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Journal Issue: Health Care Reform Volume 3 Number 2 Summer/Fall 1993

Guaranteed Coverage with Multiple Insurers: Closing Gaps and Easing Transitions
Kevin H. Haugh Gary J. Claxton

Insurer and Health Plan Practices that AffectAvailability and Continuity of Coverage

Substantial attention has been given in the past several years to structural problems in the health insurance marketplace which limit the ability of certain employers, especially small employers, to obtain and retain health insurance for workers and their family members.22 The practices that have drawn the greatest public and regulatory concern involve the ways insurers underwrite and rate groups. Underwriting is the process insurers use to determine whether or not to provide coverage for an individual or group and on what terms the coverage will be provided. These practices arise because, where the purchase of health insurance is voluntary, insurers are concerned about adverse selection, the tendency for those with the greatest need for health care to seek coverage and to wait until they most need coverage before purchasing it.

The Underwriting Process

To protect themselves from adverse selection, insurers providing coverage in the employer marketplace will review the claims/health experience of the group and, for smaller groups, may investigate the health experience of each prospective insured before insuring the group. Insurers use this information in several ways. Groups with high or frequent claims may be denied coverage, or individuals (employees or dependents) with significant health problems may be excluded from group coverage. Alternatively, coverage may be issued to the group, but coverage for certain illnesses or medical conditions may be excluded. One practice that is quite common among small and large employer plans is the use of preexisting condition limits. That is, health care for certain medical conditions that predate enrollment in the plan (preexisting medical conditions) is not covered for a certain period following enrollment (often 6 or 12 months). In some instances, insurers will permanently exclude coverage for preexisting conditions through what are often referred to as medical exclusionary riders. In other instances, insurers may cover certain preexisting medical conditions but at a lower level of coverage than other conditions. For example, they might require 50% co-insurance for medical conditions associated with preexisting heart problems versus 20% co-insurance for other ailments. Such medical exclusions and limitations can fall on children as well as adults. For example, children with birth defects or chronic conditions, such as congenital heart disease, may be subject to these provisions.

The practice of medical exclusions or limitations does not exist solely within the realm of the small-employer marketplace; similar restrictions may be found in the larger, self-insured employer market.23

The problem of coverage loss as a result of preexisting medical conditions can be much more serious for certain types of workers and families, particularly those who change jobs frequently. For example, coverage loss can be far more frequent among employees of small firms, where job tenure tends to be much shorter. Similarly, the rate of job turnover is far greater within certain industries. One study of 13 high-turnover industries found that, in a given year, these industries hired somewhere between 1.2 to 2.2 times their average number of workers.24 Limited benefits in some instances may also be responsible for high employee turnover. Employers often state that a major reason for offering health benefits is to attract and retain high-quality workers. A company's failure to provide benefits may lead some employees to change jobs once they are able to secure a position that offers health benefits.

Nonmedical Underwriting

An employer may be unable to obtain or retain health coverage for nonmedical reasons. For example, to limit adverse selection, it is common for insurers to require that a minimum percentage of eligible employees participate in a plan. In some instances, insurers require that all eligible employees participate. In other instances, an insurer may (alternatively or in addition) require that the employer make a minimum contribution to the cost of the plan (say 70%). Finally, some insurers may not be willing to cover employers who fall within certain industrial or occupational categories. While there is no uniformity across the insurance industry, a decision not to cover a certain category or group may be based on the perception of its being a high administrative burden or credit risk. For example, certain employers may more often fail to pay or be delinquent in paying their premiums. Some employee groups may be seen as high medical risks, for example, those who wash windows or work in flower shops.25

It is important to note that, over the past decade, health plans have become more and more selective in the types of groups and individuals they are willing to cover. As health care costs have risen and certain health plans have adopted more aggressive underwriting practices, other plans have been forced to either follow suit and/or adopt new ways of setting premiums to remain competitive. Health plans that resist market trends risk being ousted from the insurance business.

The Premium-setting Process

As in underwriting, there is no standard way in which insurers establish their premiums. However, in recent years the trend has been toward more discrete stratifying of group rates. While early health plans often established very broad community rates,26 for many years health plans operating in the small-group market have utilized a range of demographic factors (such as age, gender, and industry) to set rates. One of the more visible practices that has emerged in the small-employer health market in recent years has been the use of health experience or claims experience in setting rates. That is, insurers have moved toward charging healthier groups relatively low (below average) premiums, while charging less healthy groups much higher premiums. These health-dependent premiums are then applied on top of existing, longstanding rating adjustments. The result can be very large differences in rates from one small employer to the next. An employer with sick and/or older employees may face extremely high premiums. In addition, the rates for an employer who already provides coverage can change dramatically from one year to the next because one individual or several individuals become ill or the demographic composition of the group changes. The result of these practices is highly unpredictable rates for small employers, making it extremely difficult for certain groups to retain their coverage. In addition, the burdens associated with these practices can make it even more financially difficult and risky for an employer to contribute to more costly coverage for dependents.

