Healthcare Legislation

Are Some Brokers Being Forced to Violate California’s Small Group Reform Law?
by Mark Reynolds, RHU

Despite a California law that been in place for almost 15 years, some carriers have started restricting employers’ access to certain health plans. These plans allow employers to reduce their healthcare costs while maintaining the same level of benefits. It is important to note that not all carriers are restricting plans from employers nor do they threaten commission and contracts.

The California legislature adopted A.B. 1672 in 1992, which radically changed the way small group health insurance had been promoted, sold, enrolled, and administered in California. Legislators were responding to rampant industry abuses with skyrocketing rate increases, the inability to change carriers due to existing health problems, and redlining of certain industries.

The intent of the Small Business Health Insurance Reform law is to guarantee that every small employer has access to any group health insurance product that a carrier sells to small employers. The law stopped predatory underwriting and rating practices. The legislature added Section 10705 to the California Insurance Code to regulate insurance carriers and Section 1357.03 to regulate HMOs and health plans. These codes require health plans and insurers to offer all of the small group plans they offer to employer groups and associations to every small employer group. The plans or policies must be fairly and affirmatively marketed and sold to all small employers in the health plan’s or insurer’s service area or geographic region.

MERPs & HRAs Are Under Fire

Since 1996, medical expense reimbursement plans (MERPs) and health reimbursement arrangements (HRAs), have helped small employers to reduce healthcare costs without cutting employee benefits. MERPs and HRAs use high deductible health plans. Employers reimburse a portion of the employee’s healthcare expenses. These plans have saved employers a lot while giving them control over the benefits they want to offer. That’s a powerful tool for brokers who want to help clients save money and provide rich benefits to employees.

Carrier Restrictions and the Threat of Enforcement

Some major carriers are restricting employers’ access to many or all of their plans if the employer intends to use an HRA or MERP. This forces employers to pay higher premiums. Furthermore, some carriers are requiring employers to sign a statement acknowledging that they are aware of these restricted plans when enrolling. Employers that don’t sign the statement may risk having their underwriting held up. But employers that do sign the statement may be committing fraud.

The carriers are also threatening to withhold broker commission or terminate the agent’s contract if their clients use one of the carrier’s restricted plans along with an HRA, MERP, or Section 105 plan. The threat of contract termination is important, particularly since every agent contract in California is under an at-will contract. The agent’s contract can be terminated any time for any reason. It’s understandable why few agents are willing to challenge these carrier business practices and risk their livelihood. However, by going along with the carriers’ restrictions, agents may be violating the California Dept. of Insurance (DOI) Section 10705 or Health and Safety Code 1357.03.

Except for self-funded employers, carrier must fairly and affirmatively offer, market, and sell the following to all small employers in each geographic region in which it provides coverage or benefits – all its benefit plan designs that are sold to, offered through, or sponsored by, small employers or associations that include small employers.
The code further clarifies that no carrier, agent, or broker can encourage or direct small employers to refrain from filing an application for coverage because of the health status, claims experience, industry, occupation, or geographic location within the small employer’s or employee’s approved service area.

Agent Violation of Section 10705 and Section 1357.03

Any carrier or health plan that restricts any of the health plans it offers to small employers would seem to be in conflict with the law. What about the broker who represents that carrier or health plan? These carrier restrictions put agents and brokers in direct violation of Sections 10705 and 1357.03. These codes require agents to provide fair information about all carrier products to small employers. Every agent or broker who represents one or more health carriers to small employers must do the following:
• Advise the small employer of the carrier’s obligation to sell to them any of the benefit plan designs it offers to small employers. Upon request, give the small employer actual rates that would be charged for a given benefit plan design.
• Notify the small employer that the agent or broker will get rate and benefit information on any benefit plan design offered by a carrier for which the agent or broker sells health benefit plans.

