California Small Group Health Insurance Information

Learn about topics relating to small group health insurance in California:

What’s a “Management Carve-Out?”
What’s a “Stand Along” or “Wrap Around” Plan?
What’s an “Employee Elect” or “Mix and Match” Plan?
What’s an “Employee Buy Up”?
How Do Insurance Companies Price Group Health Insurance?
What does “Participation” mean?
What does Employer and Employee “Contribution” Mean?
What’s “Adverse Selection”?
How does the State of California regulate small group health insurance?
What’s a “Purchasing Pool” and How Does it Give Employees Freedom of Choice?
What does “Stop Loss” mean?

 

What’s a “Management Carve-Out?”

Sometimes companies may want to cover only a select class of employee (e.g., managers, salaried employees, shop workers) in their group health insurance plan. This allows companies to get the benefits of a group plan (see tax incentives) while only covering some of their employees. For whatever reason businesses find this necessary (usually to save money) the insurance companies allow this – with some limitations. The most important limitation is that the insurance companies do not guarantee that they will accept such a plan. The law which governs small group health insurance, AB 1672 (below), allows insurance companies to decline coverage for carve-outs. The reason: the insurance companies want to prevent against only the sick people in a company from enrolling in the health plan (see Adverse Selection, below). So, if the select class you want to carve out is relatively healthy, a “carve out” may be a good strategy to get key employees health insurance and limit the company’s total expenses. “Stand Along” or “Wrap Around” Plans (below) are another way to treat select classes of employees differently.

 

What’s a “Stand Along” or “Wrap Around” Plan?

Some insurance companies allow you to offer their health plan to employees along with the health plan of a competing company. For example, some employees may enroll in a Blue Cross PPO plan while other employees enroll in a Kaiser HMO plan. The two plans “stand along” one another. In this example, if only a few managers are able to enroll in the Blue Cross PPO plan, then the Kaiser HMO plan would “wrap around” the Blue Cross PPO plan. Usually, the insurance companies have minimum participation requirements (see below), which specify that a certain number or percentage of total employees must enroll in each plan.

 

What’s an “Employee Elect” or “Mix and Match” Plan?

Some insurance companies allow more than one plan type within a single company. This means that a company can offer their employees the choice between a PPO plan and an HMO plan. Often companies will pay for the less expensive HMO plan for the employee and allow him or her to “buy up” (see below) and purchase the PPO plan. When two plan types (PPO, HMO) are offered the employees “mix and match” the plan that best fits their needs and pocket book. The most recent innovation in the California market for small group (2 – 50 employees) health insurance is Blue Cross of California’s “Employee Elect.” Here, an employee can select any one of eight different health insurance plans: from very expensive low co-payment PPO plans to less expensive co-payment PPO plans, to any one of three different HMO plans. This gives the employee more choice and while staying with only one insurance company. A Purchasing Pool (below) is another type of plan design that gives employees freedom of choice.

 

What’s an “Employee Buy Up”?

This is when an employer offers to pay for a basic health plan and allows the employees to purchase a more expensive health insurance plan. The employee pays for the more expensive plan, or “buys up” to the richer benefit plan. Giving employees this freedom empowers the employees to exercise their own preference for health insurance and saves the employer money. Further, the employees can contribute on a pre-tax basis when a company has set up a Section 125 Plan.

 

How Do Insurance Companies Price Group Health Insurance?

There are many criteria the insurance companies use to determine the price of a health plan: the age and health status of the proposed insured, the number of employees, the county in which the employees live, and, the benefits desired. So, if you have lots of young, healthy employees it’s less expensive than if you have a few old, ill employees. It makes sense: the latter group will likely seek more medical attention than the former. If your company has 2-50 employees however, the insurance companies can only charge the unhealthy group 10 percent more than the standard rate for the health insurance. (See Price Limits, below.)

Also, in terms of the benefits, the more the insurance company pays when you get sick, the more expensive the health plan. For example, a no-deductible PPO plan that pays 90 percent until a “stop-loss” of $1,500 will cost significantly more on a monthly basis than a PPO plan with a $2,250 deductible. In the latter case, the insurance company only pays after a patient has paid $2,250 per calendar year in medical care. This type of plan will cost less on a monthly basis than if there were no deductible.

 

What does “Participation” mean?

Generally, group health insurance offered through an employer is less expensive and has greater benefits than individual health insurance coverage. The insurance companies have figured out that as a group there will be more healthy people than unhealthy people and the monthly premium paid by the group will likely offset the cost of the few sick employees. This stems from the fact that roughly 20 percent of the people insured will account for 80 percent of the money spent on health care. The potential loss for any one person is so great that it makes financial sense to pay a relatively small amount monthly to protect against possible financial ruin with no health insurance. If only the sick people were to enroll in a health insurance plan (something referred to as “adverse selection”, there would not be enough premium revenue to offset the cost of the medical care. That’s why the insurance companies require a minimum “participation” in the health plan – usually 75 percent of the eligible employees.

 

What does Employer and Employee “Contribution” Mean?

