Health Insurance Regulation: Varying State Requirements Affect Cost of
Insurance (Letter Report, 08/19/96, GAO/HEHS-96-161).

Pursuant to a congressional request, GAO provided information on the
costs of state health insurance requirements, focusing on: (1) premium
taxes on insured health plans; (2) mandated health benefits; (3)
financial solvency standards; and (4) state health insurance reforms
affecting small employers.

GAO found that: (1) state health insurance regulation imposes
requirements and costs on third-party health plans, but not on
employers' self-funded health plans; (2) state premium taxes and other
assessments for guaranty fund and high-risk pool fees, are the most
direct and quantifiable costs on insured health plans; (3) the extent to
which these requirements increase insured health plans' costs varies by
state because of differences in the nature and scope of state regulation
and plans' operating practices; (4) most states mandate that insurance
policies cover certain benefits and providers that might not otherwise
be covered; (5) costs are higher in states that mandate more costly
benefits; (6) most self-funded health plans offer many of the same
mandated benefits, but these plans would lose flexibility in offering
uniform health plans across all states; (7) state solvency standards
have a limited potential effect on plan costs, since most insurers
maintain capital and surplus levels that exceed state minimum
requirements and typically perform tasks similar to state reporting
requirements; and (8) the cost implications of states' small employer
health insurance reforms are unclear because of incomplete cost data and
the difficulty of isolating the impact of such reforms.

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

 REPORTNUM:  HEHS-96-161
     TITLE:  Health Insurance Regulation: Varying State Requirements 
             Affect Cost of Insurance
      DATE:  08/19/96
   SUBJECT:  Health insurance cost control
             State law
             Employee medical benefits
             Insurance regulation
             Fringe benefit costs
             State taxes
             Reporting requirements
             Small business assistance
             Insurance premiums
             Consumer protection
IDENTIFIER:  Virginia
             Iowa
             Maryland
             Missouri
             Minnesota
             California
             Alabama
             Delaware
             Vermont
             Wyoming
             Wisconsin
             Colorado
             New York
             Washington
             Ohio
             
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Cover
================================================================ COVER


Report to the Honorable
James M.  Jeffords, U.S.  Senate

August 1996

HEALTH INSURANCE REGULATION -
VARYING STATE REQUIREMENTS AFFECT
COST OF INSURANCE

GAO/HEHS-96-161

Health Insurance Regulation Costs

(108257)


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

  AAHP - American Association of Health Plans
  ERISA - Employee Retirement Income Security Act of 1974
  HMO - health maintenance organization
  NAIC - National Association of Insurance Commissioners

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


B-271084

August 19, 1996

The Honorable James M.  Jeffords
United States Senate

Dear Senator Jeffords: 

As concern about the affordability of health coverage has grown, the
costs attributed to state regulation of health insurance have been
increasingly debated.  State health insurance regulation is intended
to protect consumers by overseeing health plans' financial solvency,
monitoring insurers' market conduct to prevent abuses, and requiring
coverage for particular services.  Although these state actions
benefit consumers, they also result in costs that are borne by
insurers and often ultimately passed on to consumers in their
premiums.  These costs may in some cases affect an employer's
decision to offer health coverage through an insurer that is subject
to state insurance regulation or to self-fund\1 its health plan,
which avoids state insurance regulation. 

This report responds to your request that we provide additional
information on the costs of state health insurance requirements as a
follow-up to our earlier report on the Employee Retirement Income
Security Act of 1974 (ERISA).\2 In particular, you requested that we
examine the costs associated with (1) premium taxes and other
assessments, (2) mandated health benefits, (3) financial solvency
standards, and (4) state health insurance reforms affecting small
employers.  We examined the impact of these requirements on the cost
of insured health plans compared with the cost of self-funded health
plans.  Our earlier report, prepared at your request, more
comprehensively describes the advantages and disadvantages of ERISA
preemption.\3

To develop this information, we interviewed officials from the
National Association of Insurance Commissioners (NAIC) and state
insurance regulators in Iowa, Maryland, North Carolina, Oregon, and
Virginia.  We also interviewed actuaries, health insurance
executives, benefits managers for self-funded employers, and
officials from national trade associations representing each of these
groups.  We reviewed documents and used data provided by these groups
as well as available studies on mandated benefits and other state
regulatory actions.  In addition, we updated information from
previous GAO reports on state insurance regulation and ERISA.\4 Our
review was conducted between January and June 1996 in accordance with
generally accepted government auditing standards. 


--------------------
\1 Employers that self-fund their health plans bear much of the
financial risk for employee health claims.  Many of these employers
purchase stop-loss insurance to mitigate their potential losses. 
Health plans under these arrangements are referred to as self-funded. 

\2 Employer-Based Health Plans:  Issues, Trends, and Challenges Posed
by ERISA (GAO/HEHS-95-167, July 25, 1995). 

\3 For additional information on the benefits of state insurance
regulation, see also Patricia Butler and Karl Polzer, Private-Sector
Health Coverage:  Variation in Consumer Protections Under ERISA and
State Law, George Washington University, National Health Policy Forum
(Washington D.C.:  June 1996). 

\4 See Health Insurance Regulation:  Wide Variation in States'
Authority, Oversight, and Resources (GAO/HRD-94-26, Dec.  27, 1993)
and GAO/HEHS-95-167, July 25, 1995. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

State health insurance regulation imposes requirements on health
plans offered by insurers that employers' self-funded health plans do
not have.  Although these requirements benefit consumers, they also
add costs to insured health plans.  The extent to which these
requirements increase insured health plans' costs compared with
self-funded health plans' costs varies by state.  The cost impact
depends on the nature and scope of each state's regulations and on
health plans' typical operating practices. 

State premium taxes and other assessments are the most direct and
easily quantifiable cost that insured health plans face.  Premium
taxes increase costs to commercial health insurers by about 2 percent
in most states.  Other assessments not only tend to be smaller than
the premium tax but can often be deducted from premium taxes.  These
include assessments for guaranty funds that pay the claims of
insolvent plans and high-risk pools that provide coverage for
individuals unable to get private coverage because of preexisting
conditions. 

Most states mandate that insurance policies cover certain benefits
and types of providers, such as mammography screening, mental health
services, and chiropractic services, which raises claims costs to the
extent that such benefits would not otherwise have been covered.  The
cost effect varies due to differences in state laws and employer
practices.  For example, Virginia's mandated benefits accounted for
about 12 percent of claims costs, according to a recent study. 
Earlier studies estimated that mandated benefits represented 22
percent of claims in Maryland and 5 percent in Iowa.  In general,
such cost estimates are higher in states with more mandated benefits
and in states that mandate more costly benefits, such as mental
health services and substance abuse treatment.  These cost estimates
represent the potential costs of mandated benefits to a health plan
that does not voluntarily offer these benefits.  Because most
self-funded plans offer many of the mandated benefits, their
additional claims cost--were they required to comply--would not be as
high as the studies' estimates.  If required to comply with state
mandates, however, self-funded plans would lose flexibility in
choosing what benefits to offer and in offering a single, uniform
health plan across states. 

State financial solvency standards have limited potential effect on
costs because many insurers exceed the state minimum requirements and
typically perform tasks like those associated with the state
financial reporting requirements.  Most insurers maintain higher
levels of capital and surplus than the minimum state requirements,
indicating that the effect of the capital and surplus requirements on
health insurance costs is generally minimal.  Although states require
financial information and actuarial reports that in some cases differ
from the insurers' general business practices, insurance executives
indicated that the added administrative cost of preparing these
documents was marginal and that the additional information was also
valuable to the insurer. 

