Cost and Coverage: The Impact of Implementing Various State Health Care Reform Proposals Nationally. Group versus Non-group Coverage


As of the writing of this analysis, it is unclear how extending mandatory Section 125 plans to employees for the purchase of health insurance coverage on the individual (non-group) market fits with existing state regulations of the insurance market (Lewin, 2008).  Whether or not the employee is enrolling in group versus non-group coverage is an important distinction, because insurers offering group plans through employers are required to follow a more stringent set of regulations than for non-group plans; group plan regulations provide significantly more protections for enrollees than non-group plans.  For example, group plans cannot deny coverage to employees, cannot charge higher premiums based on health status, and are limited in applying pre-existing condition exclusion periods.

Recently states have expressed interest in either allowing or requiring employers to establish Section 125 plans, and also allowing contributions from employers toward their employees’ health insurance premiums for policies obtained through the individual market.  This sort of arrangement is perceived as promoting health insurance coverage for employed individuals by reducing their out-of-pocket cost as a result of an employer contribution.  At the same time, while employers may be willing to provide a contribution to coverage for their workers, offering health insurance as a benefit may be prohibitively expensive.  Therefore, allowing employers to establish Section 125 plans for the purchase of coverage on the individual market, and in some cases making a contribution that an employee can use towards purchasing coverage, is thought to be a potential model for expanding coverage to the uninsured by making the purchase of health insurance more affordable.

There is no inherent conflict with state laws that allow employees to enroll in non-group coverage when there is an employer Section 125 plan.  However, if the employer would like to make a contribution to that coverage then the law becomes less clear.  Because of federal laws and regulations governing what constitutes group coverage, it is unclear if this arrangement would be legally permissible.  While the employer would not be offering coverage through a group plan, the law has been interpreted such that it is generally understood that if an individual is enrolled in health insurance coverage that is being paid for in part or in full through a contribution from an employer, then it is considered group coverage (Department of Health & Human Services Health Care Financing Administration, 2000).  As a result, states are concerned that insurers will be reluctant to sell health insurance policies to individuals who are seeking coverage on the individual market using funds from an employer to pay for the premium.  Insurers would be apprehensive about extending coverage to these individuals because they must abide by group market regulations that are more stringent than individual market regulations.

Federal and state laws and regulations would need to be enhanced or clarified in order for employer contributions made through this arrangement to be used toward employee insurance purchases on the individual market.  In the meantime, one state, Massachusetts, has merged their individual and group markets as part of their health reform initiative.  In addition, coverage obtained by individuals through the Commonwealth Connector, an independent state agency that assists residents in identifying and enrolling in heath insurance, is considered group coverage, allowing employers to make contributions to their employees’ premiums without having to offer and administer a health insurance benefit themselves.

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