Health Insurance Regulation: Variation in Recent State Small Employer
Health Insurance Reforms (Fact Sheet, 06/12/95, GAO/HEHS-95-161FS).

Pursuant to a congressional request, GAO provided information on state
legislation to improve portability, access, and rating practices for the
small-employer and individual health insurance markets.

GAO found that: (1) no state entirely adopted the National Association
of Insurance Commissioners' (NAIC) model small-employer health insurance
act; (2) the states did not consistently define small employers,
eligible employees, carriers, and noncarrier groups offering
small-employer insurance; (3) only 20 states included the self-employed,
and not all of those states extended all provisions to that group; (4)
15 states passed some type of individual market reform, and 10 closely
applied their small-employer reforms to their individual reforms; (5)
states had the most difficulty in defining noncarrier groups offering
insurance; (6) most states included limitations on preexisting condition
exclusions and portability requirements, but differed on the length of
the waiting period; (7) most states restricted insurer rating practices,
but either significantly changed the NAIC model provisions or used a
different approach; (8) states' approaches to rate determinations,
permissible premium variations, and the number of carriers' business
classes varied significantly; and (9) NAIC amended its model act to
redefine small-employers to include the self-employed.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-95-161FS
     TITLE:  Health Insurance Regulation: Variation in Recent State 
             Small Employer Health Insurance Reforms
      DATE:  06/12/95
   SUBJECT:  Health insurance
             State law
             Eligibility criteria
             State-administered programs
             Employee medical benefits
             Small business assistance
             Insurance premiums
             Insurance regulation
             Comparative analysis
IDENTIFIER:  NAIC Small Employer Health Insurance Availability Model Act
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Fact Sheet for the Chairman, Subcommittee on Employer-Employee
Relations, Committee on Economic and Educational Opportunities, House
of Representatives

June 1995

HEALTH INSURANCE REGULATION -
VARIATION IN RECENT STATE SMALL
EMPLOYER HEALTH INSURANCE REFORMS

GAO/HEHS-95-161FS

State Insurance Reforms


Abbreviations
=============================================================== ABBREV

  ERISA - Employee Retirement Income Security Act of 1974
  MEWA - multiple employer welfare arrangement
  NAIC - National Association of Insurance Commissioners

Letter
=============================================================== LETTER


B-261061

June 12, 1995

The Honorable Harris W.  Fawell
Chairman, Subcommittee on Employer-Employee
 Relations
Committee on Economic and Educational
 Opportunities
House of Representatives

Dear Mr.  Chairman: 

Most state governments have recently passed legislation designed to
improve portability, access, and rating practices for the small
employer health insurance market and, to some extent, for the
individual health insurance market.  Currently, your Subcommittee is
considering legislation that includes provisions to reach the same
goals within a consistent and uniform national framework. 

To assist your Subcommittee in its deliberations, you asked for an
overview of what states have adopted thus far and a description of
variations in ways states treated key components of their recently
passed legislation.  Specifically, you asked us to identify
variations in how states define the types of small employers covered
by their health insurance laws, focusing in particular on how these
changes affect self-employed individuals and small employer insurance
provided through group purchasing memberships or associations.  You
further asked us to provide detailed information on variations in
state approaches to guaranteed issue and renewal provisions, premium
rate restrictions, limitations on preexisting conditions, and
renewability requirements as well as other key differences in state
approaches. 

To develop this information, we identified states that passed small
employer health insurance reforms between 1990 and 1994.  We reviewed
the legislation or other available state materials describing key
elements of these reforms.  When necessary to clarify issues, we
supplemented our review through discussions with state officials
involved in the implementation of the reforms. 

We used the National Association of Insurance Commissioners (NAIC)
Small Employer Health Insurance Availability Model Act (#118) that
was in effect in April 1993 as a benchmark for comparison of state
plans.  NAIC made significant amendments to this model in March 1995,
but we used the earlier version because it more closely characterized
the NAIC position at the time most states passed their legislation. 
The NAIC model itself provides for substantial state flexibility in
many of its specific provisions.\1 We conducted our work from April
to May 1995 in accordance with generally accepted government auditing
standards. 


--------------------
\1 To measure variation in state approaches, we used specific
limitations in the NAIC model as benchmarks for comparison.  For
example, the NAIC model provides that carriers generally use no more
than nine business classes for rate-setting purposes.  We considered
states that permitted fewer than five business classes or that did
not allow carriers to establish any classes as major variations from
the maximum of nine classes specified in the model. 


   BACKGROUND
------------------------------------------------------------ Letter :1

Earlier studies consistently point to the high and rising cost of
insurance as the key factor preventing small employers from offering
coverage to their workers.\2 Some insurance practices exacerbate the
problem by substantially increasing costs or denying coverage for
some firms and workers.  Consequently, most states have recently
adopted some type of insurance market reforms designed to improve
access and affordability of insurance for this segment of the
population.  Reforms include measures to help ensure that (1)
employees who want health insurance coverage will be accepted and
renewed by insurers; (2) waiting periods for preexisting conditions
will be short, occur only once, and be based only on recent medical
history; (3) coverage will be continuous and portable, even when an
individual changes jobs or the employer changes insurers; and (4)
extremes in premium costs will be narrowed to fall within ranges
specified by the states. 

States recognize the tough trade-offs involved in crafting reforms
that may improve availability of health insurance for some but that
could also raise average premiums.  The reforms are intended to
address a growing sense of unfairness in an insurance market in which
individuals who change jobs or experience costly medical conditions
can be excluded from coverage or effectively priced out of the
market.  On the other hand, these restrictive practices enable
insurers to charge lower premiums to employers with young and healthy
workers.  Consequently, reforms may cause insurers to pass on the
resulting costs to all consumers, thereby raising the average level
of premiums. 

In extending greater protections to consumers through tighter
regulation of the insurance market, states also recognize the
responsibility of consumers and employers in the insurance market. 
State requirements for insurance carriers to guarantee coverage to
individuals, for example, need to be balanced against the potential
for some individuals to avoid obtaining coverage until they become
sick.  In requiring guarantees that insurance coverage would be
renewed at reasonable rates for all current policyholders, states had
to consider responsibilities of the employer to file honest and
accurate claims and to continue paying premiums promptly.  Defining
and balancing the responsibilities of carriers, small employers, and
consumers in the health insurance market became the source of much of
the debate and variations among states in their reform efforts. 


--------------------
\2 See Access to Health Insurance:  State Efforts to Assist Small
Businesses (GAO/HRD-92-90, May 14, 1992). 


   OVERVIEW:  COMPARISON WITH THE
   NAIC MODEL
------------------------------------------------------------ Letter :2

We identified 45 states that passed legislation regulating the small
employer health insurance market between 1990 and 1994.  While most
laws address commonly perceived small employer health insurance
problems, including guaranteed issue and renewal, portability,
limitations on preexisting conditions, rating practices, and minimum
participation requirements, approaches adopted by the states vary,
often substantially, with no states following the NAIC model on all
of the key provisions.  (See sec.  1.)