The cost implications of small employer health insurance reforms,
such as limits on preexisting condition exclusions recently adopted
in many states, remain unclear.  The cost information to date is
mostly anecdotal and provides an incomplete view of these reforms'
effects.  Moreover, the rapid changes in health care markets, such as
the continued growth and evolution of managed care, make it difficult
to isolate the independent effect of the reforms. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Every state regulates the terms and conditions of insurance sold in
the state and nearly all tax insurers.  States require health
insurance policies sold there to include specific benefits, such as
mental health services, mammography screening, chiropractic services,
and coverage for newborns.  States use a variety of methods to
monitor health insurers' solvency, including minimum capital and
surplus levels, investment restrictions, and financial reviews.  In
addition, many states have enacted reforms to improve access and
affordability of health insurance for small employers.  Prominent
examples of these reforms are guaranteed issuance and renewal,
portability, and premium rate restrictions.  These reforms are
intended to address concerns about certain individuals being excluded
from coverage or priced out of the market.  These individuals include
those who change jobs or experience costly medical conditions while
in the small employers' insurance market. 

Although states regulate health insurance, state regulation does not
directly affect 4 of 10 people with private employer-based health
coverage.  ERISA\5 preempts states from directly regulating employer
provision of health plans, but it permits states to regulate health
insurers.  Of the 114 million Americans with health coverage offered
through a private employer in 1993, about 60 percent participated in
insured health plans that are subject to state insurance regulation. 
However, for plans covering the remaining 40 percent--about 44
million people in 1993--the employer chose to self-fund and retain at
least some financial risk for its health plan. 

Self-funding is most common among large employers.  Only 11 percent
of employees in firms of 100 or fewer employees were in self-funded
health plans compared with 34 percent of those in firms of 101 to 500
employees and 63 percent of those in firms of more than 500
employees, according to a 1993 Robert Wood Johnson Foundation
survey.\6 As stop-loss coverage with less risk to the employer
becomes available, however, more small employers may start to
self-fund.  The NAIC has adopted a stop-loss model act that attempts
to define the levels of risk that can be assumed by stop-loss
carriers for determining which state insurance laws should apply. 
State insurance regulators are concerned that some employers may
purchase stop-loss coverage in which the stop-loss carrier assumes
most of the risk and believe, therefore, that the plan should be
subject to state health insurance laws.\7

Because self-funded health plans may not be deemed to be insurance,
ERISA preempts them from state insurance regulation and premium
taxation.  Although ERISA includes fiduciary\8 standards to protect
employee benefit plan participants and beneficiaries from plan
mismanagement and other requirements, in other areas no federal
requirements comparable with state requirements for health insurers
exist for self-funded health plans.  Table 1 compares the
requirements that fully insured and self-funded health plans must
meet. 



                                          Table 1
                          
                              Comparison of State and Federal
                           Provisions Affecting Fully Insured and
                                  Self-Funded Health Plans

                              State insurance regulations
                              affecting fully insured        ERISA provisions affecting
                              health plans                   self-funded health plans\a\
----------------------------  -----------------------------  -----------------------------
Market conduct requirements
------------------------------------------------------------------------------------------
Plan benefit coverage and     States review and approve      Disclosure requirements to
description                   insurance policies to ensure   provide summary plan
                              they are not vague or          description to participants
                              misleading and they meet       and the Department of Labor.
                              state requirements, such as
                              mandatory benefit provisions.  No requirements to provide
                                                             specific benefits. However,
                                                             group health plans covering
                                                             more than 20 employees must
                                                             offer coverage (at the
                                                             employees' expense) for 18 to
                                                             36 months following
                                                             termination of employment and
                                                             other qualifying events.

Small group reforms           Most states require insurers   No comparable requirements.
                              selling to small employers to  States are preempted from
                              accept and renew employees     applying small group reforms
                              who want health insurance      to self-funded health plans.
                              coverage, establish short
                              waiting periods for
                              preexisting conditions, and
                              require portability of
                              coverage when an individual
                              changes jobs or insurers.\b

Consumer protections and      States monitor insurers'       Plan must reconsider denied
complaints                    actions to ensure they are     claims at participants'
                              not engaging in unfair         request. Federal courts, not
                              business practices or          state courts, have
                              otherwise taking advantage of  jurisdiction over litigation
                              consumers and assist           of denied claims.
                              consumers by investigating
                              their complaints, answering    States have no authority to
                              questions, and conducting      pursue consumer complaints
                              educational programs.          about self-funded plans.
                                                             Department of Labor has
                                                             responsibility for complaints
                                                             about self-funded health
                                                             plans.


Financial requirements
------------------------------------------------------------------------------------------
Licensing                     States license insurance       No comparable requirements.
                              companies and the agents who
                              sell insurance to ensure that
                              companies are financially
                              sound and reputable and that
                              agents are qualified.

Financial solvency            States set standards for and   No solvency requirements but
                              monitor financial operations   fiduciary duty to act in a
                              of insurers to determine       prudent manner solely in the
                              whether they have adequate     interests of plan
                              reserves to pay                participants and
                              policyholders' claims. States  beneficiaries.
                              restrict how insurers invest
                              their funds.

Rate reviews                  States review and approve      No comparable requirements.
                              rates or require actuarial
                              certification to ensure that
                              rates are reasonable for
                              consumers and sufficient to
                              maintain the solvency of
                              insurance companies.

                              Some states regulate insurer   No comparable requirements.
                              rating practices in the small
                              group market to determine the
                              factors insurers may use in
                              setting premiums.\b


Tax requirements
------------------------------------------------------------------------------------------
Premium taxes                 Nearly all states assess       States are preempted from
                              premium taxes on insurers.     assessing premium taxes on
                                                             self-funded health plans.

Guaranty funds                States assess insurers to      States are preempted from
                              finance guaranty funds that    requiring self-funded health
                              provide financial protections  plans to participate in
                              to enrollees who have          guaranty funds.
                              outstanding medical claims in
                              case of insurer insolvency.

High-risk pools               Some states assess insurers    States are preempted from
                              to finance losses in high-     requiring self-funded health
                              risk pools that provide        plans to participate in high-
                              health coverage for            risk pools.
                              individuals who otherwise had
                              been denied coverage because
                              of a medical condition.
------------------------------------------------------------------------------------------
\a ERISA requirements apply to all private employer and union health
plans, including fully insured and self-funded health plans.  See
GAO/HEHS-95-167, July 25, 1995.  Although states are preempted from
regulating self-funded health plans directly, some states regulate
third parties that provide administrative services for self-funded
health plans and stop-loss insurance carriers that reimburse
self-funded health plans for claims that exceed a predetermined
threshold. 

\b For a list of states that have enacted these reforms, see Health
Insurance Regulation:  Variation in Recent State Small Employer
Health Insurance Reforms (GAO/HEHS-95-161FS, June 12, 1995). 


--------------------
\5 ERISA is the federal law that covers employer-based pension and
welfare benefit plans, including health plans.  P.L.  93-406, 88
Stat.  829 (classified as amended at 29 U.S.C.  1001 et seq. 
(1994)). 

\6 The Robert Wood Johnson Foundation Employer Health Insurance
Survey was conducted in 10 states.  See Gregory Acs and others,
"Self-Insured Employer Health Plans:  Prevalence, Profile,
Provisions, and Premiums," Health Affairs, Vol.  15, No.  2 (1996),
pp.  266-78. 

