrimination requirements.
                         29
                          For 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).
                         30
                          U.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
                            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
Patient Protection          of any size to have an internal review process for individuals who appeal a
Requirements                denied benefit claim. Most states had established requirements for
                            independent external review processes for health insurers, although these
Regarding Appeals of        review processes varied substantially among states in their specifics. In
Denied Claims and           addition, most states had patient protections that allowed patients direct
                            access (without prior approval) to certain health care providers and
Access to Certain           services, such as emergency services and obstetricians/gynecologists.
Health Care Services

Federal Requirements        Federal requirements include provisions for internal claims review in
Establish Internal Review   settling appeals regarding denied claims. Under ERISA, health insurers or
Procedures for Appeals of   employers’ self-funded plans must maintain procedures for an internal
                            review process for considering individuals’ appeals of any denied claims.
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.




                            31
                             In 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.
                            32
                                 29 C.F.R. pt. 2560 (2002).




                            Page 25                           GAO-03-1133 Small Business Health Coverage Requirements
Most States Established      Most states had a requirement that some or all insurers establish a process 

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

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

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

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

and Provided Other Patient   Based on information from a May 2002 report prepared by the Institute for 

Protections                  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 



                             33
                              See 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.
                             34
                                  BCBSA 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
                            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,
Fiduciary and               that individuals with discretionary authority over assets related to any
Financial                   employer-sponsored health coverage must act prudently and in the
                            exclusive interest of enrolled individuals. In contrast, states established
Requirements                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        Federal requirements for employer-sponsored health coverage do not
Limited to Fiduciary        specify solvency or other financial requirements for that coverage. Rather,
Responsibilities, Not       ERISA requires that fiduciaries—persons who have control or authority
                            over assets related to the health coverage—act prudently and in the
Solvency or Other           exclusive interest of enrolled individuals. These fiduciary responsibilities,
Financial Protections       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             State financial requirements for insurers selling in the small or large group
Requirements for Insurers   market focused on ensuring that the insurers were financially sound and
in the Small or Large       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
Group Market Include        outstanding claims). These reserve requirements focused on ensuring that
Insolvency Protections,     insurers can meet pending claims and benefits, based largely on incurred
Reporting Rules, and        liabilities, prior experience, and projections that assume moderately
Oversight Activities        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,



                            35
                               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, 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.
                            36
                             States 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



37
  GAO 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.
38
  Amounts 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.




39
  GAO 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.


                     We provided a draft of this report to DOL, NAIC, and 12 states whose
Comments from        benefit or premium requirements for the small group market were
External Reviewers   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


                     40
                          In 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

                                                               9   a
 Asthma treatment
 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
                                   9
 Clinical trials                                   9           9                                           9

 Colorectal screening                              9           9           9                    9a
                                                   9           9           9           9        9                           9a
                                                                   a
 Complications of pregnancy
 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                       9   b
                                                                                       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
                                                          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

                                                                         9                          9   b
 Rehabilitation services
 Residential crisis services                                             9

 Second opinion                                                          9

 Temporomandibular joint disorders 

 treatment                                                               9             9                                      9            9

                                                                         9             9            9             9                        9

                                                                                                        b
 Well-child care
 Providers
 Acupuncturist                                                                                                                9

 Athletic trainer                                                                      9

 Chiropractor                                                                          9                          9           9            9           9

 Dentist                                                                                            9             9                                    9

 Marriage therapist                                                                                               9           9

 Nurse                                                                                                            9           9

                                                                                       9

                                                 d
 Nurse, registered first assistant
 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

                                                                                                                                                                   9

                                        e
 Public and other facilities
 Social worker                                                                                      9             9           9