   DEFINING WHO IS COVERED BY
   STATE LAWS
------------------------------------------------------------ Letter :3

There is substantial variation among states in both the way they
define small employers and how they define which employees are
eligible for coverage.  Differences in how a full-time worker is
defined and whether part-time or temporary workers are covered are
among the sources of state variation. 

Whether to extend provisions of the state reforms to self-employed
individuals was among the most contentious issues the states faced. 
Only 20 states include the self-employed; moreover, all provisions of
the state reforms, most notably those requiring carriers to guarantee
coverage, are not always extended to the self-employed.  We also
identified 15 states that passed separate legislation regulating
health insurance plans that cover individuals.  Reflecting this state
variation, NAIC recently amended its model legislation by changing
the definition of small employer to include self-employed individuals
and deleting any reference to a maximum number of employees. 
Treatment of more complex insurance arrangements through multiple
employer welfare arrangements (MEWA) and insured plans offered
through fraternal organizations or trade associations are often not
clearly delineated in the state reforms.  (See
sec.  2.)


   SUBSTANTIAL VARIATION IN
   SPECIFIC PROVISIONS OF STATE
   LAWS
------------------------------------------------------------ Letter :4

Provisions affecting guaranteed issue, guaranteed renewal,
limitations on preexisting conditions, portability, and premium rate
restrictions are included in most state reforms, but most states
deviate, often substantially, from at least one of these key
provisions as defined in the NAIC model.  The provision least likely
to be adopted by states is guaranteed issue of insurance products. 
Even those including guaranteed issue typically deviate from the NAIC
model in at least one of the following dimensions:  definition of
small employers, the number of plans that carriers must guarantee
issue, or the characteristics of guaranteed plans.  All but one state
include guaranteed renewal of policies in their reforms.  Guaranteed
renewal provisions tend to have only minor variations from the NAIC
model. 

State reforms typically include limitations on preexisting condition
exclusions and portability requirements that waive any preexisting
conditions or waiting periods for individuals who change plans and
can demonstrate previous coverage under another plan.  States,
however, differ in the waiting periods required for coverage to take
effect. 

Most of the state laws also place some restrictions on insurer rating
practices--that is, the way insurers determine prices of the health
insurance products at initial issuance and/or at time of renewal. 
State restrictions on rating practices used by insurers are probably
the most variable and controversial element of state reforms.  While
28 states employ the rate-banding approach in the NAIC model, most of
them made significant changes in how they use the relatively complex
rate-banding methodology.\3 Sixteen states took a different course,
generally using an adjusted community rating approach that allows no
adjustments based on the claims or health experience of the group
covered. 

State variations in approach are evident in many of the elements of
rate determination, including the premium rate adjustment factors
allowed in setting rates, premium variation permitted, number of
business classes for which carriers can define separate rates, and
permitted increase in rates at renewal.  For example, some states
added adjustment factors such as nicotine use, participation in
wellness programs, or unhealthy lifestyles to the age, family size,
geographic area, gender, industry, and group size case factors
specified by NAIC.  (See sec.  3.) More detailed information
comparing each state's reforms with the NAIC model is in appendix I. 


--------------------
\3 The NAIC rate-banding approach limits the insurer to nine separate
business classes for which it can charge separate rates.  The model
also restricts the variation in premiums the insurer can charge to
firms that fall into one of these classes and further restricts the
variation allowed among business classes. 


---------------------------------------------------------- Letter :4.1

This report provides some initial information on small employer
health insurance reform issues.  You also expressed interest in more
information on the impact of these reforms.  Since many of them were
passed recently, little evaluative information rooted in solid data
is currently available.  We are continuing to investigate the
effectiveness of these reforms. 

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from the date of this letter.  At that time, we will send copies to
interested parties and make copies available to others upon request. 
Please contact me at (202) 512-7119 if you have any questions.  Major
contributors to this report are listed in appendix II. 

Sincerely yours,

Sarah F.  Jaggar
Director, Health Financing
 and Policy Issues


RECENT STATE REFORMS:  COMPARISON
WITH THE NAIC MODEL
============================================================ Chapter 1

Growing concerns about the availability and affordability of health
insurance coverage for the workers of small employers led to a flurry
of state legislative activity in the early 1990s.  Between 1990 and
1994, at least 45 states passed legislation that modified the terms
and conditions under which health insurance is offered to small
employers.  During the same period, at least 15 states also passed
legislation affecting the offerings of insurance to individuals. 

There are substantial variations in the way states approached small
employer health insurance reforms.  This report identifies the most
common types of reforms introduced and delineates some of the
differences among states on key elements of those reforms. 


   THE NAIC SMALL EMPLOYER HEALTH
   INSURANCE AVAILABILITY MODEL
   ACT
---------------------------------------------------------- Chapter 1:1

State insurance regulators established the National Association of
Insurance Commissioners (NAIC) to promote effective insurance
regulation and encourage uniformity in state approaches to
regulation.  NAIC has developed legislative models for states to use
in formulating licensing and regulation requirements for all lines of
insurance under the purview of state insurance departments.  Many
states adopt NAIC models in whole or in part, but NAIC has no
authority to require states to adopt them. 

NAIC has developed and refined its Small Employer Health Insurance
Availability Model Act, which serves as the basis of substantial
portions of many state reform laws.  We used the NAIC model as a
benchmark or reference point for assessing the extent to which states
vary in their treatment of key components.\4 This section discusses
key components of the small employer health insurance reforms in the
NAIC model.  Later sections take a more detailed look at how states
deviate from the model. 


--------------------
\4 As a specific benchmark, we used NAIC model #118, which reflects
NAIC recommendations as of April 1993.  This model most closely
reflects the NAIC position at the time most states introduced their
reforms.  In March 1995, NAIC amended the model to introduce adjusted
community rating provisions, to expand the definition of small
employer, to require guaranteed issue of all products, and for other
purposes. 


      SMALL EMPLOYER DEFINITION
-------------------------------------------------------- Chapter 1:1.1

The NAIC model addresses insurance policies for small employers with
no more than 25 eligible workers.  (However, all of the model's
provisions do not apply to all such employers.)


      APPLICABILITY
-------------------------------------------------------- Chapter 1:1.2

The NAIC model applies to any carrier-provided health benefit plan
that covers the eligible workers of a small employer in the state. 
Eligible employees are defined as full-time (30 hours or more)
workers and include sole proprietors, a partner in a partnership, and
independent contractors.  The model permits carriers to require a
minimum number of eligible employees to participate in a small
employer's health plan as long as the carrier imposes the minimum
consistently across all employers of the same size. 