\7 Maryland and Missouri promulgated regulations similar to the NAIC
stop-loss model act, but both regulations were found by federal
courts earlier this year to be preempted by ERISA.  American Medical
Security, Inc.  v.  Bartlet, 915 F.  Supp.  740 (D.  Md.  1996) and
Associated Industries of Missouri v.  Angloff (unreported).  Maryland
is planning an appeal.  Missouri argued its appeal on July 3, 1996,
and is awaiting the court's decision. 

\8 ERISA defines a fiduciary as anyone who exercises discretionary
control or authority over the management of a plan or renders
investment advice to a plan. 


   STATE TAXES TYPICALLY INCREASE
   INSURED HEALTH PLANS' COSTS
------------------------------------------------------------ Letter :3

One of the most direct and quantifiable costs that insured health
plans incur compared with self-funded health plans results from state
premium taxes and other assessments paid by health insurers.  Most of
the costs associated with taxes result from premium taxes that
increase costs to insured health plans by about 2 percent in most
states.  In addition, states also assess insurers for other purposes,
but these assessments are generally small and, in many states, the
insurer may receive a credit from its premium taxes for these
payments. 

Most states tax health insurance premiums.  State revenues from
premium taxes on all types of insurance, including property,
casualty, life, and health insurance, totaled over $8 billion in
1993.  Premium taxes for commercial health insurers range from 0 to
over 4 percent; most states have premium tax rates of about 2
percent.  Many states exempt or have lower rates for Blue Cross and
Blue Shield plans as well as health maintenance organizations (HMO). 
In some states insurers receive credits that lower their premium tax
rates, such as credits for insurers who are headquartered locally or
invest in state securities.  In addition, the expense of state taxes
can be deducted from insurers' federal taxes, reducing their net
cost.  See appendix I for a list of premium tax rates by state and
type of insurance. 

Health insurers may also be liable for paying other miscellaneous
assessments collected by the states, including assessments for
guaranty funds and high-risk pools.  Guaranty funds provide financial
protections to enrollees who have outstanding medical claims in the
case of an insurer insolvency.  In years that monies are drawn from
the guaranty funds due to an insurance failure, states assess
insurers a fee on the basis of their market share within the state to
pay for the guaranty fund expenses.  States cap the maximum rate
insurers may be assessed in a year, typically at about 2 percent of
gross premiums.  Except in a few states where a relatively large
insurer has failed, however, actual assessments are much lower than
the maximum rate.  In 1993, actual assessments against life and
health insurers for guaranty funds averaged 0.34 percent, and
guaranty fund assessments exceeded 1 percent of premiums in only
seven states.  Most states allow insurers to deduct some or all of
the guaranty fund assessment from their premium taxes.  Appendix II
shows state assessments for guaranty funds and deductions from
premium taxes. 

About half of the states maintain high-risk pools to provide health
coverage for individuals denied health coverage because of a medical
condition.  In 1994, about 100,000 Americans were covered by
high-risk pools.\9 Although participants in these plans pay a premium
for their coverage, the costs of the high-risk pools exceed the
premiums collected.  To compensate for the difference in premiums
collected and claims paid, 20 states have the authority to assess
insurers who participate in the high-risk pool.\10 In 1994, 15 states
actually assessed insurers to cover high-risk pool losses. 
Minnesota, with the largest high-risk pool in the nation, assessed
insurers 1.7 percent of their premiums in 1995 to cover high-risk
pool losses.  Most states with assessments (although not Minnesota)
allow insurers to offset at least some of the expense of the
high-risk pool assessments from their premium taxes.  Appendix III
shows state assessments for high-risk pools. 

Table 2 summarizes the costs to health insurers of the various state
taxes.  Most insurers and HMOs are likely to pass on the costs of
these taxes to their customers through higher premiums.  However,
their ability to do so depends on such factors as the competitiveness
of the market, size of the employer, and insurer's marketing
strategy. 



                                Table 2
                
                   Taxes on Insured Health Plans as a
                          Percent of Premiums


                         Range  Median   Range  Median   Range  Median
----------------------  ------  ------  ------  ------  ------  ------
Premium taxes\a           0.0-     2.0    0.0-     0.5    0.0-     0.0
                           4.3             4.0             3.5
Guaranty fund            0.0\-     0.3   0.0\-   0.0\b   n/a\b   n/a\b
 assessments\              3.2           1.3\b
High-risk pool            0.0-     0.0    0.0-     0.0     n/a     n/a
 assessments             1.7\c           1.7\c
----------------------------------------------------------------------
\a Premium tax rates do not reflect credits or rebates for locally
based insurers or other credits. 

\b Guaranty funds in 27 states do not include Blue Cross and Blue
Shield plans.  Only three states include HMOs in their guaranty
funds, and four states establish separate HMO guaranty funds.  In
states that do not include these plans in the guaranty fund, Blue
Cross and Blue Shield plans and HMOs are not responsible for these
assessments. 

\c Data on assessments as a percent of premiums are not available for
every state.  Minnesota's assessment of 1.7 percent is listed as the
high end of the range because Minnesota's total assessment to members
($44 million in 1994) greatly exceeds that of any other state. 
Wisconsin, with a total assessment of $17 million in 1994, was second
highest. 


--------------------
\9 See Communicating for Agriculture, Inc., Comprehensive Health
Insurance for High-risk Individuals:  A State-by-State Analysis,
Ninth Edition (Bloomington, Minn.:  1995) for information on high-
risk pools, their financing, and enrollment. 

\10 States also use general revenues or taxes from other sources to
fund the additional costs of high-risk pools. 


   MANDATED BENEFITS INCREASE
   HEALTH INSURANCE COSTS BUT
   MAGNITUDE VARIES
------------------------------------------------------------ Letter :4

The cost impact of mandated benefits varies because states differ in
the number and type of benefits mandated.  The available studies
reflect this cost variation, estimating higher claims costs in states
with the most mandated benefits and more costly benefits, such as
treatment for mental health and substance abuse.  However, the
studies are limited because their measurement of costs does not
account for certain other cost elements, including administrative
costs for multistate employers and a loss of flexibility claimed by
employers in designing cost-effective benefit packages.  In addition,
reported cost estimates often do not measure the incremental cost of
adding a mandated benefit to a health insurance package; instead, the
estimates represent the fraction of total health insurance claims
that are paid for each of the mandated benefits.  Furthermore, claims
costs may exaggerate the differences in costs between insured and
self-funded health plans because many commonly mandated benefits are
often covered by employers who self-fund even though they are not
subject to state regulation. 


      NUMBER AND TYPE OF MANDATED
      BENEFITS ADOPTED BY STATES
      VARY
---------------------------------------------------------- Letter :4.1

On average, states have enacted laws mandating about 18 specific
benefits.  As shown in figure 1, 16 states have over 20 mandated
benefits; 8 states have 10 or fewer mandates.  Maryland (39),
Minnesota (34), and California (33) have the most mandated benefits. 
In contrast, Idaho has only six mandated benefits; Alabama, Delaware,
Vermont, and Wyoming each have eight mandated benefits.\11

   Figure 1:  Mandated Benefits by
   State

   (See figure in printed
   edition.)

Source:  Blue Cross and Blue Shield Association. 

States most frequently mandate coverage for preventive treatments,
such as mammograms and well child care, or for treatment of mental
illness or alcohol and drug abuse.  In addition, states often require
coverage for some types of providers such as optometrists and
chiropractors.  States typically mandate that insurers cover specific
benefits in all plans sold, but some states merely mandate that each
insurer make the mandated service available in at least one plan that
it offers.  Appendix IV shows how many states have enacted each of 20
commonly mandated benefits. 