Defining Coverage for Dependents

While employers who make coverage available to employees also customarily make coverage available to their family members, health plans use different rules to derive premiums for the coverage of dependents. For example, in some instances, health plans will offer two rates—an employee-only rate and a family rate (for two or more family members). Other health plans establish three (e.g., individual, couple, and family), four (e.g., individual, individual and child, couple, couple and family), or more rate categories. Establishing more categories for coverage of dependents has the effect of increasing rates for larger family units and reducing rates for smaller families.27 Thus, the premium structure chosen by an employer or established by a health plan can affect the types of families that may or may not elect family coverage.

Job Lock

One of the frequent results of common underwriting and rating practices is the job-lock phenomenon: employees are afraid to change jobs for fear of losing their own health insurance coverage or coverage for their dependents. Families that include a pregnant woman or a chronically ill child can be particularly affected by job lock. As noted earlier, under the new employer's plan, individuals may be excluded altogether from the group's health plan, or coverage for their specific conditions may be limited or excluded. To the extent that health insurance coverage is extended to currently uninsured workers and their dependents, job lock could become an even bigger issue. Job transitions are far more common among workers employed by firms that do not provide health insurance coverage. According to one estimate, 45% of workers in firms not offering health coverage had at least one job transition over a 16-month period. In contrast, only 23% of workers in firms offering coverage had at least one job transition over 16 months.9

The Insurance Reform Response

Over the past several years, certain states have enacted insurance reform legislation to address underwriting and rating practices in the small-employer marketplace. While a number of insurance reform bills have been introduced at the federal level, to date none have passed. The specifics of reforms vary. However, common to most reform proposals are the following elements:


  • Guaranteed Issue. A requirement that insurers offer an established set of benefits to any small-employer group applicant regardless of health status or claims experience of the group or its employees.28
  • Whole Group Coverage. A requirement that insurers accept all full-time employees and their dependents and apply underwriting rules uniformly and fairly across individuals.29
  • Renewability. A requirement that insurers not cancel the coverage of a group of employees except for very limited reasons (such as failure to pay premiums, fraud, or withdrawal of an insurer from the marketplace).
  • Rating Limits. A limitation on how much insurers may vary their rates based on certain rating factors (at a minimum, these limits generally apply to the use of health status, claims experience, and industry).30
  • Continuity of Coverage. A requirement that insurers accept coverage for new groups (or new employees or dependents) without applying limits or exclusions in coverage for preexisting conditions if the person was previously insured.

More than 30 states have passed rating and renewability reforms of varying types. A number of these states have also passed some of the other elements described above (such as the guaranteed issue and continuity provisions).30 Because these reforms have been enacted by states only over the past two to three years, it is too early to assess their impact on availability of health insurance.

Some Limitations of Common Insurance Reform Proposals

Several caveats are necessary for a complete understanding of the implications of many of the insurance reform initiatives passed to date.

First, affordability is the primary barrier to health insurance for families and employers. In fact, many of the practices that legislative reform attempts to address are responses to unchecked cost pressures. Thus, while legislative action may change what practices are allowed, it does little to address the underlying issue of costs and the economic pressures that create undesirable outcomes.

Second, by making health coverage more available to less healthy groups and individuals, these reforms, at least in the short run, will likely increase the average cost of health coverage in the small-employer market.31 Although some less healthy groups with very high premium rates will see their rates fall as a result of the reforms, healthier groups with lower-than-average rates will see their rates rise.32 Whose rates will increase or decrease and by how much, will depend, of course, on the precise details of the rating and other reforms.33 In the long run, the hope is that these reforms will reduce health care expenditures by changing the bases on which health plans compete. In other words, eliminating the opportunity for health plans to compete based on rating and other undesirable practices will force them to compete on the basis of cost effectiveness and quality of service.

Third, these reforms typically apply to health insurance provided to small employers. In part this is because the small-employer market is where some of the most egregious problems and practices exist. However, there are also practical reasons reforms tend to focus on small employers. Many medium-sized employers and most large employers have made the decision to fully or partly self-insure their health benefits.34 With a few exceptions,35 federal law does not allow states to regulate the conduct of self-insured, employer-sponsored health plans.36 As a result, states are not in a position to require employers using such arrangements to comply with reform rules. In addition, while self-insurance is relatively uncommon among small firms today, its use appears to be on the rise. The application of market reforms by states will likely further encourage movement to partly and fully self-insured arrangements by smaller firms. This is because market reform brings with it added costs for certain lower-risk small employers, and these costs may sometimes be avoided through self-insurance.