A carrier is defined as any entity that provides health insurance
that is subject to state regulation, including insurance companies,
prepaid hospital or medical care plans (such as some Blue Cross and
Blue Shield plans), and health maintenance organizations.  The model
also applies to multiple employer welfare arrangements (MEWA).  It is
more difficult to assess the extent to which the model applies to
other organizations that may provide or serve as intermediaries for
health plans (including collectively bargained Taft-Hartley plans and
fully insured plans offered by fraternal benefit societies and trade
associations).  The model indicates that it applies to any similar
entity subject to state regulation. 


      GUARANTEED ISSUE
-------------------------------------------------------- Chapter 1:1.3

The NAIC model requires all carriers to actively offer at least two
health plans (a basic and a standard plan) to small employers within
the state.  The model reserves to states substantial flexibility in
defining the coverage requirements for these plans, suggesting only
that a state appoint a commission composed of representatives of
carriers, small employers and employees, health care providers and
producers to define the two types of benefit packages.  NAIC
characterized the basic plan as a "bare bones" package providing
coverage at lower cost by excluding state-mandated benefits or by
requiring high deductibles, coinsurance, or low lifetime maximums. 
NAIC characterized the standard benefit package as representing
average or typical plans in the state. 


      GUARANTEED RENEWAL
-------------------------------------------------------- Chapter 1:1.4

The NAIC model requires that all policies be renewed regardless of
health status or claims experience of plan participants with limited
exceptions, such as cases of fraud or failure to pay premiums. 


      PREEXISTING CONDITION
      LIMITATIONS
-------------------------------------------------------- Chapter 1:1.5

The NAIC model permits carriers to deny coverage for preexisting
conditions for no more than 12 months after coverage is effective.  A
preexisting condition is one that was diagnosed or treated during the
6 months immediately preceding the effective date of coverage. 


      PORTABILITY
-------------------------------------------------------- Chapter 1:1.6

The NAIC model requires carriers to waive a preexisting condition
period for covered services if comparable services were previously
covered under another policy that was continuous to a date not more
than 90 days prior to the effective date of the new coverage. 


      RESTRICTIONS RELATED TO
      PREMIUM RATES
-------------------------------------------------------- Chapter 1:1.7

Under the NAIC model, carriers are subject to a number of
restrictions on (1) the factors they can use in setting rates, (2)
the number of business classes for which they can charge different
rates, (3) the variation allowed in rates within a business class,
(4) the variation allowed in rates among business classes, and (5)
the amount of increase in rates permitted at the time of renewal. 
The restrictions are as follows: 

  Premium rate adjustment factors--The NAIC model stipulates that
     carriers "shall not use case characteristics other than age,
     gender, industry, geographic area, family composition, and group
     [employer] size" in determining rates.  Other consistently
     applied case characteristics can be employed only with approval
     of the state insurance commissioner.  But the model specifically
     lists claim experience, health status, and duration of coverage
     as factors that cannot be used as case characteristics in rate
     determination. 

  Business classes--Small employer carriers may establish rates for
     up to nine separate business classes for rating purposes to
     reflect substantial differences in expected claims experience or
     administrative costs.  Additional business classes may be used
     only with approval of the state insurance commissioner. 

  Rate differences between classes--The difference between the
     "index" or average premium rate for any business class should
     not exceed the index for any other business class by more than
     20 percent. 

  Premium rate differences within a single business class--The lowest
     or base rate charged should be no lower than 25 percent below
     the index rate.  The highest rate allowed within that same
     business class would be no more than 25 percent above the index
     rate. 

  Restrictions on premium rate increases at renewal--Increases in
     premium rates for a new rating period cannot exceed more than 15
     percent annually because of the claims experience of the group. 
     Additional increases are permitted for any changes in coverage
     or case characteristics of the covered population and for
     changes in premium levels charged to all insured health plans. 


   STATE VARIATION FROM NAIC MODEL
---------------------------------------------------------- Chapter 1:2

Important differences surface among states as to how a small employer
is defined and how a state determines applicability of the law to
different types of employers.  There are even more substantial
differences in the way states treat individuals who wish to purchase
health insurance. 

Figure 1.1 shows the extent to which states adopted key reform
strategies and the extent to which they essentially followed or
modified the NAIC approach for five specific provisions we
investigated.  We found that all 45 states that passed reforms in the
1990s changed at least one of the key provisions of the NAIC model. 

   Figure 1.1:  States Adopting
   NAIC Model Provisions

   (See figure in printed
   edition.)

Thirty-five of 45 states passed guaranteed issue provisions, but in
our judgment only about half of them closely followed the NAIC model. 
They typically varied from the model in the types or numbers of plans
for which guaranteed issue applied or in the characteristics of small
employers to which guaranteed issue applied.  States were more likely
to pass guaranteed renewal legislation and more closely follow NAIC
guidelines in that area. 

Both preexisting conditions and portability clauses were included in
most state laws.  States tended to deviate from the NAIC model
particularly with respect to the length of time associated with these
clauses. 

Some type of rating restrictions were included in all 45 state laws,
but the states' approaches to rating varied substantially. 


DEFINING WHO IS COVERED BY STATE
SMALL EMPLOYER HEALTH INSURANCE
REFORMS
============================================================ Chapter 2

Before examining variations in specific provisions of the small
employer health insurance reforms, it is essential to note that
states adopted different approaches toward defining a small employer,
an eligible worker of a small employer, a carrier, and associations
that offer insurance to small employers.  States struggled with
applicability of the law particularly in regard to the self-employed
or groups of one to three eligible employees and in defining an
approach to multiple employer plans.  Indeed, several states passed
separate legislation governing provision of insurance to individuals. 
NAIC is working on model legislation to cover state reforms in the
individual market. 


   DEFINING EMPLOYERS COVERED BY
   REFORMS
---------------------------------------------------------- Chapter 2:1

The NAIC model defines a small employer as any person, firm,
corporation, partnership, or association that is actively engaged in
business that, on at least 50 percent of the working days during the
preceding calendar quarter, employed no more than 25 eligible
employees, the majority of whom were employed within the state.  The
guaranteed issue provisions would apply only to firms with 3 to 25
workers.\5 This provision on minimum employer size was included to
protect small employer carriers from adverse selection. 

States vary from the NAIC model on both ends of the spectrum
regarding firm size.  Most commonly, states extend the maximum to
employers with about 50 eligible workers (2 states set the limit at
100 eligible workers).  Differences at the lower end are more
controversial.  Some states exempt employers with fewer than three
workers not only from guaranteed issue provisions, but also from all
other provisions of the state reforms.  Others also extend guaranteed
issue to employers with 1 (11 states) or 2 (14 states) eligible
workers.  Arizona's guaranteed issue requirements currently apply to
employers with 25 to 40 eligible workers, while other provisions
apply to employers with 3 to 40 workers. 

