California Health Insurance Companies Exploit Loophole in AB 1672 denying Guarantee Issue Small Group Health Insurance to Legitimate Companies |
>> return to Articles |
AB 1672 is land mark legislation, passed in 1992 and became effective in 1993. It protects California small employers from unfair insurance company practices. Among the safeguards AB 1672 provides small employers are:
- guarantee issue, meaning all qualified companies must be offered coverage;
- guarantee renewal, meaning that the company can not be cancelled when an employee or dependent gets seriously sick or injured; and,
- rating protection, meaning that prices are regulated where an insurance company sets a standard risk rate and the prices they offer small employers are either 10 percent above or below the standard risk rate.
- Since its passage AB 1672 has done wonders to help make California's health insurance market very competitive and ensure that small groups can obtain health insurance at reasonable cost.
The loophole in AB 1672 is that it only protects existing companies that have had 2 to 50 employees for at least 50 percent of the preceding quarter or calendar year. This is reasonable for newly formed companies which must wait until they have paid employees for this amount of time. A glaring problem is the way California health insurance companies apply this requirement to companies which change their ownership status, e.g., sole proprietorship to Sub S corporation, or Partnership into Corporation. The insurance companies consider these businesses to be "new businesses" and refuse to offer guarantee issue (GI) health insurance to these companies.
What this means is that a company with 2 to 50 employees, with workers compensation, with a perfect history of paying employee taxes, pension plans, and health insurance, will not be able to offer their employees health insurance if an employee or dependent has a history of serious medical condition. Companies with ten years or more of existence, compliance with all State and Federal laws, do not get the protection of AB 1672. The insurance companies take the position that because there is a new tax ID number, it is a new company. Therefore they must wait until they have had a payroll record under the new tax entity for at least 50 percent of the preceding quarter. Effectively, the ongoing business and its employees will not have health insurance during that period.
The health insurance company position that this is a new business and not protected by AB 1672 is even weaker:
- in the case of businesses where there is no ownership change (e.g., the sole proprietor is the 100 percent owner of the Sub S Corp. or the C Corp.);
- when all of the employees of the old company are identical to the new tax entity;
- when the new business is providing the identical service or product;
- where the clients of the old business entity are transferred to the new business entity;
- where the dba name of the old entity is used by the new entity;
- when only new item is the tax ID number, everything else is the same as the original business.
This loophole allows health insurance companies to decline or cancel coverage to companies with sick or injured workers. It is wrong and this loop hole should be fixed. |