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Debate Starts To Percolate Over Voluntary Major Medical

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U.S. workers can buy dental insurance, critical illness insurance, limited-benefit medical insurance and even pet health insurance through the worksite.

So far, however, regulatory barriers and liability concerns have kept individual major medical insurance off the menu at most employers, including those that offer no group coverage.

Many consumer groups, insurers and benefits producers say restricting or banning voluntary major medical insurance programs is vital to protecting the small group health insurance market from adverse selection.

“If the regulations make it easy and tax-efficient for employees to purchase individual policies through pre-tax payroll deduction, all of the healthy employees would do so leaving only the sick in the employer’s group plan,” says Brian Urban, a financial planner in the Omaha, Neb., office of AXA Advisors. “This would lead to a death spiral of the group plan.”

Some brokers, economists and others would like to see the government give worksite major medical plans a chance.

J.P. Wieske, state affairs director at the Council for Affordable Health Insurance, Arlington, Va., argues in a recent CAHI commentary that the government should let workers escape from the damage that ill-conceived reforms have done to the small group market.

The individual market “still manages to function pretty well in most states, providing lots of policies and a wide range of policies,” Wieske writes.

Officials trying to evaluate the issue from a neutral perspective say they are not sure how to do so.

Officials serving on a Maryland Health Care Commission reported in 2004 that it could find virtually no data on “list bill” arrangements, the most common vehicle for making individual health coverage available at the worksite.

“It is challenging to conclusively determine if there are any impacts, either positive or negative, of these list-billing arrangements,” Maryland officials write.

To many employers, the idea of simply giving employees cash and letting them buy their own coverage seems to be an obvious response to rising group health prices.

When United Benefit Advisors L.L.C., Indianapolis, a broker consortium, commissioned a survey of 1,094 employers with fewer than 1,000 employees, the survey team asked the employers about their views on likely future trends.

The prediction that “costs will shift more to employees” came in first, but the second-most popular prediction was that the group health market will see “a move to individual coverage coupled with health savings accounts or health reimbursement accounts.”

Workers have been using pre-tax contributions to Section 125 plans to buy individual life and disability insurance through the worksite for decades, and workers also can buy hospital indemnity or limited-benefit “mini med” plans through the worksite, often on a guaranteed issue or simplified underwriting basis. Hospital indemnity products account for about 15% of worksite supplemental insurance sales, according to Eastbridge Consulting Group Inc., Avon, Conn.

United Group Programs Inc., Boca Raton, Fla., for example, sells a “mini med” plan that offers a $100,000 annual maximum. That limit is $25,000 higher than the annual maximum for the California major medical risk pool.

Buying true group coverage may be more efficient than buying individual coverage through the worksite, and some consumer groups criticize the quality of typical individual health insurance plans.

Jennifer Wenke, a Fort Myers, Fla., health insurance agent who is president of the Southwest Florida Association of Health Underwriters, says she sees many practical obstacles to running voluntary health insurance programs.

“Not every individual will be approved,” Wenke says. “Many will be declined or ridered due to medical history, or have surcharge due to tobacco use. This results in some employees being able to access medical insurance, and some not.”

The employees who do qualify for individual coverage could end up facing large rate increases once rate guarantee periods expire, Wenke says.

But health policy experts interviewed say the main reason voluntary mini med plans are widely available and voluntary major medical plans are not is the Health Insurance Portability and Accountability Act of 1996.

The authors of HIPAA decided to require insurers to issue coverage to any small group and renew coverage for any small group, no matter how bad that group’s experience might be.

In theory, insurers could develop individual worksite health insurance products that would meet the HIPAA small group requirements. In the real world, the high cost of complying with HIPAA gives small employers with young, healthy employees a financial incentive to buy ordinary individual products that are not subject to the HIPAA requirements, producers interviewed say.

The federal government has tried to counteract the pressure for anti-selection by creating a broad, flexible definition of the term “small group.”