 Total state mandates (benefits and 

                                                                           f
 providers)                                                             32            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
                                                                                                                     a
Nevada                                                  • Mental illness defined as 6 biologically based conditions
                                                        • 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 State-
Mandated 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.
                                                                                                                          d
 Georgiac                                                 • Coverage to same extent as physical illness for ICD/DSM 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 State-
Mandated 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 State-
Mandated 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 premium-
State                     requirement (2003)             setting for renewals (2002)
Alabama                   Rating band
Alaska                    Rating band                                             9
Arizona                   Rating band                                             9
Arkansas                  Rating band                                             9
California                Rating band                                             9
Colorado                  Modified community rating                               9
Connecticut               Modified community rating                               9
Delaware                  Rating band                                             9
District of Columbia      None
Florida                   Rating band                                             9
Georgia                   Rating band                                             9
Hawaii                    None
Idaho                     Rating band                                             9
Illinois                  Rating band                                             9
Indiana                   Rating band                                             9
Iowa                      Rating band                                             9
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
Appendix III: State Premium Requirements




                                        Type of premium setting                           Sets limits on premium-
 State                                  requirement (2003)                              setting for renewals (2002)
 North Dakota                           Rating band                                                                          9
 Ohio                                   Rating band                                                                          9
 Oklahoma                               Rating band                                                                          9
 Oregon                                 Modified community rating                                                            9
 Pennsylvania                           None
 Rhode Island                           Rating band                                                                          9
 South Carolina                         Rating band                                                                          9
 South Dakota                           Rating band                                                                          9
 Tennessee                              Rating band                                                                          9
 Texas                                  Rating band                                                                          9
 Utah                                   Rating band                                                                          9
 Vermont                                Pure community rating
 Virginia                               Rating band                                                                          9
 Washington                             Modified community rating
 West Virginia                          Rating band                                                                          9
 Wisconsin                              Rating band                                                                          9
 Wyoming                                Rating band                                                                          9

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
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
                                   9
               Colorado                                        9
                                   9
               Connecticut                                     9
                                   9
               Delaware
               District of Columbia                            9

               Florida                                         9

               Georgia                                         9

               Hawaii                                                                               9
               Idaho
               Illinois                                        9

               Indiana                                                                              9
               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
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
                                           9
 New Jersey                                                                9
                                           9
 New Mexico                                                                9
                                           9
 New York                                                                  9

 North Carolina                                                            9

 North Dakota                                                              9

 Ohio
 Oklahoma
 Oregon                                                                    9
                                           9
 Pennsylvania
 Rhode Island                                                              9
                                           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
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
                               9
 Arkansas
 California                                                                9                              9

 Colorado                                                                  9                              9
                               9
 Connecticut                                                               9                              9
                               9
 Delaware                                                                  9                              9
                               9
 District of Columbia                                                      9                              9
                               9
 Florida                                   9                                                              9

 Georgia                                   9                                                              9

 Hawaii                                    9                                                              9
                               9
 Idaho
 Illinois                                                                  9                              9

 Indiana                                                                   9                              9
                               9
 Iowa                                                                      9                              9
                               9
 Kansas                                                                    9                              9                                9

 Kentucky                                  9                                                              9                                9

 Louisiana                                                                 9                              9                                9

 Maine                                                                     9                             9   b




 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
                                                                    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
                                                                                                                                                                                            a
 State                                            review                            external review                  external review process                                 determination
 New York                                                                                                   9                                             9                                        9
 North Carolina
 North Dakota
 Ohio                                                           9                                                                                         9                                        9
 Oklahoma                                                                                                   9                                             9                                        9
 Oregon                                                                                                     9                                             9
 Pennsylvania                                                                                               9                                             9                                        9
 Rhode Island                                                                                               9                                             9                                        9
 South Carolina                                                                                             9                                             9                                        9
 South Dakota
 Tennessee                                                                                                  9                                             9                                        9
 Texas                                                                                                      9                                             9
 Utah                                                                                                       9                                             9
 Vermont                                                                                                    9                                             9                                        9c
 Virginia                                                                                                   9                                             9                                        9
 Washington                                                     9                                                                                         9
 West Virginia                                                                                              9                                             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
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
                        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
                                             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
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                                                                                                                                 9
 Oklahoma
 Oregon                                                        9
                                                                     9
 Pennsylvania                                                  9