Several states phase in the requirements over time for different size
employers.  California, for example, initially applied guaranteed
issue requirements to employers with 5 to 50 workers, but will apply
the requirements to employers with as few as 3 workers effective July
1, 1995. 

States tend to follow the NAIC model in applying the law to the
broadest range of employer types.  Some states include language to
ensure that particular types of employers would be included or
excluded.  For example, Wisconsin specifically includes a farm
business and certain village or town governments as employers covered
by its legislation.  California does not require that small
government units be protected under its small employer health
insurance legislation because they already have the option of
obtaining insurance through a state-sponsored health purchasing
alliance.\6


--------------------
\5 The 1995 amendments to the NAIC model changed the size to include
as few as 1 self-employed individual and removed the upper limit of
25, leaving the maximum to the state's discretion. 

\6 See Health Insurance:  California Public Employees' Alliance Has
Reduced Recent Premium Growth (GAO/HEHS-94-40, Nov.  22, 1993). 


   DEFINING ELIGIBLE EMPLOYEES
---------------------------------------------------------- Chapter 2:2

The NAIC model defines an eligible employee as one who works on a
full-time basis with a normal work week of 30 hours or more.  The
term includes a sole proprietor, a partner of a partnership, and an
independent contractor if this person is included as an employee
under a small employer's health benefit plan.  "Eligible employee"
does not include an employee who works on a part-time, temporary, or
substitute basis.  The model permits carriers to impose a minimum
employee participation requirement on small employer plans as long as
they do so consistently across all employers of the same size. 

Several states modified requirements pertaining to eligible
employees.  At least six states reduced the required normal work week
to 17.5 through 25 hours.  For example, Minnesota legislation
includes employees with a normal work week of 20 hours.  States
generally do not extend the provision to part-time, temporary, or
substitute employees.  However, at least eight states do not define
"eligible employee" and two states explicitly give employers the
option of including part-time employees.  For example, carriers in
New Hampshire would have to guarantee issue and follow other
provisions of the act for any small employer who chooses to offer
insurance benefits to part-time workers.  Finally, at least eight
states also impose restrictions on carriers' use of minimum
participation requirements.  Four states permit carriers to impose a
requirement of no more than 75 percent, four states impose a 75-
through 90-percent minimum participation requirement on carriers or
employers, and one state does not permit carriers to use any minimum
participation requirement for groups of four or more. 


   SELF-EMPLOYED AND INDIVIDUAL
   COVERAGE
---------------------------------------------------------- Chapter 2:3

States that extend guaranteed issue and other provisions of their
small employer health insurance reforms to firms with one eligible
employee (that is, self-employed individual with no employees)
typically require that the person covered have sufficient
documentation to verify his or her status as self-employed. 
Individuals who are not self-employed are generally not protected by
the small employer reforms.  States that attempt to extend rating
protections or guarantees of coverage to individuals who are not
self-employed generally do so through separate individual market
reform legislation. 

We have identified at least 15 states that have passed some type of
individual market reform.  At least 10 of the states closely follow
most of the provisions in their small employer reforms.  In four of
the states, the individual reforms only include insurance rating
restrictions. 

NAIC is currently drafting model legislation for states regarding
health insurance for individuals.  Initially, NAIC attempted to
develop model legislation that included both individual and small
employer coverage but recognized the different insurance market
characteristics of employed individuals and those who are not
attached to the workforce. 


   DEFINING THE CARRIER
---------------------------------------------------------- Chapter 2:4

Most states follow the NAIC model definition of an insurance carrier
as any entity that provides health insurance in the state.  Carriers
are defined to include insurance companies, prepaid hospital or
medical care plans such as some Blue Cross and Blue Shield, health
maintenance organizations, and any other entity providing a plan of
health insurance or health benefits subject to state regulation. 

States have the most trouble in dealing with entities that provide
coverage to a number of small employers or individuals through some
type of group purchasing process.  These organizations argue that
they are not carriers, that small employer insurance reforms do not
apply to them because they cover large groups, or that they are
exempt from state regulation under the federal Employee Retirement
Income Security Act of 1974 (ERISA, P.L.  93-406).  Some of the
differences in how these types of group purchasing associations are
treated are discussed next. 


   MULTIPLE EMPLOYER WELFARE
   ARRANGEMENTS
---------------------------------------------------------- Chapter 2:5

ERISA defines MEWAs as employee welfare benefit plans or similar
arrangements, including health plans, established or maintained for
the purpose of offering or providing benefits typically provided by
an employee welfare benefit plan to employees of two or more
employers.  The term does not, however, include such arrangements
when they are established under a collective bargaining agreement or
by a rural electric cooperative.  Generally, ERISA broadly preempts
states from regulating employee welfare benefit plans but allows them
to retain greater authority to regulate MEWAs whether or not they are
employee welfare benefit plans.  Under ERISA, any MEWA that is an
employee welfare benefit plan and fully insured is subject to certain
state insurance laws and regulations that a state may impose.  In
addition, self-insured MEWAs are subject to any state insurance laws
that are not inconsistent with ERISA. 

Furthermore, the 1982 amendments to ERISA that created the MEWA
provisions leave MEWAs that are not employee welfare benefit plans
fully subject to state regulation. 

A drafting note to the NAIC model suggests that states include MEWAs
within the list of carriers covered by state provisions if a state
licenses MEWAs.  NAIC further suggests that states that do not have
separate licensing for self-funded MEWAs should treat them as
unauthorized insurers.  Some states chose to specifically include
MEWAs in their legislation.  Others did not, but it is not always
clear whether MEWAs were intended to be excluded or whether the
states expected them to be covered under the clause covering "any
other entity providing a plan of health insurance or health benefits
subject to state insurance regulation."


   MURKINESS IN STATE DEFINITION
   AND TREATMENT OF ASSOCIATION
   PLANS
---------------------------------------------------------- Chapter 2:6

Fraternal organizations, trade associations, and unions are entities
that may offer health plans to small employers and individuals. 
Whether the state's small employer health insurance laws apply to
such entities is often unclear, differs among states, and reflects
sharp differences in how states define and regulate these types of
entities. 

  Fraternal organization plans--A drafting note to the NAIC model
     suggests that states enact language that would include plans
     offered by fraternal benefit societies.  Several states have
     done so, but many have not expressly included fraternal benefit
     organizations within their legislation.  In our discussions with
     state officials, those from at least two states indicated that
     separate legislation covered fraternal benefit plans operating
     in their states.  Since these plans are not explicitly included
     in the states' small employer reform legislation, the officials
     were uncertain whether any of the reform provisions are
     applicable to the fraternal benefit plans. 