An “employer need not be a party to the insurance policy, or arrange or pay for it directly, in order for its coverage to be considered group health plan coverage,” officials at the agency now known as the Centers for Medicare & Medicaid Services write in a November 2000 bulletin. “A determination of whether there is a group health plan depends upon the particular facts and circumstances surrounding the employer’s involvement.”

The CMS opinion cites Massachusetts Casualty Insurance Company vs. Reynolds, a 1997 6th Circuit Appeals Court decision that found that a group of individual policies constituted an employee welfare benefit plan, and O’Brien vs. Mutual of Omaha Insurance Company, a 1999 Louisiana district court case in which the judge ruled that an individual policy purchased by an employee was not part of an employee welfare benefit plan because the employer had not established or maintained a plan.

For agents and brokers who want to sell individual health insurance through the worksite, “the rules aren’t very clear-cut,” says Jessica Waltman, a vice president at the National Association of Health Underwriters, Arlington, Va.

Insurers such as Health Care Service Corp., Chicago, the parent of several Blue Cross and Blue Shield plans, and units of UnitedHealth Group Inc., Minnetonka, Minn., and Assurant Inc., New York, have tried to cope with HIPAA restrictions by offering list-bill programs.

An insurer can list bill by sending an employer a list of workers who have agreed to buy coverage from it. The employer or the employer’s benefit plan administrator simply forwards payments from the workers named on the list bill to the insurer.

Some states explicitly allow list-bill arrangements.

In 2002, South Carolina insurance regulators said employers there can offer list-billing without complying with small group health plan rules if they do not pay any portion of the premiums, do not reimburse employees for any portion of the premiums, and do not let workers use cash from a Section 125 plan or other tax-advantaged plan to pay the premiums.

Texas and Kentucky regulators recently put out bulletins suggesting that they may apply group health requirements to list-bill arrangements if workers use Section 125 plan funds to pay the premiums, or even if employers simply give employees cash and encourage them to use the cash to buy individual health coverage.

Texas regulators began thinking about list-billing when they found a website encouraging employers to let workers use health reimbursement arrangement funds to buy individual health coverage through list-bill arrangements, according to Jennifer Ahrens, associate commissioner for life, health and licensing at the Texas Department of Insurance.

Insurers and producers also have cooperated with the Kentucky department, says Julie Mix McPeak, executive director of the Kentucky Office of Insurance.

McPeak says list-billing arrangements can cause problems for the insurance market as a whole: Kentucky regulators took an interest in list-billing when the state’s high risk pool complained that some small employers seemed to be shutting down group plans and dumping the employees with health problems into the risk pool.

Maryland lawmakers considered a bill authorizing list-billing arrangements in 2003, but the sponsors withdrew the bill after brokers, several health insurers and consumer groups spoke against the bill.

If employers, insurers and producers decide that they do want to make voluntary major medical insurance more widely available, “Congress needs to clarify that a list billing arrangement is not defined as group insurance,” Wieske writes in his commentary on list billing.

In addition, “Congress needs to clarify that any part of the premium paid by the employee through a Section 125 plan could be excluded from income – just as it is for employer-provided coverage in the small and large group market,” Wieske writes.

Jeff Smedsrud, chief strategic development officer at Independence Holding Company, Stamford, Conn., a player in the mini med market, likes the idea of easing barriers to voluntary health insurance.

“I don’t think it’s necessarily a bad idea for employers to encourage employees to take care of their own health care,” Smedsrud says. “There’s a lot of marketplace interest in it.”

Employer involvement in the U.S. health finance system is a historical anomaly, Smedsrud says.

Mel Schlesinger, president of the Rainmakers Group Inc., Winston-Salem, N.C., says he set up many list-bill arrangements in the early 1990s.

For some workers at employers that choose not to offer traditional group major medical coverage, list-bill major medical could be a good alternative to mini med plans, Schlesinger says.

When state legislatures and regulators shut out list-bill arrangements, “I think they are making a mistake,” Schlesinger says.