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Laws Related to Health Insurance
 California Small Group Law AB1672
COBRA and CalCOBRA
Employee Retirement Income Security Act of 1974 (ERISA)
Health Insurance Portability and Accountability Act (HIPAA)
California Mental Health Parity Law AB88
There is no law requiring employers to offer employees or their dependents medical insurance. If you do offer coverage, however, you will be subject to many rules and regulations—the most important of which we explain at this site.
There are several federal and state laws that govern various aspects of how businesses must handle insurance issues. Which laws apply to you depends on how many employees you have and the type of coverage you provide.
California Small Group Law AB1672
Type of law: State.
Who's affected: Small employers in California, defined as businesses with 2 to 50 employees. (Technically the law applies not to employers themselves, but to the insurance carriers that sell small group health coverage.)
What it does: If you are a small employer in California with 2 to 50 employees, an insurer cannot deny you group medical coverage based on the health status of your employees, and premiums can only be slightly higher than average if employees have health problems. The law's key provisions are:
- Guaranteed issue and renewal of small group policies,
- Rules on small group rates,
- Limitations on pre-existing condition exclusions, and
- Requirement that plans and brokers provide fair information about all products.
The requirements apply whenever an employer pays directly for any portion, however small, of an employee's coverage.
Guaranteed Issue and Renewal
Every small employer has the right to buy any health insurance "product" sold by a health plan to small employers. Think of a "product" as a package containing a list of benefits (what's covered) and a type of service delivery (for example, HMO or PPO). This is what's known as "guaranteed issue."
"Guaranteed renewal" means that a health plan may not cancel a small group's coverage just because one or more enrollees got very sick and generated high health plan costs. A plan may cancel coverage for fraud or failure to pay premiums only.
Rating Protections
No law sets rates, nor requires rates to be approved by state regulators. California law does limit a health plan's ability to charge low rates to groups whose members are all in good health, and high rates to groups that include sicker individuals. These rating protections operate by basing premium calculations on a "standard" rate that every health plan develops according to certain allowable factors. Plans must set actual premiums no more than 10 percent above or below the standard rate. This creates a "rate band" that allows the health plan to adjust employer rates for risk factors such as previous use of health services or industry type.
The law does not restrict health plans' average annual premium increases, but does restrict group premium increases due to changes in health status or other risk factors that would be above and beyond the overall average premium increase. Health plans may not increase the Risk Adjustment Factor (RAF) more than 0.10 (10 percent) in a single year. For example, a group that was assigned a RAF of 0.9 in the first year could receive a RAF no higher than 1.0 in the second year.
Limitations on Pre-Existing Condition Exclusions
California law AB1672 establishes guidelines on how pre-existing conditions may be treated by insurers. This law benefits both California small employers and employees as follows:
- Benefits for small employers. Before AB1672 was passed in 1992, insurers could deny coverage to a small employer or charge significantly higher rates simply because one or more employees had a pre-existing condition. Today, insurers cannot deny coverage to a small employer on the basis of pre-existing conditions. As described in the Rating Protections section above, an insurer may not charge a small employer more than 110 percent of its standard premium.
- Benefits for employees. Certain plans require new enrollees to be covered for a period of time before paying benefits for a pre-existing condition. This period is called a "pre-existing condition waiting period" and may extend up to 12 months. With AB1672, new small group enrollees whose medical coverage ends within 62 days of becoming eligible for a new medical plan can receive "credit" toward meeting the waiting period. This ability to apply "creditable coverage" from one plan to the next is often referred to as "portability."
Access to Information
Beyond the general rules of guaranteed issue and renewal, insurers—as well as agents or brokers—are required to follow certain rules designed to ensure that you have access to the whole range of an insurer's product offerings, with accurate and understandable information about your options and rights. In order to facilitate comparison-shopping, the law generally requires insurers to produce and provide various materials, including a summary brochure of all of its benefit plan designs.
Agents and brokers are required to advise you of many of your rights, including the availability of the summary brochure. You also must be notified about standard employee risk rates and the impact of the risk adjustment factor in determining actual premiums. Once an actual premium is quoted, you have 30 days to exercise the right to buy at that rate.
Insurers, as well as agents and brokers, are prohibited from refusing or discouraging an application based on risk factors (such as health status, claims history, industry, occupation, or geographic location). Plans and agents are also prohibited from trying to steer "bad risks" to particular insurers or products.
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In the tool box, see "Regulatory Information" for more information about California's small group regulation. |
COBRA and CalCOBRA
Type of law: COBRA is a federal law. CalCOBRA is California state law.