  Association plans--A number of small businesses and individuals
     obtain health insurance coverage through trade or other
     association plans.  The NAIC model is silent on association
     plans that potentially insure a substantial share of the small
     employer market,\7 but states have taken a variety of approaches
     to deal with them.  Montana, for example, exempts association
     plans if they guarantee issue to their members.  Vermont and New
     Hampshire allow association plans to use their own community
     rate.  California took the approach of defining guaranteed
     associations by expanding the definition of small employer to
     include any "guaranteed association" acting on behalf of
     individuals or employers meeting the association's membership
     criteria to purchase health insurance.  Any association that
     meets the definitional requirements in California law would be
     afforded the protections of the state's small employer health
     insurance reforms, including but not limited to guaranteed
     renewal of the plan for all of its individual and employer
     members.\8

  Taft-Hartley plans--Taft-Hartley plans are essentially
     union-organized plans that provide, for example, health coverage
     under collectively bargained agreements.  The NAIC model
     provides that a state require such plans to seek written
     approval from the insurance commissioner for waiver of the
     insurance rating provisions of the state's reform law.  Some
     states included this requirement.  However, an official in one
     state said it was unnecessary to include it because Taft-Hartley
     plans are exempt from state regulation under ERISA, which
     preempts all state laws related to employee benefit plans. 
     Recognizing that ERISA preempts state regulation of Taft-Hartley
     plans, NAIC deleted the language at issue from the most recent
     version of the model. 

State officials we contacted had differing interpretations concerning
the role of states in regulation of both fraternal organization and
association plans.  One interpretation is that association plans are
intermediaries offering insured products; thus, any state regulation
should be directed toward the insuring entity.  Another state
official contended that associations domiciled in other states assert
that any other state's laws do not apply.  Some plans may be
inappropriately claiming they are not subject to the state laws
because they are exempt under ERISA.  States maintain that they often
cannot identify such plans until an already serious problem is
brought to the attention of the insurance commissioner's office. 


--------------------
\7 Information on the extensiveness of association plan coverage is
limited.  One state official estimated that about one-fourth of the
small employer market in that state was probably covered by
association plans.  A recent article estimated that about 17 percent
of small firms nationally obtain insurance through association plans. 
Definitions and structure of association plans vary widely.  We are
conducting further work for your Subcommittee on the role of
association plans in the small employer insurance market. 

\8 The California law requires that the guaranteed association plan
cover at least 1,000 people with each carrier with which it
contracts. 


VARIATIONS IN STATE APPROACHES: 
GUARANTEED ISSUE AND RENEWAL,
PREEXISTING CONDITIONS,
PORTABILITY, AND RATING REFORMS
============================================================ Chapter 3

Most states included guaranteed issue, guaranteed renewal,
preexisting condition limitations, and portability provisions in
their small employer health insurance reform legislation.\9 Except
for guaranteed renewal, most states deviated, often in substantial
ways, from the NAIC model.  Guaranteed issue was frequently modified
and, in several instances, omitted from state reforms altogether. 
While premium rate restrictions are more commonly included in state
reforms, there is less adherence to the more complex provisions of
the NAIC model.  Most states also included preexisting conditions and
portability in their small employer statutes.  Nearly half of them
essentially followed the NAIC model with respect to preexisting
condition limitations, and about one-fifth did so with respect to
portability.  (See fig.  1.1.)


--------------------
\9 Washington passed the comprehensive Health Services Act in 1993
that included all of these provisions.  However, since the reform was
not specifically designed for the small employer market, Washington
is not included in the following discussion. 


   GUARANTEED ISSUE
---------------------------------------------------------- Chapter 3:1

At least nine states did not include guaranteed issue provisions in
their reforms:  Arkansas, Georgia, Illinois, Indiana, Louisiana, New
Mexico, South Dakota, Utah, and West Virginia. 

Among the 35 states where guaranteed issue was included, there were
often significant variations in the number or types of plans an
individual carrier was required to offer to all small employers.  In
10 states, insurers were required to guarantee issue all plans that
they offered in the small employer market.  Guaranteed issue of only
one plan was required in six states.  One state required carriers to
offer five guaranteed issue products.  Only 18 states followed the
NAIC model in offering 2 plans.  These states typically offered
something akin to the NAIC standard and basic plans (the latter was
sometimes labeled "bare bones" or "minimum" plan in state
legislation). 

Even the states that offered the two plans suggested by NAIC often
deviated from the NAIC model in other important ways.  The most
notable variation was in the size of the employer subject to
guaranteed issue provisions.  As noted previously, several states
extended guaranteed issue to self-employed individuals and employers
with only two eligible workers, while others extended guaranteed
issue to larger employers. 

The actual benefit structure of the basic and standard plans is a
potential source of even more variation in state reform legislation. 
While most states followed NAIC suggestions to have a state board or
commission define these benefit packages, composition of the boards
coupled with differences in health industry and structure in the
states further contributed to differences in the product subject to
guaranteed issue.  Among the issues debated within states are size of
deductibles or copayments and whether specific services like mental
health are covered.  We did not try to assess the full range of
differences in benefit structure. 


   GUARANTEED RENEWAL
---------------------------------------------------------- Chapter 3:2

Every state we examined except Georgia included guaranteed renewal
within recent reform legislation.  Most states followed NAIC
provisions by limiting cases where an insurer can refuse to renew
coverage to incidents of fraud or failure to make required payments. 
It is interesting to note that 8 of the 43 states that included
guaranteed renewal did not have guaranteed issue provisions. 


   PREEXISTING CONDITION
   LIMITATIONS
---------------------------------------------------------- Chapter 3:3

Only 4 of the 44 states had no provision limiting the use of
preexisting conditions to deny coverage for specific illnesses.  The
NAIC model stipulates that an insurer may deny, exclude, or limit
benefits for a covered individual's losses incurred no more than 12
months following the effective date of coverage because of a
preexisting condition.  Preexisting conditions should not be more
restrictively defined than

  a condition that would have caused an ordinarily prudent person to
     seek medical advice, diagnosis, care, or treatment during the 6
     months immediately preceding the effective date of coverage;

  a condition for which medical advice, diagnosis, care, or treatment
     was recommended or received during the 6 months immediately
     preceding the effective date of coverage; or

  a pregnancy existing on the effective date of coverage. 

About half of the states follow the NAIC provisions with respect to
both the 6-month period before coverage as the appropriate length of
time for defining preexisting conditions and the maximum 12-month
waiting period after the coverage is effective. 

The two most common changes to NAIC's guidelines were (1) to extend
the definition of "preexisting condition" from a condition diagnosed
or treated 6 months before the effective date of coverage to one
diagnosed or treated 12 months before (11 states) and (2) to shorten
the waiting period before a preexisting condition is covered to 6
months (6 states).  Four states deviated further from the time
periods suggested in the NAIC model.  At one extreme, Maryland
eliminated preexisting conditions entirely as a basis for limiting
coverage for any illness or condition.  In sharp contrast, Montana's
reform legislation built on previous legislation that permits
insurers to limit coverage for preexisting conditions that arose up
to 5 years before coverage became effective. 