In addition, many states have recently begun considering mandating
that health insurance cover minimum postpartum hospital stays.  For
example, a state may require the insurer to cover 48 hours of
hospitalization following a vaginal delivery or 96 hours following a
caesarian delivery if recommended by the doctor, although in some
states shorter stays may be allowed if they are accompanied by a home
visit by a nurse or other medical professional.  According to the
American College of Obstetricians and Gynecologists, as of July 28,
1996, 28 states have enacted laws requiring coverage for postpartum
care. 


--------------------
\11 The number of mandated benefits includes requirements that
insurers provide or continue coverage for specific populations, such
as dependent students, as a mandated benefit.  Thus, the number of
mandated benefits per state includes these requirements as well as
treatment- and provider-related mandated benefits.  See Blue Cross
and Blue Shield Association, State Legislative Health Care and
Insurance Issues:  1995 Survey of Plans (Washington, D.C.:  Blue
Cross and Blue Shield Association, 1995) for a list of mandated
benefits for each state. 


      ESTIMATES OF THE COSTS OF
      MANDATED BENEFITS VARY BY
      STATE
---------------------------------------------------------- Letter :4.2

Studies conducted in several states between 1987 and 1993 provide
varying estimates of the claims costs associated with mandated
benefits.  (See table 3.) The Virginia State Corporation Commission,
for example, has required insurers to report cost and utilization
information annually for each of the mandated benefits in the state. 
Overall, the commission's report, the most recent of these studies,
estimated that Virginia's mandated benefits accounted for about 12
percent of group health insurance claims in 1993.  An earlier study
in Maryland, the state with the most mandated benefits, estimated
that mandated benefits represented 22 percent of average claims costs
in 1988.  In Iowa, a state representing the other extreme, a 1987
study estimated that the potential costs of introducing several
commonly mandated benefits would be about 5 percent of claims costs. 



                          Table 3
          
          Studies of the Claims Costs of Mandated
                Benefits in Selected States

                                          Percent of total
State                             Year        claims costs
------------------  ------------------  ------------------
Maryland                          1988                22.0
Massachusetts                     1990                18.0
Virginia                          1993                12.2
Oregon\a                          1989                 8.1
Wisconsin\b                       1989                 7.9
Iowa\c                            1987                 5.4
----------------------------------------------------------
Note:  The studies estimated the percent of total claims costs
represented by the benefits mandated in a state.  This differs from
the incremental costs an employer would face from a mandated benefit
because the employer may provide similar benefits before the mandate. 

\a This includes 16 of over 20 mandates that were in force at the
time of the study.  The other mandates were excluded because of data
deficiencies.  Included in the study's cost estimate were mandates
for mental/nervous disorders, newborn coverage, alcoholism and drug
dependency treatment, and optometry services. 

\b This includes six mandated benefits:  mental health and substance
abuse treatment, chiropractic care, diabetes care, home health care,
skilled nursing facility care, and kidney disease treatment. 
Wisconsin also had mandates for other benefits that were not included
in the study. 

\c The study in Iowa examined potential costs of selected commonly
mandated benefits, including mental health, alcohol and drug abuse,
podiatrists, optometrists, registered nurses, and physical
therapists.  Iowa has not adopted all of these mandates; according to
the Blue Cross and Blue Shield Association, Iowa's current mandates
are mammography screening, well child care, chiropractors, dentists,
registered nurses, optometrists, and diabetes education. 

Sources:  Jonathan Gruber, "State-Mandated Benefits and
Employer-Provided Health Insurance," Journal of Public Economics,
Vol.  55 (1994), pp.  433-64; Michael L.  Hand and G.  Marc Choate,
"The Impact of State-Mandated Health Care Benefits in Oregon" (Salem: 
Associated Oregon Industries Foundation, 1991); Gail Jensen and Jon
Gabel, "The Price of State Mandated Benefits," Inquiry, Vol.  26
(1989), pp.  419-31; Gregory Krohm and Mary H.  Grossman, "Mandated
Benefits in Health Insurance Policies," Benefits Quarterly, Vol.  VI,
No.  4 (1990), pp.  51-60; Virginia State Corporation Commission, The
Financial Impact of Mandated Health Insurance Benefits and Providers,
(Richmond:  1995), p.  15. 

The differences in the cost estimates reported by the various studies
are in part due to the number of mandated benefits included in each
state.  For example, the studies that reported the highest estimated
costs were those for Maryland and Massachusetts, which have more
mandated benefits than most states.  Thus, these cost estimates
cannot be generalized to other states. 

Although the studies reported varying total costs in different
states, they generally agreed that several specific mandated benefits
accounted for a large share of the costs.  In particular, obstetrical
care and mental health care were cited as among the most costly
mandated benefits; other commonly mandated benefits, such as
mammography screening, account for less than 1 percent of costs.  For
example, in Virginia, obstetrical care, mental health care, and
substance abuse benefits accounted for over half of the total claims
costs associated with mandated benefits in 1993.  Table 4 lists the
costs of individual mandates in Virginia. 



                          Table 4
          
           Average Claim Cost per Group Contract
                  for Mandates in Virginia

                                  Cost per      Percent of
                                  contract    total claims
Mandates                         (dollars)           costs
--------------------------  --------------  --------------
Treatment-related benefits
----------------------------------------------------------
Obstetrics                          116.47            3.85
Mental health                       106.25            2.39
Alcohol and drug abuse               26.95            0.77
Well child care                      14.72            0.46
Mammography                          10.04            0.10

Provider-related benefits
----------------------------------------------------------
Chiropractor                         18.87            0.61
Physical therapist                   10.27            0.46
Dentist                              10.41            0.44
Psychologist                         15.18            0.43
Podiatrist                            7.27            0.27
Clinical social worker                5.77            0.20
Optometrist                           2.21            0.11
Professional counselor                2.55            0.09
Audiologist                           1.16            0.09
Clinical nurse specialist             0.61            0.04
Speech pathologist                    1.81            0.03
Optician                              0.44            0.02

Other
----------------------------------------------------------
Newborn children                     58.91            1.72
Disabled dependent                   16.87            0.14
 children
==========================================================
Total                               426.76           12.22
----------------------------------------------------------
Source:  Report of the State Corporation Commission on the Financial
Impact of Mandated Health Insurance Benefits and Providers,
Commonwealth of Virginia (Richmond:  1994). 

In some cases, mandated benefits covering services offered by some
alternative types of providers, such as nurse midwives, may reduce
costs because they substitute for more costly forms of care.  Some
provider mandates, however, may also increase the demand for
services, increasing costs.  For example, although chiropractic
services may be a less expensive alternative for some treatments,
mandating their coverage may also lead to increased use. 

One limitation of most studies on mandated benefits is that they have
examined the cost effect of mandated benefits using the fraction of
the total health insurance claims costs paid for each benefit,
instead of estimating the incremental cost of adding a benefit to the
health insurance package.  In addition, the reported cost estimates
do not necessarily capture the actual effect on employers' costs,
especially in cases in which all costs associated with a mandate do
not occur at the same point in time.  For example, one actuary
estimated that including in vitro fertilization services in health
plans would increase premiums by less than 1 percent.  In the case of
one self-funded employer, however, the total costs to the employer of
in vitro fertilization would be greater than the initial cost of the
service because multiple attempts are often required and its use may
lead to costly, high-risk pregnancies or multiple childbirths. 