 Rhode Island                                                                                                                         9
 South Carolina                                                                              9

 South Dakota 

 Tennessee                                                                                   9                                        9a

 Texas                                                         9                                                                      9

                                                                                             9                                        9
                                                                                                                                          b

 Utah
 Vermont                                                       9                                                                      9

 Virginia                                                      9

                                                                                             9                                        9
                                                                                                                                          c

 Washington
 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
     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
                     9
         Alaska                                        9                         9

         Arizona                                       9

         Arkansas                                      9
                                               9
         California                                    9                         9
                     9
         Colorado                                      9                         9
                     9
         Connecticut                                   9                         9
                     9
         Delaware                                      9                         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
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
                 9
 Maine                                                 9                             9
                 9
 Maryland                                              9                             9
                 9
 Massachusetts                                         9                             9
                 9
                                                       9
                                               9
                                                                                      a
 Michigan
 Minnesota                                             9                             9
                 9
 Mississippi                                                                                            9
 Missouri                                              9                             9
                 9
                                                       9
                                               9
                                                                                      a
 Montana
 Nebraska                                              9                             9
                 9
 Nevada                                                9                             9
                 9
 New Hampshire                                         9                             9
                 9
 New Jersey                                                                          9
                 9
 New Mexico                                            9                             9
                 9
 New York                                              9                             9
                 9
 North Carolina                                        9                             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
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

                                              a
State                     and surplus amount               capital                  by insurersb             for guaranty fund

Alabama                              2,500,000                                          7,417,714                            1
                                                                                                c
Alaska                               2,000,000                                                                               2
Arizona                                  650,000                   9                    7,041,211                            2
Arkansas                                 862,500                   9                   12,924,359                            2
California                           5,200,000                                         14,997,981                            1
Colorado                             1,500,000                     9                   24,762,714                            1
Connecticut                          1,000,000                     9                   25,118,329                            2
Delaware                                 450,000                                        2,771,037                            2
District of Columbia                 1,500,000                     9                   15,484,145                            2
Florida                              2,500,000                                         10,901,659                            1
Georgia                              1,500,000                     9                   23,220,427                            2
Hawaii                                   900,000                                        6,165,906                            2
Idaho                                2,000,000                                         15,047,046                            2
Illinois                             2,000,000                     9                    6,975,443                            2
Indiana                              2,000,000                                          9,910,472                            2
Iowa                                10,000,000                     9                  198,360,000                            2
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
                                                              Appendix VI: State Financial Requirements




                                                                                                                Median capital and                       Maximum percent of
                                      Initial minimum capital Health risk-based                           surplus amount reported                  premium insurers assessed
                                                            a
 State                                  and surplus amount               capital                                      by insurersb                          for guaranty fund
 North Dakota                                             1,000,000                                9                             6,409,980                                 2
 Ohio                                                     2,500,000                                                            10,597,782                                  2
 Oklahoma                                                 1,500,000                                                              7,702,198                                 2
 Oregon                                                   3,000,000                                                            11,897,051                                  2
 Pennsylvania                                             1,125,000                                9                           20,219,606                                  2
 Rhode Island                                             3,000,000                                                            50,546,340                                  3
 South Carolina                                           1,200,000                                                            17,053,445                                  4
 South Dakota                                                500,000                                                             6,508,404                                 2
 Tennessee                                                2,000,000                                                            17,490,787                                  2
 Texas                                                    1,400,000                                9                             4,219,443                                 1
 Utah                                                        700,000                               9                           17,016,615                                  2
 Vermont                                                  5,000,000                                                           116,130,000                                  2
 Virginia                                                 4,000,000                                9                           12,408,548                                  2
 Washington                                               4,000,000                                9                           21,657,387                                  2
 West Virginia                                            2,000,000                                                            23,079,209                                  2
 Wisconsin                                                3,000,000                                                            22,189,369                                  2
                                                                                                                                              c
 Wyoming                                                  1,500,000                                                                                                        2

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
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.




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              Page 57                 GAO-03-1133 Small Business Health Coverage Requirements
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