Who's affected: If they offer group coverage, employers with at least 20 employees must comply with federal COBRA, and employers with 2 to 19 employees must comply with CalCOBRA.
What it does: The federal Consolidated Omnibus Budget Reconciliation Act (COBRA) requires you to continue offering group medical coverage for a certain amount of time (generally 18 months) to qualified beneficiaries after they lose medical coverage because of a qualifying event. A qualified beneficiary is an employee or an employee's spouse or dependent child who, on the day before a qualified event, is covered by the employer's group medical coverage. A covered employee's newborn child or child placed for adoption with the covered employee during continuation period is also a qualified beneficiary. Qualifying events include: termination of a covered employee's employment, for any reason except gross misconduct, or reduction in the number of employee's work hours to fewer than that required for plan participation; covered employee dies, divorces, or legally separates; covered employee no longer is eligible for group coverage because he or she becomes covered by Medicare; or covered dependent child is no longer eligible under the terms of your group medical coverage. CalCOBRA offers the same continuation rights as COBRA.
Under COBRA, you may charge qualified beneficiaries up to 102 percent of the actual coverage cost. If CalCOBRA applies, you may charge 110 percent of the actual coverage cost. During months 19 to 29, if continuation is extended due to disability, you may charge 150 percent.
What you need to do: If you provide group coverage, you must offer COBRA or CalCOBRA, depending on your group size (see above). In addition:
- You must notify the plan administrator (or insurer if the insurer is the plan administrator) within 30 days of the qualifying event.
- An employee or qualified beneficiary has 60 days to notify the plan administrator of a divorce or legal separation or of a child's loss of dependent status under the terms of the plan. If the employee fails to notify the plan administrator the employer is not required to offer continuation coverage to the qualified beneficiary.
- Plan administrator must notify the qualifying beneficiaries in writing of their COBRA rights within 14 days from the date the plan administrator is notified of the qualifying event.
- Plan administrator must provide the qualified beneficiaries with a COBRA election form explaining the time in which continuation coverage elections must be made within 60 days of the later of the date you notify them of their continuation rights, or when coverage ends and whether to send the COBRA premium payment to the employer or the COBRA administrator. Purchasing pools, such as PacAdvantage or CalChoice, bill the COBRA beneficiary directly.
- You must notify the qualifying beneficiaries about a change in insurers, if the plan covers them under COBRA. You must let them know how and when to enroll in the new plan. Qualified beneficiaries can participate in open enrollment in the same way as active employees.
Employee Retirement Income Security Act of 1974 (ERISA)
Type of law: Federal.
Who's affected: All private sector employers or sponsors (such as labor trusts or associations) that provide group health benefits. Health benefit plans offered by state and local governments or churches are not subject to ERISA.
What it does: ERISA governs many employee benefit plan aspects, including how employers must provide plan information to employees. ERISA also governs the claims and appeals procedures for qualified plans.
What you need to do: You must provide all covered employees with a Summary Plan Description that describes the plan in understandable terms, how benefits are paid, when benefits are not paid, and employees' rights and responsibilities. You must also provide a notice to all employees when you make a significant change to your plan. This notice is called a Summary of Material Modifications.
Health Insurance Portability and Accountability Act (HIPAA)
Type of law: Federal and state.
Who's affected: Federal law governs employers with two or more employees. California law governs employers with one or more employees.
What it does: HIPAA protects an employee's or a dependent's right to group medical coverage in case of job change or job loss.
What you need to do: If your medical plan has a pre-existing condition clause, make sure new employees provide evidence of creditable coverage—if any was obtained from their previous employer—also known as a HIPAA certificate. You will need to notify the new participant of the length of the applicable pre-existing condition exclusion after creditable coverage, if any. When coverage ends for an employee or family member, the insurer must send a HIPAA certificate to the former participant. The certificate sometimes looks like a letter or a statement of benefits.
California Mental Health Parity Law AB 88 Type of law: State.
Who's affected: All California employers, if they purchase fully insured coverage.
What it does: For certain severe mental health conditions (including schizophrenia, bipolar disorder, major depressive disorders, and several others) or serious emotional disturbance of a child, health plans may not impose limitations or exclusions on mental health benefits that exceed those imposed on medical conditions in general. Plans may not impose higher copayments or deductibles for these conditions, nor may they impose different maximum lifetime benefits (caps) for these conditions. If the plan covers prescription drugs, prescription drugs for these conditions must also be covered.
What you need to do: You may want to let your employees know that this law exists, and that they have the following rights:
- To a second opinion regarding diagnosis and treatment;
- To file a grievance through their health plan and then follow up through the Department of Managed Health Care, if they believe that medically necessary care has been denied, delayed, or modified.
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