Moreover, multistate employers note that the variation in
state-mandated benefits results in additional administrative cost
that is not reflected in the studies' estimates.  Employers that
purchase health insurance may need to modify their plans to meet
differences in state-mandated benefits.  Furthermore, employers are
concerned that, to the extent that they must comply with mandated
benefits, they lose the flexibility to design the most cost-effective
health benefit plan to meet their employees' needs. 

Employers and managed health care plans have also expressed concern
about the potentially high costs associated with any-willing-provider
laws.  The actual cost impact of these laws, however, as they have
been enacted by states is likely to be limited.  Any-willing-provider
laws require managed health care plans to accept any qualified
provider who wants to participate and is willing to accept the plans'
contract terms.  The few available studies have examined only
hypothetical results of broad any-willing-provider laws and provide
no definitive measure of actual costs of the laws that have been
implemented.\12 The actual costs of enacted laws would be more
limited than the studies' estimates because most states have passed
versions with narrow scopes.  The American Association of Health
Plans (AAHP) reported that, as of April 1996, 19 of the 24 states
with any-willing-provider laws limit them to particular providers,
such as pharmacists, or particular types of managed care plans. 
Furthermore, any-willing-provider laws have been enacted mostly in
states with relatively low managed care penetration.  AAHP reported
that 24 percent of HMO enrollees are in states with limited
any-willing-provider requirements, and less than 2 percent are in
states with broad any-willing-provider laws. 


--------------------
\12 For example, one study found that any-willing-provider laws could
increase premiums for HMOs by 9 to 28 percent.  See Atkinson and
Company, The Cost Impact of "Any Willing Provider" Legislation
(1994).  Some of this study's assumptions have been criticized,
including the effects of any-willing-provider laws on provider
participation rates and negotiated discounts. 


      SELF-FUNDED HEALTH PLANS
      OFTEN COVER BENEFITS
      COMMONLY MANDATED BY STATES
---------------------------------------------------------- Letter :4.3

The actual cost effect of mandated benefits to employers also depends
on whether the employer offers a comprehensive or limited health
plan, which in turn often depends on the size of the employer. 
Employers frequently offer many of the commonly mandated benefits,
even employers who self-fund and are not subject to the state
mandates.  In general, large employers are more likely to self-fund
their health plans and tend to offer more comprehensive benefits than
small employers.  For small employers, who typically purchase fully
insured health plans and are less likely to offer any health
coverage, mandates may impose claims costs for benefits that they
otherwise might not have covered.  Studies conflict about whether
increased costs associated with mandated benefits lead small
employers to drop health insurance coverage.\13

Self-funded health plans typically offer many of the benefits
commonly mandated by states for fully insured health plans, according
to studies.  This may be due in part to the labor market, where firms
must offer competitive health plans to compete for labor.  As shown
in figure 2, a KPMG Peat Marwick survey of employer benefits among
all firm sizes indicates that self-funded health plans are more
likely to offer well child care, outpatient alcohol treatment,
outpatient drug treatment, mental health benefits, and chiropractic
care than fully insured health plans.  This survey also reported
similar patterns for other benefits that are not typically mandated,
including prescription drugs, adult physicals, and dental
benefits.\14 Similarly, a survey of Wisconsin insurers also found
that "self-funded health plans provide at least as many of the
mandated benefits as insured health plans and in some cases provide
more generous coverage."\15 This result may partially be due to the
tendency of large employers to both self-fund and offer more
comprehensive benefits. 

   Figure 2:  Comparison of
   Selected Benefits Offered by
   Fully Insured and Self-Funded
   Health Plans

   (See figure in printed
   edition.)

Source:  KPMG Peat Marwick, March 1996, based on 1995 employer
surveys. 

Although self-funded plans often offer the same types of benefits
states commonly mandate for insurers, self-funded plans may include
features that differ from those required by state mandates.  For
example, state mandates generally specify a minimum number of days of
care that insurers must cover for inpatient mental health care.  One
employer association indicated that many employers prefer designing
more flexible mental health benefits, for example, requiring case
management rather than specifying a limited number of days of care. 
Thus, even though 97 percent of self-funded plans offer inpatient
mental health care services, some of these plans would not meet the
state requirements for fully insured health plans. 

Assessing the cost differences between self-funded and fully insured
health plans resulting from mandated benefits is difficult.  To the
extent that self-funded health plans offer benefits that are like
state-mandated benefits, their claims costs would not significantly
differ because of their exemption from state-mandated benefit laws. 
For less commonly offered benefits, such as in vitro fertilization,
self-funded employers would face additional claims costs if they were
required to meet the state mandates.  In addition, if employers who
self-fund their health plan were required to comply with state
mandates, they would lose flexibility in choosing the benefits to
offer and in offering a single uniform health plan in many states. 


--------------------
\13 Studies differ on the proposition that mandated benefits force
small businesses to drop coverage.  See Gruber, pp.  433-64.  This
study contradicts findings from an earlier study that had concluded
that small firms are likely to forgo insurance coverage as a result
of continued growth in mandated benefits.  See Gail Jensen and Jon
Gabel, "State Mandated Benefits and the Small Firm's Decision to
Offer Insurance," Journal of Regulatory Economics, Vol.  4 (1992) pp. 
379-404. 

\14 The data in figure 2 represent percentage of covered workers in
conventional health plans.  KPMG Peat Marwick reports similar
findings for workers in preferred provider organizations and
point-of-service plans that are either self-funded or fully insured. 
KPMG Peat Marwick is examining to what extent these differences in
rates of benefit coverage among self-funded and fully insured health
plans can be explained by differences in firm size and premium
levels. 

\15 See Krohm and Grossman, p.  56.  The mandated benefits surveyed
include substance abuse, diabetes care, home health care, skilled
nursing facility care, kidney disease treatment, and chiropractic
care. 


   STATE SOLVENCY STANDARDS'
   IMPACT ON INSURERS' COSTS IS
   LIMITED
------------------------------------------------------------ Letter :5

State solvency requirements add costs only to the extent that they
exceed prudent industry practices a health insurance carrier would
follow in the absence of state requirements.  States use a variety of
methods to monitor health insurers' solvency, including minimum
capital and surplus levels, investment restrictions, and financial
reviews.  The specific requirements vary both by state and by type of
insurance. 

State laws generally require insurers to maintain a minimum level of
capital or surplus to become licensed, but this level is a small
fraction of most insurers' assets.  The minimum levels of capital and
surplus vary by state and by type of insurance, ranging in 1993 from
$200,000 to $5 million.  Most insurers have capital and surplus
levels that exceed these minimum requirements.  For example, Maryland
requires insurers selling both life and health insurance to have a
minimum of $3.75 million in capital and surplus to be licensed.\16 In
comparison, as of December 31, 1994, the actual capital and surplus
level for life and health insurers licensed in Maryland averaged $200
million.  The cost effect of the minimum requirements can be more
significant for small insurers, however.  According to data from the
Maryland Insurance Administration, 19 percent of life and health
insurers licensed in Maryland had less than $10 million in capital
and surplus. 