We identified at least three states that did not include a specific
statement regarding pregnancy on the effective date of coverage and
had a 6-month period for defining preexisting conditions, leaving
uncertainty as to whether some preexisting pregnancies would be
covered. 


   PORTABILITY
---------------------------------------------------------- Chapter 3:4

Thirty-eight states included a portability provision in their small
employer health insurance legislation.  Portability provisions
require carriers to waive any preexisting condition or waiting period
before an individual is covered.  Portability applies to individuals
who had previous health insurance coverage that was continuous to a
date not more than 90 days prior to the effective date of the new
coverage.  Nine states used the 90-day waiting period, while 29
states changed that period, generally reducing it to either 30 or 60
days. 

Portability becomes a more complicated issue when an employer
switches to a policy that has different limitations on services or
conditions covered.  For example, if a person switches from a plan
that does not include coverage for mental health services to one that
does, a question arises as to whether the carrier would be required
to waive preexisting condition limitations for this service.  Most
states follow the NAIC model, which does not require carriers to do
so.  However, we identified 15 of the states with portability
provisions that do not have any specific linkage requirement between
coverages in current and prior policies.  In these cases, preexisting
conditions for all services covered under the new policy would
presumably be waived. 


   PREMIUM RATE RESTRICTIONS
---------------------------------------------------------- Chapter 3:5

At least 44 states included premium rate restrictions as part of
reforms passed between 1990 and 1994.  Most followed a variation of
NAIC's rate-banding approach or used other approaches, such as
adjusted community rating.  (See table 3.1.) Premium rate
restrictions include many complex and technical provisions.  Some of
the key sources of differences among state approaches are highlighted
here with the understanding that interaction among specific state
provisions and additional detailed provisions also contribute to
state variation. 



                          Table 3.1
           
               State Approaches to Premium Rate
                         Restrictions

Approach                                              States
----------------------------------------------------  ------
NAIC rate banding                                          7
Modified NAIC                                             21
Adjusted community rating or other                        16
------------------------------------------------------------
The approach to premium rating NAIC used in its model prior to the
1995 amendments permitted insurers to define up to nine business
classes and to allow claims experience as an adjustment factor for
determining rates at the group level but not for determining any
individual employee's rate.  Earlier this year, NAIC amended the
rating methodology by abandoning the separate rate classes and
eliminating any adjustments for claims experience.  This simpler
rating methodology comes closer to an adjusted community rating
methodology. 

Indeed, NAIC's recent model amendments reflect recognition that many
states did not use the banding approach because it was too complex. 
Some states also considered the earlier NAIC approach too lax in the
restrictions placed on carriers' rating flexibility.  Thus, a number
of states opted for narrower rating bands or chose an adjusted
community rating methodology. 

NAIC officials characterized the organization's recent decision to
build adjusted community rating into its model as a highly
contentious one.  As a compromise, adjusted community rating was
included in the amended model but was followed by a drafting note
stating that NAIC does not endorse this or any particular approach to
premium rate restrictions.  Changes in the model reflect the
constantly changing and dynamic nature of health insurance markets. 

At least 21 states modified the NAIC rate-banding approach.  States
most commonly modified provisions relating to the number of allowable
rating factors and business classes carriers may use in setting
rates, the degree of permitted variation in index rates among
business classes, and the degree of permitted premium rate variation
within a class.  (See table 3.2.)



                          Table 3.2
           
             States That Modified Key NAIC Rating
                          Provisions

NAIC rating provision modified                        States
----------------------------------------------------  ------
Allowable premium rate adjustment factors                 17
Allowable business classes                                13
Index rate variation among classes                         7
Premium rate variation within classes                     10
------------------------------------------------------------
The modifications made by 11 states are limited to the number of
premium rate adjustment factors or business classes carriers may use. 
For example, Iowa places no explicit limit on the number of allowable
business classes and removes industry and gender as allowable rate
adjustment factors.  Montana does not enumerate the allowable rate
adjustment factors but otherwise follows the NAIC approach fully. 
More significantly, 10 states modified the permitted rate variations
within or among business classes.  For example, North Dakota permits
index rates among classes to vary by no more than 15 percent (NAIC
permits 20 percent) and premium rates within a class to vary from the
index rate by no more than 20 percent (NAIC permits 25 percent).  In
Ohio, premium rates within a class may vary from the index rate by as
much as 35 percent with exceptions that permit even further
variation, and no limits are placed on index rate variation among
business classes. 

While at least 28 states use NAIC's rate-banding approach or a
variant, 16 states use some other approach to rate
restrictions--generally a form of adjusted community rating.  States
using adjusted community rating permit adjustments in the community
rate for various factors and impose various limits on the extent to
which rates, after adjustments, may vary.  For example, in New
Hampshire, premium rates may be adjusted only for age in a range of
50 percent above or below the community rate for policyholders with
similar family compositions.  Maine permits several additional
adjustment factors to be used but limits rate variation to a range of
33 percent above or below the community rate. 

Table 3.3 shows the allowable premium rate adjustment factors in
states using a rate-banding approach and an adjusted community rating
approach. 



                         Table 3.3
          
             States Using Specific Premium Rate
                     Adjustment Factors

                     NAIC rate-banding
                           approach or  Adjusted community
Adjustment factor            variation    rating and other
------------------  ------------------  ------------------
Age                                 15                  13
Family size                         14                  12
Geography                           15                  12
Gender                              13                   6
Industry                            12                   4
Group (employer)                    12                   3
 size
Smoking practices                    2                   2
Not specified                       12                   1
Other                                2                   5
----------------------------------------------------------
The NAIC model does not specify allowable ranges or limitations on
specific premium rate adjustment factors beyond a limitation that
adjustments for industry not vary by more than 15 percent.  Some
states specify how individual factors are to be used.  Treatment of
age, for example, differs widely.  Many states permit carriers to use
any age ranges they wish to determine premium rates, while other
states permit carriers to use only certain age categories.  For
example, California permits the use of only seven age
categories--younger than 30, 30 to 49, 40 to 49, 50 to 54, 55 to 59,
60 to 64, and 65 and older.  Finally, in addition to rate banding or
adjusted community rating restrictions, at least four states also
impose a minimum loss ratio\10 requirement on carriers of between 70
and 75 percent. 


--------------------
\10 Loss ratio is usually defined as the ratio of paid claims plus
changes in funds set aside for future health claims to earned
premiums. 