Fourth, while these reforms will address some of the major continuity-of-coverage problems, they will not necessarily provide adequate continuity of care, particularly if the system moves to more integrated managed care plans. To an employee who changes jobs, changing managed care plans often translates into a change in health care providers. Similarly, to a child with a chronic illness, changing health plans can mean a change in providers, often resulting in disruption of care. These discontinuities in care are largely created by an employer-based system in which health plans are not portable from job to job. The discontinuities and disruptions in health care associated with job change are one reason managed care plans are much less prevalent in the small group market.

Continuity-of-care problems such as these demonstrate the need for and the potential value of more fundamental restructuring in the relationship among health plans, employers, and workers. policy implications section addresses this issue in greater detail.

State and Federal Continuation and Conversion Laws

In addition to the insurance reforms recently enacted by some states, other federal and state laws allow individuals to continue their employer's group coverage for some period beyond termination of employment. Under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA),37 employers with 20 or more employees (whether they are insured or self-insured) are required to allow former employees and their dependents to continue to participate in group coverage by paying for it at 102% of the group premium. COBRA permits continuation of coverage for 18 to 36 months.38

In addition to the continuation of coverage guaranteed by federal law, 40 states provide continuation of group health coverage for employees; 38 states provide continuation for dependents.39 These laws typically apply to all insured group health fall under the 20-employee threshold established by COBRA. However, these laws vary in the length of required continuation period.

Most states (40) also require insurers to allow individuals to convert from group to individual coverage (often once an individual's continuation period has expired). Coverage after conversion can be permanent, but the benefits in some instances are relatively limited. In addition, the conversion process also generally means facing higher nongroup rates. Under both continuation and conversion policies, premiums can be beyond the financial reach of many individuals (particularly during periods where the individual is without a job). According to one study, only 2 in 10 individuals eligible for continuation coverage accept it.40 While some individuals may decline continuation of coverage because they have gained coverage elsewhere, other individuals may decline this coverage because they cannot afford it. Moreover, if benefits are limited, continuation may not be an attractive option, either because of the limitations themselves or because, without certain benefits, coverage may not be worth the cost.

Coordination of Benefits

In families with two workers, it is relatively common for both workers to have coverage, often with both sources covering multiple family members. In situations where family members are covered by more than one policy, health plans apply coordination of benefit (COB) rules. Coordination is designed to prevent overpayment where individuals are covered by two or more policies. The specific goals of coordination can vary.41

In the past, most companies used what is referred to as the gender rule, meaning that the adult male's plan was considered the plan of first resort (primary) for coverage of children. Today, however, the birthday rule has largely superseded the gender rule, meaning that the policy of the parent whose birthday falls earliest in the year is considered primary. In a single parent family or a family in which only one parent has family coverage, it is, of course, that parent's plan which covers the children. If, however, both parents have family coverage, the applicable birthday or gender rule takes precedence for children. For insured group plans, state regulations generally specify which rule is to be used.

However, confusion and gaps often arise where coordination occurs between an insured and self-insured plan or between two self-insured plans. From a business standpoint, firms have an incentive to adopt different COB rules. For example, firms with a predominantly female work force fare better under the gender rule, while the opposite holds true for firms with predominantly male work forces. Disputes often arise over which plan should be primary when, for example, one firm uses the birthday rule and the other uses the gender rule (because both might consider the other as primary). The courts have had to resolve many COB disputes.

Many of the trends in coordination of benefits have been directed at reducing cross-subsidies to employees of other firms. As policies have changed, however, some firms' coordination policies have resulted in outright gaps in coverage. For example, some companies apply what is often referred to as phantom COB; that is, one spouse's employer may agree to coordinate with whatever policy a spouse could, but chose not to, purchase through his or her own employer. The result can be denial of coverage from one plan on the basis that the other plan, which the spouse turned down, would have been primary had he or she enrolled in it. Depending on how such provisions are interpreted, these rules could naturally affect coverage for children as well as adults.41

In short, the varied rules that companies and insurers apply with regard to COB can create disputes over which plan is primary. The consumer can be forced to bear large cost burdens, or claims can go unpaid during periods of dispute. In addition, the practices of self-insured businesses can sometimes create unknown and undesirable gaps or absences in coverage. For insured plans, there are fairly well established and agreed-upon coordination rules; for self-insured plans, such rules are virtually nonexistent.