Although some insurers may need to keep higher levels of capital and
surplus to comply with the minimum levels that states require under
the NAIC-developed model risk-based capital standards, most insurers
also exceed these levels.\17 Under risk-based capital, a level
(called the "control level") is calculated for each health plan based
on its unique characteristics.  If a health plan's reserves were to
fall below this level, the state is authorized to take control of the
insurer.\18 A range of regulatory actions would occur if an insurer
were to approach this control level.  At 200 percent of the control
level, the state requires an insurer to prepare a plan to increase
its capital; at the extreme, if the insurer's capital were below 70
percent of the authorized control level, the insurance commission
would have to take control of the insurance company.  However,
standard industry practices tend to be similar to or exceed these
minimum state requirements.  For example, a representative of the
Health Insurance Association of America told us that 90 percent of
insurers in 1995 exceeded 250 percent of the authorized control level
for risk-based capital.  In addition, a Virginia state official noted
that, since Virginia adopted enforcement actions based on NAIC's
risk-based capital formula in July 1995, no insurers have fallen
below the level where state standards would require action. 

Blue Cross and Blue Shield plans have different requirements under
state laws.  For example, many states set target capital and surplus
levels for Blue Cross and Blue Shield health plans to ensure that
they have sufficient funds to cover, for example, 1 or 2 months of
claims.  Furthermore, to maintain their nonprofit status, some states
require that Blue Cross and Blue Shield plans' surplus not exceed a
target level, such as 7 months' claims. 

In addition, states restrict how insurers invest their funds,
potentially imposing an opportunity cost on insurers who might
otherwise invest in higher yielding assets.  These investment
restrictions vary by state, but in general states regulate the type
and amount of assets in which health plans invest to diversify
insurers' investments and minimize their risk.  For example, many
states limit the amount of funds that a health insurance carrier may
invest in certain types of investments, such as common stocks and
foreign securities, with potentially higher return rates than other
permitted investments.  The risk associated with these investments is
also greater, however, so the insurer could get a lower rate of
return than with permitted investments.  An insurer could even lose
money, possibly damaging its solvency.  Furthermore, actuaries note
that investments typically provide a smaller share of income to
health insurers than other types of insurance such as life insurance. 

States' oversight of health insurers' solvency may also add
administrative costs to insurers who must comply with reporting and
review requirements, but industry officials note that such costs are
difficult to quantify.  The administrative costs include preparing
audited financial statements and actuarial analyses for state review,
functions insurers would likely perform anyway.  States require
insurers to report financial information using NAIC's accounting
standards, however, which differ from generally accepted accounting
principles in their valuation of assets.  In some cases, this may
require an insurer to maintain two sets of accounting data, but
insurance company executives we spoke with said this is a marginal
additional cost. 

The costs of actuarial certification vary by type of insurance. 
Insurers selling only health coverage may prepare a simplified
actuarial certification that requires few resources.  Insurers
selling health and life coverage must prepare a more extensive
actuarial certification that would be more costly.  One insurer,
however, noted that the information developed for the actuarial
certification provides the insurer with valuable information on the
adequacy of the insurer's reserves for meeting anticipated costs. 

Finally, many states charge the insurer for the costs of on-site
financial examination, which typically occur once every 3 to 5 years. 
The costs of these exams vary depending on their length and
complexity, but one state reported that the cost can be as high as $1
million for a complex review of a large insurer; less complex ones
may cost less than $100,000.\19


--------------------
\16 Insurers selling only health insurance in Maryland must have
$1.875 million.  HMOs must have $1.5 million to become licensed and
then must maintain the greater of $750,000 or 5 percent of premiums,
up to $3 million.  When an insurer operates in more than one state,
it must meet other states' minimum capital and surplus requirements
only to the extent that they exceed the domiciled state's.  For
example, an insurer based in Maryland that sells health insurance
only would have to demonstrate that it has an additional $1.125
million in capital and surplus to meet Virginia's $3 million minimum
capital and surplus requirement. 

\17 The existing risk-based capital formula applies only to insurers
that sell life and health insurance.  NAIC is drafting a standard
formula for other types of health plans, including HMOs. 

\18 For example, the minimum surplus level is set by a formula that
takes into account the type of insurance sold and the company's
investments and assigns risk factors that measure the variability of
these products and investments. 

\19 States also conduct market conduct exams that include reviews of
insurers' advertising, compliance with licensing requirements, claims
practices, and handling of consumer complaints.  These exams are
typically conducted less often and are less costly than financial
reviews. 


   COST EFFECTS OF STATE SMALL
   EMPLOYER REFORMS DIFFICULT TO
   ASSESS
------------------------------------------------------------ Letter :6

Most states have recently passed legislation designed to improve
portability, access, and rating practices for the small employer
health insurance market.  It is too early to assess the cost effects
of these reforms definitively because most available information is
anecdotal.  Moreover, even if more systematic data were available,
isolating the effect of small group reforms from other factors would
be difficult in the currently dynamic health care market. 

The small group reforms include provisions 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 relatively 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) wide variation in premium rates will be narrowed to
fall within state-specified ranges.  In an earlier report, we
identified 45 states that passed legislation between 1990 and 1994
regulating the small employer health insurance market (typically
fewer than 25 or 50 employees).\20 We also noted that the specific
state requirements vary both by state and from the NAIC model act. 

The available evidence on states' early experience with small group
reform is mostly testimonial, anecdotal, and often contradictory. 
Following are examples of some of this evidence. 

  -- The Colorado Insurance Division reports that small employer
     reforms, including guaranteed issue and rate restrictions, have
     moderated premium increases and increased the number of
     individuals covered by small group health plans. 

  -- Some initial reports on New York's experience stated that
     insurers left the state and premiums increased.  Subsequent
     reports, however, have questioned the extent of these problems. 
     Furthermore, state officials note that most changes occurred in
     the individual market rather than the small employer market and
     resulted from other factors, particularly the financial status
     of the state's largest insurer. 

  -- Minnesota and Colorado officials point to the decline in
     enrollment in their high-risk pools as evidence of the success
     of small group reforms in making private health coverage more
     available. 

  -- Washington's reforms, which were partially repealed before
     implementation, resulted in a surge in high-cost, high-risk
     enrollees that has led insurers to warn of high premium
     increases and their potential withdrawal from the state. 

  -- Maryland officials asserted that in the first year of
     implementing small employer reforms competition in the small
     group health insurance market has increased and premiums have
     declined, but they acknowledged that data on premiums before the
     reforms were sparse. 

As these examples illustrate, the results across states are not
consistent or generalizable to other states' experiences. 
Furthermore, even within the states noted above, conflicting views
exist about the success or failure of the small group reforms. 

Some states have specifically designed their reforms to minimize
potential cost increases.  For example, the task force that developed
Maryland's reforms designed the benefits package to cost less than 12
percent of average wages in Maryland.  Ohio state officials scaled
back their original reforms after receiving estimates that they could
increase costs.  As a result, Ohio enacted less generous requirements
for guaranteed coverage. 

In addition, because the private insurance market has been changing
rapidly, the effect these reforms have had on health insurance
premiums is difficult to isolate.  Besides the small employer
insurance reforms, factors affecting insurance premiums include
nationwide declines in the growth rate of health care costs, the
growth of managed care, changes in health benefits, and the expansion
of Medicaid coverage.  Small group reforms may also have
redistributive effects, with some enrollees facing increased costs
while others face reduced costs, making the net effect unclear. 
Changes resulting from small group reforms may take several years to
play out fully.  Finally, the paucity of data preceding the enactment
of reforms may hamper before-and-after comparisons of insurance
premiums. 


--------------------
\20 See GAO/HEHS-95-161FS, June 12, 1995. 