STRUCTURE OF STATE SMALL EMPLOYER
HEALTH INSURANCE REFORMS
=========================================================== Appendix I



                                    Table I.1
                     
                       Variation in State Adoption of NAIC
                                      Model

                      Guarantee
                      d issue
                      (no. of
           Employer   plans/                           Preexisti
           size (no.  applicabl                        ng
           of         e                                condition  Restrictions
           employees  employer   Guarantee  Portabili  exclusion  related to
State      )          size)      d renewal  ty         s          premium rates
---------  ---------  ---------  ---------  ---------  ---------  --------------
Alabama    --         --         --         --         --         --

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

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

Arkansas   X          --         X          --         --         Variation

Californi  4-50\c     All        X          30\b\,e    6/6        Other
a                     plans/4-
                      50\d

Colorado   2-50\f     2          X          X          6/6        Adjusted
                      plans\g/                                    community
                      2-50                                        rating

Connectic  Less than  All        X          30         X          Other
ut         50         plans/
                      less than
                      50

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

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

Georgia    1-50       --         --         --         --         Other

Hawaii\h   --         --         --         --         --         --

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

Illinois   3-25       --         X          30         12/12      Variation

Indiana    3-25       --         X\i        --         --         Variation

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

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

Kentucky\  100 or     1 plan/    X          60\b       6/6        Adjusted
j          less       100 or                                      community
                      less                                        rating

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

Maine      Less than  All        X          X\k        12/12      Adjusted
           25         plans/                                      community
                      less than                                   rating
                      25

Maryland   2-50       1 plan/    X          N/A\l      None       Adjusted
                      2-50                                        community
                                                                  rating

Massachus  X          All        X          30         6/6        Adjusted
etts                  plans/1-                                    community
                      25\m                                        rating

Michigan   --         --         --         --         --         --

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

Mississip  1-35       1 plan/    X          30         12/12      Variation
pi                    1-25

Missouri   3-25       X          X          30         X          X

Montana    3-25       X          X          30         5 years/   Variation
                                                       12 months

Nebraska   3-25       X          X          X          X          X

Nevada     --         --         --         --         --         --

New        1-100      All        X          Not        3/3/9\p    Adjusted
Hampshire             plans/1-              NAIC\o                community
                      100                                         rating

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

New        2-50       --\r       X          31\        6/6        Variation
Mexico

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

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

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

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

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

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

Pennsylva  --         --         --         --         --         --
nia

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

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

South      X          --         X          --         --         Variation
Dakota

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

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

Utah       1-50       --         X          X          X          X

Vermont    1-49       All        N/A\t      0\u        12/12      Adjusted
                      plans/1-                                    community
                      49                                          rating

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

Washingto  --         --         --         --         --         --
n\v

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

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

Wyoming    2-25       2 plans/   X          X          X          Variation
                      2 or more
--------------------------------------------------------------------------------
Legend

-- = No provision exists.
X = Provision is substantially similar to the NAIC provision.
N/A = Not applicable. 


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

\b The act does not specify that services covered previously must
have been comparable to current coverage. 

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

\d After 7/1/95, this provision applies to groups with 3 or more. 

\e This may be extended to 180 days in cases where an individual
changes employers but still maintains employer-related coverage. 

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

\g As of 1/1/96, this provision will also apply to a business group
of 1. 

\h Hawaii was the first state to attempt universal coverage with its
passage of the Prepaid Health Care Act in 1974.  With the act's
employer mandate and public programs to ensure coverage, the state
comes closer to having universal coverage in place than any other
state.  Because this act was passed before the federal ERISA law,
Hawaii is the only state granted an exemption under ERISA. 

\i Expressly refers to and limits cancellations. 

\j These reforms will be effective 7/15/95. 

\k The services covered under the portability provision differ based
on whether an employee changes jobs or an employer changes coverage. 

\l Preexisting condition limitations are generally prohibited. 

\m A carrier has the option to deny issue to a group of 5 or fewer
eligible persons if the group does not enroll through an
intermediary. 

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

\o Time an individual was covered under a prior health plan must be
credited toward any preexisting condition exclusion period of the new
plan if there was no lapse in coverage.  However, if a lapse in
coverage resulted because of unemployment, carriers must treat the
unemployment period as continuous coverage. 

\p A waiting period for preexisting conditions may be no more than 3
months if individuals incur no medical treatment expense in
connection with the preexisting condition during those 3 months. 
Otherwise, the waiting period may be no longer than 9 months for a
preexisting condition diagnosed or treated up to 3 months prior to
the effective date of coverage. 

\q Preexisting condition limitations apply only to groups of five or
fewer eligible employees and may not be imposed on larger groups. 

\r Related provision exists under state Health Alliance Act. 

\s Time an individual was covered under a prior health plan must be
credited toward any preexisting condition exclusion period of the new
plan if there was no lapse in coverage.  The act does not specify
that previously covered services must have been comparable to current
coverage. 

\t State has continuous open enrollment. 

\u Preexisting condition period must be waived if substantially
similar coverage under a prior policy was in effect for the previous
9 months.  Does not provide for a lapse in coverage. 

\v Washington passed the Health Services Act in 1993 to create a
universal coverage program for all residents through an employer
mandate.  This act included provisions to ensure the availability and
affordability of health coverage to all residents of the state. 
Although the state did not pass separate small employer health
insurance reform, the comprehensive act contains provisions that
would ensure guaranteed issue (all plans), guaranteed renewal,
limitations on preexisting condition waiting periods (3/3),
portability of coverage (90 days), and adjusted community rating. 



                                        Table I.2
                         
                          State Restrictions Related to Premium
                                          Rates

State         Restrictions
------------  ---------------------------------------------------------------------------
Alabama       No provision exists.

Alaska        Variation--Premium rates may vary within a range of 35% (2:1) of applicable
              index rate. No limit on the variation of index rates among business
              classes. No limit on the number of allowable classes.

Arizona       Variation--Accountable Health Plans cannot vary premium rates by more than
              60% (4:1) from the applicable index rate. No limit on the variation of
              index rates among business classes. The act does not specify allowable
              demographic characteristics but excludes some factors. No limit on the
              number of classes, and the only allowable rating factors are family
              composition, geographic area, and demographic characteristics.

Arkansas      Variation--The act does not explicitly limit the number of business
              classes. Case characteristics are not specified but may not include claims
              experience, health status, or duration of coverage.

California    Other--Eligible employees are placed in a risk category based on age,
              geographic region, and family composition. Carriers assign a standard risk
              rate to each category with no limits imposed on the allowable variation in
              standard risk rates between categories. Within a category, premium rates
              may vary from the standard risk rate for individual employees by no more
              than 20% (1.5:1) for actual or anticipated claims experience. After 7/96,
              premium rate variation within a category is limited to 10% (1.2:1).

Colorado      Adjusted community rating--Adjustments limited to age, family size, and
              geographic area. For new business premium rates, the act allows an
              additional variation of 20% (1.5:1) for industry and class of business but
              not for health status. Beginning in 1998, no adjustments will be allowed.