Limitations that Primarily Affect Children

Many of the limitations and practices discussed to this point can affect adults and children alike. However, certain practices are particularly germane to the coverage of children. Two such areas involve the types of services health plans are or are not required to cover and provisions related to coverage of special populations.

Maternity Care

To date, the federal government has been relatively inactive in defining the content of health benefit plans. However, at least two exceptions to this general federal policy have important implications for the types of health coverage available to children. The first involves the Federal Pregnancy Discrimination Act, which was passed in 1978.42 This law amended the Civil Rights Act of 1964 to require that employers with 16 or more employees include coverage for maternity care “to the same extent” that other health benefits were covered. Prior to this time, it was very common for insurers to exclude or severely limit coverage for maternity care.43 Because the law applies to employers, it is applicable to insured as well as self-insured health benefit plans. Largely for this reason, employer coverage of some form of maternity care is nearly universal. However, the law does not apply to small employers. Furthermore, it excludes non-employer-based health plans and can allow exclusions for coverage of pregnancy-related conditions of teenage dependents of insured employees.44 Some 33 states mandate the provision of coverage for maternity care under group policies and, in doing so, capture small firms that fall under the federal size threshold.39 Again, however, the precise provisions of these laws differ from state to state.


While all 50 states have laws requiring that insured plans automatically extend coverage to newborns,39 anecdotal evidence suggests that some self-insured employers are limiting coverage for sick newborns, where premature birth and complications can produce enormous costs.

Preventive Services

The federal HMO Act of 1973 is a second major area where the federal government clearly specified health benefits applicable to children. This law, which outlines the criteria HMOs must meet to become federally qualified,45 includes requirements that plans cover a range of preventive services, some of which are specifically targeted at children. For example, federally qualified HMOs must cover well-child care, eye, and ear exams for children, and pediatric immunizations.46

In addition to federal laws applicable to HMOs, a number of states have their own benefit regulations for HMOs, whether they are federally qualified or not. Often these regulations include child-related preventive service requirements. A number of states have also passed benefit and provider mandates which apply to all insured health plans. For example, 14 states require that insured plans either offer or provide coverage for well-child care. Some states have mandated coverage for other specific child-related services, such as prenatal care.47

The Extent of Coverage

While federal and state action has been taken to promote coverage of child-related health benefits, this action has been spotty at best. For example, while 97% of employment-based enrollees in staff or group model HMOs have coverage for well-child care, only 39% of enrollees in conventional health plans have such coverage. Other forms of coverage show similar differences. While 99% of participants in staff and group model HMOs have coverage for child immunizations, only 47% of participants in conventional plans have such coverage.19 Table 2 provides data on the extent of coverage for a range of services.

Dependent Students and Adopted Children>

Historically, health plans would often terminate coverage for children once they reached the age of 18 or 21. Children who attended college or pursued postsecondary education often lost coverage when they left home. In recent years, it has become more common for health plans to cover dependent children while they are students (up to a certain age). In addition, seven states mandate that insurers extend coverage for dependent students. Adopted children have also experienced some gaps in coverage. Some companies do not provide immediate coverage for adopted children. Anecdotal evidence suggests that coverage gaps for adopted children can occur when these children are subjected to limits on coverage or waiting periods as a result of preexisting conditions. Thirty-one states now require that insurance coverage be extended to adopted children.39

Children of Divorced Families

Divorce can result in the loss of health coverage for children. Because the male often carries the health insurance coverage, divorce can cause a loss of coverage for the spouse as well as the children. It is common for court divorce settlements to require that one spouse or the other take financial responsibility for providing health coverage for dependents. However, in some instances this responsibility may fall on the spouse who does not already have insurance. To the extent that these spouses may be unable to acquire coverage for themselves, they may be unable to obtain affordable coverage for their dependents. Situations of this kind create gaps in coverage for children.

While it is customary for insurers to cover dependents whether or not they live with their parent, some insurer contracts (or employers) specify that a child must live with the parent to obtain coverage. Because health plans differ in what rules they follow in coverage of dependents when custody is awarded to one spouse or the other, gaps in coverage can occur.

The movement to managed care plans can create other unique coverage problems for children of divorced parents. Divorced parents may live in different geographic areas. A parent who enrolls in a managed care plan in one area and wishes or is required to provide coverage for children in another area may have difficulty doing so unless, by chance, the plan's network includes providers in both areas.

Where it does not, a parent may be faced with either not enrolling in a managed care plan (to the extent that this is an option) or purchasing more costly, nongroup family coverage for dependents. In an environment where managed care plans are the only form of coverage, the coverage rules and established premium rate policies become critical.