What the Carriers are Saying

Carriers legitimize these restrictions by saying that the plans are not priced for self-funding. Carriers also skew their actuarial assumptions. Carriers say they price these plans based on specific utilization and actuarial assumptions. They say that their high deductible health plans were not priced for self-funding, but were priced assuming that the member would be responsible for the entire high deductible. A member would utilize more services if someone else helps them pay the deductible, which would skew actuarial assumptions.

These points may seem reasonable, but there are flaws to this logic. Using actuarial assumptions as a reason to restrict certain plans is not valid since claims experience cannot be a factor in encouraging an employer to refrain from applying for a plan.

The actuarial assumption or utilization statement might be more credible if members were moving from a deductible of $250 to $500. However, these restricted plans typically have deductibles of $1,500 and $2,000.

In the spring of 2007, a Kaiser representative, presenting to the Orange County Health Underwriters, stated that 85% of members will spend less than $1,000 per year. While addressing the Los Angeles Health Underwriters in 2003, WellPoint’s Chairman and CEO Leonard Schaffer said that 68% of Californians will use less than $150 in medical services per year. These companies have some of the best databases and actuaries in the world. If these statements are true, how would an employer-funded HRA affect a $2,400 or $2,700 deductible plan enough to force carriers to threaten brokers?
All HRAs and MERPs are federally sanctioned and regulated benefits under Section 105 of the Internal Revenue Code. Employers can install an HRA even without a health plan in place. If carriers restrict their plans from a federally qualified plan, such as an HRA, what would stop them from restricting a plan that’s being used with a Section 125 FSA? When discussing state reform efforts, CAHU leadership always mentions the “camel’s head under the tent.” Wouldn’t these HRA restrictions be the same camel’s head under the tent?

A Call to Action

Brokers probably assume there is little they can do on their own to respond to this issue. They look bad if they tell their clients that they can’t show a plan because the carrier may not pay their commission. But, if the client found out about a plan through another source, the broker would still look bad. So what can brokers do? With the following steps, brokers can work toward complying with the law and ensuring that their employer groups continue to be treated fairly:
• Contact their local assembly member or state senator through a personal visit, phone call, e-mail, or letter and explain their situation. This matter should resonate with legislators since healthcare reform is at the top of agenda in Sacramento.
• Contact the California Dept. of Insurance, the California Dept. of Managed Healthcare, the attorney general, or the governor’s office. They are probably not aware that carriers are restricting small employers’ access to health plans.
• Ask small group clients to reach out also. Everyone responds when a voter files a complaint.
• Stand up at the next CAHU meeting and ask members to get involved. While members of many local CAHU chapters and CAHU leadership are predominately on the carrier side of the industry, CAHU must take up this issue.

Sustaining Profitability While Providing Solutions to California’s Healthcare Crisis

Employers and employees need our help with the high cost of healthcare. Everyone struggles as benefits are being reduced while premiums increase. HRAs and MERPs should continue to be viable solutions for small employers. Using the transparency of an HRA or MERP to allow members to share healthcare costs with employers will yield better healthcare consumers. Most employers and employees are not mentally or financially ready for an HSA, but the HRA or MERP provides excellent training experiences so members can see how to navigate healthcare choices.
At the same time, I honestly believe that carriers that are offering small group medical plans in California want to deliver the best products and the best price. I believe that they want their plans to be competitive, profitable, and sustainable so that fewer rate increases are required.
I am convinced that small employers are willing to take on more financial responsibility through HRAs and MERPs, which makes that employer a partner with the carrier in financing healthcare. You cannot have a better partner than one that’s willing to put itself at financial risk for the benefit of all involved. We will find a solution to the healthcare crisis in which everyone wins by creating a partnership in which brokers, employers, employees, and carriers are on the same side of the table.
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Mark Reynolds is CEO and president of California based BEN-E-LECT, a third party administrator (TPA), which has been providing solutions to brokers since 1996. A registered health underwriter (RHU), he has played an active leadership role in the industry for years, serving as a founding member of the Inland Empire Association of Health Underwriters and past president of the Health Care Administrators Association (HCAA). For more information call 888-886-7973.