Connecticut   Other--Premium rate variation limited to 120% of the base rate by year-end
              1994 and will be phased out by 7/95 for groups of 1 to 25. After that,
              community rating with adjustments for age, gender, geographic area,
              industry, group size, and family composition for groups of 1 to 50.

Delaware      Variation--Within a class, a premium rate variation of 35% (2:1) of the
              applicable index rate is allowed with an additional combination variation
              of no more than 10% for age, family composition, and geography. Unhealthy
              lifestyles and industry are also allowable case characteristics. Unhealthy
              lifestyles include smoking or maintaining excessive weight, blood pressure,
              or cholesterol other than because of organic causes.

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

Georgia       Other--Pool rating with adjustments allowable for age, sex, size, area,
              industry, occupational, and avocational factors. Based on these
              adjustments, the total premium may vary by not more than 25% (1.67:1) of
              the pool rate.

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

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

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

Indiana       Variation--Premium rates cannot vary from the applicable index rate by more
              than 35% (2:1). Case characteristics are not specified but may not include
              claims experience, health status, or duration of coverage.

Iowa          Variation--No limit on the number of allowable classes, and industry and
              gender are not allowable case characteristics. Basic benefit coverage
              policies must return a cumulative loss ratio of at least 70%.

Kansas        Substantially similar to NAIC provision.

Kentucky      Adjusted community rating--Adjustments for age, geography, family status,
              plan design, cost containment, participation in the alliance, and some
              discounts for healthy lifestyles. Healthy lifestyles have not yet been
              defined.

Louisiana     Variation--Premium rates within a class may not vary by more than 20%
              (1.5:1) of the applicable index rate until 1/1/96, then reduced to 10%
              (1.2:1). The allowable number of classes is essentially limited to 6. Case
              characteristics are not specified but may not include health status, claims
              experience, or duration of coverage.

Maine         Adjusted community rating--Adjustments for age, smoking, industry,
              geographic area, wellness programs, group size, and family status with an
              allowable variation of 33% (2:1). Allowable premium rate variation is
              annually decreased and will be phased out by 7/15/97.

Maryland      Adjusted community rating--Adjustments for age, geographic area, and family
              composition, with an allowable variation of 50% (3:1) until 6/30/95. This
              variation will gradually be decreased to 16% (1.38:1) after 7/1/97.

Massachusett  Adjusted community rating--Premium rates must be set within a range of 2:1
s             with variation allowed for age, sex, industry, group size, and
              participation rate.

Michigan      No provision exists.

Minnesota     Other--Pure community rating after 7/1/97. Currently, adjustments for age
              50% (3:1), geographic area 20% (1.5:1), and a general premium variation of
              25% (1.67:1) that is based on health status, claims experience, and
              occupation. The general premium variation is to be decreased to 12.5% on 7/
              1/95.

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

Missouri      Substantially similar to NAIC provision.

Montana       Variation--Allowable case characteristics are not specified but may not
              include claims experience, health status, or duration of coverage.

Nebraska      Substantially similar to NAIC provision.

Nevada        No provision exists.

New           Adjusted community rating--Adjustments are permitted only for age within a
Hampshire     range of 4:1 for the first year (1994) and 3:1 thereafter and for family
              size. Annual increases are limited to 25% plus increases related to
              industry trends and the age composition of the group generally.

New Jersey    Adjusted community rating--Adjustments are allowed only for age, gender,
              and geography, and rates can vary by no more than 300%. Also, the act
              imposes a minimum loss ratio of 75%.

New Mexico    Variation--The number of allowable business classes is limited to 2, and
              allowable case characteristics are limited to age, gender, geographic area,
              and smoking practices. Premium increases at renewal are generally limited
              to 10% for claims experience, health status, or duration of coverage, in
              addition to any increases related to overall industry trends such as
              medical cost inflation. Effective 7/1/98, community rating with an
              adjustment allowed only for 2 age categories--under 19 or over 19 years of
              age.

New York      Adjusted community rating--Adjustments permitted only for family
              composition and geographic area. Premium rate increases must be approved by
              the Commissioner unless carrier meets an anticipated minimum loss ratio
              requirement of 75%.

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

North Dakota  Variation--Index rates may not vary among classes by more than 15%
              (1.35:1). Premium rates within a class may not vary by more than 20%
              (1.5:1) of the applicable index rate.

Ohio          Variation--There is no limit on index rate variation among classes of
              business. Premium rates within a class that vary by more than 35% (2:1) of
              the applicable index rate are subject to additional rate increase
              limitations. There is no explicit limit on the allowable number of classes.
              Allowable case characteristics are not specified but may not include health
              status, claims experience, and duration of coverage.

Oklahoma      Substantially similar to NAIC provision.

Oregon        Other--Premium rates may not vary from the average rate in a geographic
              area by more than 33% (2:1), with adjustments allowed for family
              composition. Period-to-period increases may not exceed 15% plus any overall
              increases related to industry trends such as medical cost inflation.

Pennsylvania  No provision exists.

Rhode Island  Substantially similar to NAIC provision.

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

South Dakota  Variation--The act does not specify the allowable case characteristics, but
              they may not include claims experience, health status, and duration of
              coverage. The act does not place an explicit limit on the allowable number
              of business classes.

Tennessee     Variation--Index rates may not vary among classes by more than 25%
              (1.67:1). Premium rates within a class may not vary by more than 35% (2:1)
              of the applicable index rate. The allowable numbers of business classes and
              case characteristics are not specified, but case characteristics may not
              include claims experience, health status, or duration of coverage.

Texas         Substantially similar to NAIC provision.

Utah          Substantially similar to NAIC provision.

Vermont       Adjusted community rating--Limited adjustments that may produce rates that
              vary by no more than 20% (1.5:1) from the community rate.

Virginia      Variation--There is no limit on index rate variation among classes. Premium
              rates within a class may vary by no more than 20% (1.5:1) of the applicable
              index rate. There is no explicit limit on the number of allowable business
              classes, and case characteristics are not specified but may not include
              claims experience, health status, and duration of coverage.

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

West          Variation--Case characteristics are not specified but may not include
Virginia      claims experience, health status, or duration of coverage. The allowable
              number of business classes is limited to 4. In order to increase rates at
              renewal, carriers must meet an anticipated minimum loss ratio requirement
              of 73%.

Wisconsin     Variation--No limit on variation of index rates among business classes.
              Premium rates cannot vary from the applicable index rate by more than 30%
              (1.86:1). Case characteristics are not explicitly specified but may not
              include claims experience, health status, or duration of coverage.

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

MAJOR CONTRIBUTORS TO THIS FACT
SHEET
========================================================== Appendix II

Michael Gutowski, Assistant Director, (202) 512-7114
Randy DiRosa, Senior Evaluator, (312) 220-7671
Susan Thillman, Evaluator
Craig Winslow, Senior Attorney
Leslie Albin, Reports Analyst