The contribution amount refers to the percentage of the employee premium paid by the employer. All of the insurance companies require an employer to make a minimum contribution, ranging from 50 percent to 75 percent. The minimum employer contribution is required because this also prevents against “adverse selection” (see below) where only sick people enroll. Insurance companies give price concessions to groups who insure their employees. If the employee were to pay 100 percent of the premium, probably only those most likely to use the insurance would enroll. This would lead to higher losses incurred than generated by the insurance premium paid. Without some limitations, such as the minimum employer contribution and the participation requirements (above) the insurance companies would go out of business.

 

What’s “Adverse Selection”?

This is when, for whatever reason, a plan favors enrolling people with a higher likelihood of needing medical attention. For example, if a plan allowed people to enroll at any time, most people would only enroll when they needed to go see a doctor. Then, they would drop out of the plan when they were healthy and re-enroll the next time they got sick. Obviously, this would save consumers a lot of money but there is no way the insurance companies could stay in business if only sick people enrolled. Such a system would be similar to buying car insurance after you’ve had an accident: great for the consumer, foolish for the insurance company.
This would destroy the value of health insurance, which is to protect people from the financial ruin that could result from contracting a serious illness or injury. Insurance companies require that people applying for individual and family coverage enroll while they are healthy to prevent “adverse selection.” For group coverage, insurance companies limit enrollment to follow the group’s waiting period for newly hired employees, or at an annual open enrollment period.

 

What are the Government Requirements for Insurance Companies to Guarantee Coverage and Limit Prices for Small Groups in California?

In 1992, the California State Legislature passed Assembly Bill 1672. This far-reaching legislation now regulates health insurance for companies in California that have 2 to 50 employees. The major changes affected two areas: guaranteed insurance coverage; and, mandatory price limits.

Guaranteed Insurance Coverage: Specifically, AB 1672 states that no matter what the health condition of the employees and dependents applying for coverage, the insurance companies must offer group health insurance coverage to a company in California with 2 – 50 employees. It used to be that insurance companies would cancel coverage if there were a history of bad health in a small group. Now, a sole-proprietor with diabetes, cancer, or any other pre-existing health problem, can get health insurance – as long as there is at least one employee in the company.

Mandatory Price Limits: Not only do insurance companies have to offer health insurance to small group employers with 2 – 50 employees, but they also have to limit the price range that they can charge different small groups for the health insurance. According to AB 1672, insurance companies must use age-based rates (e.g., under age 30, 30-39 years old, etc.) and the insurance companies must establish a Risk Adjustment Factor (RAF) for each county they serve. Further, if everyone is healthy and the insurance company wants to offer lower rates to a company with 2-50 employees, the maximum reduction is 10 percent below the standard RAF. Conversely, if there are very sick people in a group, the maximum price the insurance companies can charge is 10 percent above the standard RAF. The insurance companies set their own RAF and they must offer all small groups health insurance at plus or minus 10 percent of the standard 1.00 RAF.

 

What’s a “Purchasing Pool” and How Does it Give Employees Freedom of Choice?

The California State Legislature created these plans in 1992 as part of the AB 1672 legislation (see above). The purchasing pool is really a single administrator for many health insurance plans. The purchasing pool offers three to five standard plans (e.g., standard and deluxe HMO plans, and two POS plans) and nine to ten insurance companies participate in the purchasing pool. Five plans times ten insurance companies give employees 50 plans to choose from. Originally, the State of California organized a purchasing pool for small group (2 to 50 employees) health insurance. The Health Insurance Plan of California (HIPC) was the name of the original State-run plan. In 1998 the State of California sold the HIPC and it became PAC Advantage. A privately organized purchasing pool called California Choice, also offers health insurance coverage to small group employers in California. Some employers love giving their employees so much freedom, other employers find them too complicated and confusing. Also, because the purchasing pools offer employees so many choices, it is difficult for an employer to accurately estimate the company’s cost for providing health insurance before the employees select a plan. One solution to this complexity is for employers to offer to pay for the least expensive plan offered and for the employee to pay any increase.

 

What does “Stop Loss” mean?

People purchase health insurance to protect themselves from financial ruin. Cancer, spinal injuries, or heart disease are just a few of the many terrible things that can happen to us. Fighting these and all other diseases and/or accident that might strike is extremely expensive. As an example, in just the last few years, insurance companies have paid over $150,000 for each of three different clients of Professional Benefits & Insurance Services. These clients were protected by the “stop loss” provisions of their health insurance plans. Once the patient reached the stop loss limit, usually $2,000 in a calendar year, the health insurance plan paid 100 percent of the cost for medical care. Without the out-of-pocket maximum provision, even people who purchased health insurance could face financial ruin. Most PPO plans require a co-payment of from 10 to 40 percent of the medical bill. Ten to forty percent of $150,000 is $15,000 to $60,000 – a huge amount of money. The out-of-pocket maximum limits an insured person’s liability.

 

Learn more about Small Group Health Insurance in California:

California Small Group Eligibility
Myth Busters: Employee Participation and Employer Contribution

Get a California small group health insurance plan quote.