   CONCLUDING OBSERVATIONS
------------------------------------------------------------ Letter :7

State requirements on health insurance and their effects raise two
questions:  who is affected directly, and what factors determine the
size of the requirements' cost impact?  Under the ERISA statute,
state governments cannot tax or regulate self-funded plans
established by an employer who bears most of the financial risk.  By
contrast, states continue to have authority to tax and regulate
health insurance.  As a result, enrollees in insured health plans
have the benefits associated with state regulation but also bear an
additional cost relative to enrollees in self-funded health plans. 
This cost differential can differ considerably by state. 
Specifically, state taxes on health insurers raise the costs of fully
insured plans by about 2 percent in most states, with the actual
level determined by state tax rate and type of health plan.  In
addition, the extent to which mandated benefits and solvency
requirements raise costs differs by state, depending upon the scope
of state laws.  Furthermore, the extent to which a cost differential
between self-funded and insured health plans would be apparent
depends on whether state regulation results in a change in employers'
and insurers' behavior.  At the extreme, for health plans that
provide comprehensive benefits and maintain surpluses exceeding state
minimum requirements, the cost differential may be nonexistent. 

The burden of state requirements on large versus small employers
depends on the employers' use of self-funding.  Because large
employers' health plans are predominantly self-funded (and outside
the states' purview) and small employers generally purchase health
coverage from private insurers, the costs associated with state
requirements fall largely on small employers.  But this may be
changing.  Some small employers are also beginning to self-fund,
partly to avoid state regulation and taxation of their health plans. 
Whether this trend will continue, and at what rate, is unclear. 


   NAIC'S COMMENTS
------------------------------------------------------------ Letter :8

NAIC officials provided us with comments on a draft of this report. 
They pointed out that although the costs associated with state
requirements are accurately described, the benefits to plan
participants are addressed only to a limited extent.  We acknowledge
that participants benefit from many state requirements.  As noted
earlier, our ERISA report\21 more comprehensively describes the state
and employer perspectives on the implications of ERISA preemption of
state regulation.  As agreed to with our requester, our primary focus
in this report was to provide additional information on the costs
associated with these state requirements. 

In addition, NAIC officials noted that the report could also address
"the costs that employers and employees might face when covered
through ERISA-governed plans." Indeed, ERISA requirements, such as
reporting, disclosure, and fiduciary responsibilities, may have
associated costs.  As noted in the report, however, these costs are
borne by all ERISA-governed plans, including both fully insured and
self-funded health plans.  Thus, they do not lead to a differential
in costs between fully insured and self-funded health plans in the
way that state requirements applying only to fully insured health
plans may. 

NAIC officials also provided technical comments, which we
incorporated where appropriate. 


--------------------
\21 GAO/HEHS-95-167, July 25, 1995. 


---------------------------------------------------------- Letter :8.1

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 call me on (202) 512-7114 if you or your staff have any
questions about this report.  Other major contributors are listed in
appendix V. 

Sincerely yours,

Jonathan Ratner
Associate Director,
 Health Financing and Systems Issues


STATE HEALTH INSURANCE PREMIUM TAX
RATES
=========================================================== Appendix I

                              Blue Cross and
                      Health     Blue Shield
                    insurers           plans          HMOs
                   (percent)       (percent)     (percent)
--------------  ------------  --------------  ------------
Alabama                1-4\a           1-4\a           1\b
Alaska                   2.7             6\c           2.7
Arizona                    2               2           2\d
Arkansas                 2.5               1         2.5\e
California              2.35               0             0
Colorado                2.25          5ï¿½ per           0\f
                                    enrollee
Connecticut             1.75             2\g        1.75\g
Delaware                   2               0             0
District of             2.25               0             0
 Columbia
Florida                 1.75            1.75             0
Georgia                 2.25            2.25        2.25\h
Hawaii                 4.265               0             0
Idaho             1.4-2.75\i          4ï¿½ per        4ï¿½ per
                                  enrollee\j    enrollee\j
Illinois                 2\k               0             0
Indiana                    2               0             0
Iowa                       2               2         0-2\l
Kansas                 1-2\a           1-2\a       0.5-1\l
Kentucky                 2\m             2\m           2\m
Louisiana           2-2.25\n        2-2.25\n      2-2.25\n
Maine                      2               0             0
Maryland                   2               0           0\o
Massachusetts       2-2.28\p               0             0
Michigan                 0\q               0             0
Minnesota                  2               0             0
Mississippi                3               0             0
Missouri                   2               0             0
Montana                 2.75               0             0
Nebraska             0.5-1\r               1             1
Nevada                   n/a             3.5           3.5
New Hampshire            2\s               0           2\s
New Jersey              1.05          2ï¿½ per             0
                                  subscriber
New Mexico           0.9-3\j         0.9-3\j       0.9-3\j
New York                   1               0             0
North Carolina           1.9             0.5             0
North Dakota            1.75            1.75        1.75\t
Ohio                   2.5\u           2.5\u             0
Oklahoma                2.25            2.25        2.25\v
Oregon                2.25\w               0             0
Pennsylvania               2               0           2\x
Rhode Island               2               0             0
South Carolina          1.25            1.25           0\y
South Dakota             2.5             2.5         2.5\b
Tennessee                2.5             2.5             2
Texas                   1.75               0        1.75\z
Utah                       0               0             0
Vermont                    2               0             0
Virginia                2.25         0.75\aa          0\bb
Washington              2\cc            2\cc          2\cc
West Virginia              3               0             0
Wisconsin                  2               0          0\dd
Wyoming                 0.75            0.75          0.75
----------------------------------------------------------


Note:  Premium taxes expressed as percentage rate assessed on
premiums unless otherwise noted. 

\a Domestic (state-based) insurers pay lower rate. 

\b Credit for HMOs with home office. 

\c Tax based on gross premium less claims paid. 

\d Tax assessed on net charges. 

\e Credit for HMOs with state home office and local salaries and
wages. 

\f Fee collected on the basis of premium volume. 

\g Tax collected on the basis of net direct premiums. 

\h City license fee deducted. 

\i Lower rate applies to insurers investing in state securities. 

\j Per month. 

\k Domestic insurers meeting certain requirements are tax exempt. 

\l HMOs less than 6 years old pay the lower rate. 

\m Additional tax of $0.25 per outpatient pharmaceutical drug if tax
is not paid by pharmacist. 

\n Tax set as $140 for $7,000 or less in premiums received and $225
for each additional $10,000 in premiums received. 

\o HMOs are tax exempt except where HMO benefits are offered by a
for-profit commercial insurer.  HMOs offered by nonprofit insurer are
tax exempt. 

\p Lower rate is paid by insurer if also licensed as life insurance
company.  Preferred provider organizations taxed at 2 percent. 

\q Insurers pay business tax. 

\r Lower rate applies to group plans. 

\s Minimum payment of $200. 

\t HMO credits for exam fees and home office. 

\u Domestic insurers pay lesser of 2.5 percent or franchise tax. 

\v Federal payments (Medicare and Medicaid) to HMOs are tax exempt;
credit if invested in state securities; credit for HMO state home
office. 

\w Domestic insurers pay income tax instead. 

\x Nonprofit or benevolent HMOs are tax exempt. 

\y Taxed as a corporation at 5 percent; also have a license tax. 

\z For first $450,000 of gross reserves collected, HMO tax rate is
0.875 percent.  HMOs receive a credit for Texas investments not to
exceed $2 per enrollee. 

\aa Tax assessed on subscriber fees. 

\bb Pay insurance commission maintenance assessment of no more than
0.1 percent of premium, with a minimum of $300. 

\cc Additional fee assessed for Department of Insurance operations,
not to exceed 0.125 percent of receipts. 

\dd HMOs pay franchise tax of 7.9 percent. 

Source:  National Association of Insurance Commissioners, "Premium
Tax Rate by Line," Compendium of State Laws on Insurance Topics
(Kansas City, Mo.:  NAIC, 1995). 


STATE LIFE AND HEALTH GUARANTY
FUND ASSESSMENTS
========================================================== Appendix II

                                                   Percent
                  Assessment          Actual   offset from
                         cap     assessment,       premium
State              (percent)  1993 (percent)         taxes
--------------  ------------  --------------  ------------
Alabama                    1            0.31         100\a
Alaska                     2            1.48             0
Arizona                    2            0.43         100\b
Arkansas                   2            0.24         100\a
California                 1            0.31             0
Colorado                   1            0.22           0\c
Connecticut                2            0.01            50
Delaware                   2            0.65         100\a
District of                2            0.00         100\d
 Columbia
Florida                    1            1.30           n/a
Georgia                    2            1.32         100\a
Hawaii                     2            3.19         100\a
Idaho                      2            0.63         100\a
Illinois                   2            0.18         100\e
Indiana                    2            0.11         100\a
Iowa                       2            0.19         100\a
Kansas                     2            0.00         100\a
Kentucky                   2            0.36         100\a
Louisiana                  2            0.21         100\a
Maine                      2            0.12           0\c
Maryland                   2            0.30             0
Massachusetts              2            0.41          50\f
Michigan                   2            0.00             0
Minnesota                  2            0.81             0
Mississippi                2            0.68          50\g
Missouri                   2            0.23         100\a
Montana                    2            1.06         100\a
Nebraska                   2            0.34         100\a
Nevada                     2            0.70         100\a
New Hampshire              2            0.00         100\a
New Jersey                 2            0.15          50\h
New Mexico                 2            1.27             0
New York                   2            0.00          80\i
North Carolina             2            0.74         100\a
North Dakota               2            0.65         100\a
Ohio                       2            0.04         100\a
Oklahoma                   2            0.71         100\a
Oregon                     2            0.16         100\a
Pennsylvania               2            0.48         100\a
Rhode Island               3            0.21          50\j
South Carolina             4            0.00         100\a
South Dakota               2            0.49         100\k
Tennessee                  2            0.31         100\l
Texas                      1            0.05         100\m
Utah                       2            0.24         100\a
Vermont                    2            0.05         100\a
Virginia                   2            0.00    See note\n
Washington                 2            0.40         100\a
West Virginia              2            0.44             0
Wisconsin                  2            1.63         100\a
Wyoming                    2            0.94         100\d
----------------------------------------------------------

\a 20 percent for 5 years following assessment. 

\b Offset graduated over several years until 100 percent recovered. 

\c Recoup health guaranty fund assessments by surcharge of premiums. 

\d 10 percent for 10 years following assessment. 

\e 20 percent for 5 years following assessment; offset only allowed
if aggregate assessment of all insurers exceeds $3 million. 

\f 10 percent for 5 years following assessment if aggregate
assessment for all insurers exceeds $3 million. 

\g 25 percent for 2 years following assessment. 

\h 10 percent for 5 years beginning third year after assessment but
no more than 20 percent of tax liability. 

\i Offset effective when aggregate assessments for insurers exceed
$100 million. 

\j 10 percent for 5 years following assessment. 

\k 20 percent for 5 years beginning year after assessment, up to $2
million per year. 

\l 10 percent for 10 years beginning year after assessment or 1
percent of premiums written. 

\m 10 percent for 10 years beginning year after assessment;
assessments for administrative expenses may be subtracted from year's
tax owed. 

\n May offset 0.05 percent of gross premium for insurance written for
account each year. 

Sources:  National Association of Insurance Commissioners, "Life and
Health Guaranty Fund Laws," Compendium of State Laws on Insurance
Topics (Kansas City, Mo.:  NAIC, 1995) and National Organization of
Life and Health Insurance Guaranty Associations, Comparison of
Assessments and Estimated Assessment Capacity (Herndon, Va.:  NOLHGA,
1995). 


STATE ASSESSMENTS FOR HIGH-RISK
POOLS
========================================================= Appendix III

                    Participants (Dec.             Insurer
State                        31, 1994)  assessments (1994)
------------------  ------------------  ------------------
Alaska                             128           $ 600,000
Arkansas                         n/a\a                 n/a
California                    19,353\b                No\c
Colorado                         1,921                No\c
Connecticut                    1,364\d           8,365,979
Florida                          2,387          11,814,627
Illinois                         4,755                  No
Indiana                          4,638          10,717,539
Iowa                             1,341           3,000,000
Kansas                           619\e                   0
Louisiana                          386                No\c
Minnesota                       33,477          44,424,903
Mississippi                        610          See note\f
Missouri                           931           1,934,854
Montana                            268                   0
Nebraska                         3,331           6,200,000
New Mexico                       1,124           3,426,625
North Dakota                     1,422           1,500,000
Oklahoma                         n/a\a                 n/a
Oregon                         4,313\g           3,956,818
South Carolina                   1,264                 n/a
Utah                             710\h                No\c
Washington                       1,307          11,499,657
Wisconsin                       10,864          17,107,689
Wyoming                            200             517,350
----------------------------------------------------------
\a Legislation enacted in 1995. 

\b As of April 1995. 

\c Insurer assessments not used to finance high-risk pool. 

\d Number of policies, not individuals. 

\e As of March 15, 1995. 

\f Each insurer is assessed an amount no more than $1 per policy per
month.  The rate in 1994 was $0.50 per policy per month. 

\g As of June 1995. 

\h As of May 1995. 

Source:  Comprehensive Health Insurance for High-risk Individuals:  A
State-by-State Analysis, Communicating for Agriculture, Inc. 
(Bloomington, Minn.:  1995). 


HEALTH INSURANCE BENEFITS STATES
COMMONLY MANDATE
========================================================== Appendix IV


                                 Cover     Offer     Total
----------------------------  --------  --------  --------
Treatment-related benefits
----------------------------------------------------------
Mammography screening               42         4        46
Alcoholism treatment                23        16        39
Mental illness                      15        16        31
Well child care                     21         4        25
Drug abuse treatment                13        10        23
Pap smear                           17         0        17
Infertility treatment/in            12         2        14
 vitro fertilization
Temporomandibular joint             11         3        14
 disorders
Off-label drug use                  13         0        13
Maternity care                      11         2        13
Breast reconstruction                9         2        11
 following mastectomy

Provider-related benefits
----------------------------------------------------------
Optometrists                        46         1        47
Chiropractors                       43         3        46
Psychologists                       42         0        42
Podiatrists                         38         0        38
Social workers                      26         0        26
Osteopaths                          21         0        21
Nurse midwives                      15         0        15
Physical therapists                 14         0        14
Nurse practitioners                 13         1        14
----------------------------------------------------------
Note:  In some cases, states limit mandates to particular types of
health plans such as HMOs or group insurance plans. 

Source:  NAIC, Compendium of State Laws on Insurance Topics: 
Mandated Benefits (Kansas City, Mo.:  NAIC, 1995). 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

Michael Gutowski, Assistant Director, (202) 512-7128
John Dicken, Senior Evaluator, (202) 512-7135
Carmen Rivera-Lowitt, Senior Evaluator, (202) 512-4342


*** End of document. ***