CONTRACT PROVISIONS : Benefit Schedules

CONTRACT PROVISIONS
The provisions contained in group term life insurance contracts are more uniform than those found in other types of group insurance. Much of this uniformity is a result of the adoption by most states of the Group Life Insurance Standard Provisions Model Bill developed by the National Association of Insurance Commissioners (NAIC). This bill, coupled with the insurance industry's attempts at uniformity, has resulted in provisions that are virtually identical among insurance companies. While the following contract provisions represent the norm and are consistent with the practices of most insurance companies, some states may require slightly different provisions, and some companies may vary their contract provisions. In addition, negotiations between a policyholder and an insurance company may result in the modification of contract provisions.

Benefit Schedules
The purpose of the benefit schedule is twofold. It classifies the employees who are eligible for coverage, and it specifies the amount of life insurance that will be provided to the members of each class, thus minimizing adverse selection because the amount of coverage for individual employees is predetermined. A benefit schedule can be as simple as providing a single amount of life insurance for all employees or as complex as providing different amounts of insurance for different classes of employees. For individual employer groups, the most common benefit schedules are those in which the amount of life insurance is based on either earnings or position.

Earnings Schedules
Most group term life insurance plans use an earnings schedule under which the amount of life insurance is determined as a multiple (or percentage) of each each employee's earnings. For example, the amount of life insurance for each employee may be twice (200 percent of) the employee's annual earnings. Most plans use a multiple between one and two, but higher and lower multiples are occasionally used. The amount of insurance is often rounded to the next higher $1,000 and for underwriting purposes may be subject to a maximum benefit, such as $200,000. For purposes of the benefit schedule, an employee's earnings usually consist of base salary only and do not include additional compensation like overtime pay or bonuses.

An alternative to using a flat percentage of earnings is to use an actual schedule of earnings such as the one in Table 1. This type of schedule may be designed so that all employees receive an amount of coverage that is approximately equal to the same multiple of annual earnings or, as in this example, larger multiples with higher earnings. Benefit schedules usually provide for a change in the amount of an employee's coverage when the employee moves into a different classification, even if this does not occur on the policy anniversary date. For example, the schedule in Table 6-1 indicates that the amount of coverage for an employee earning $28,000 would increase from $40,000 to $75,000 if the employee received a $4,000 raise. Some schedules, however, specify that adjustments in amounts of coverage will be made only annually or on monthly premium due dates.


Table 1: Earnings Schedule

Position Schedules
Position schedules are similar to earnings schedules except that, as Table 6-2 shows, the amount of life insurance is based on an employee's position within the firm rather than on the employee's annual earnings.


Table 2: Position Schedule

Because individuals in high positions are often involved in designing the benefit schedule, underwriters are concerned that the benefits for these individuals be reasonable in relation to the overall plan benefits. Position schedules may also pose problems in meeting nondiscrimination rules if excessively large amounts of coverage are provided to persons in high positions.

Even though position schedules are often used when annual earnings can be easily determined, they are particularly useful when it is difficult to determine an employee's annual income. This is the situation when income is materially affected by such factors as commissions earned, number of hours worked, or bonuses that are based on either the employee's performance or the firm's profits.

Flat-Benefit Schedules
Under flat-benefit schedules, the same amount of life insurance is provided for all employees regardless of salary or position. This type of benefit schedule is commonly used in group insurance plans covering hourly paid employees, particularly when benefits are negotiated with a union. In most cases, the amount of life insurance under a flat-benefit schedule is relatively small, such as $10,000 or $20,000. When an employer desires to provide only a minimum amount of life insurance for all employees, a flat-benefit schedule is often used.

Combination Benefit Schedules
It is not unusual for employers to have benefit schedules that incorporate elements from several of the various types previously discussed. While there are numerous possible combinations, a common benefit schedule of this type provides salaried employees with an amount of insurance that is determined by a multiple of their annual earnings and hourly employees with a flat amount of life insurance.

Reduction in Benefits
It is common for a group life insurance plan to provide for a reduction in benefits for active employees who reach a certain age, commonly 65 to 70. Such a reduction, which is due to the high cost of providing benefits for older employees, is specified in the benefit schedule of a plan. Any reduction in the amount of life insurance for active employees is subject to the provisions of the Age Discrimination in Employment Act.

Benefit reductions fall into three categories:
(1) a reduction to a flat amount of insurance;
(2) a percentage reduction, such as to 65 percent of the amount of insurance that was previously provided; or
(3) a gradual reduction over a period of years (for example, a 10 percent reduction in coverage each year until a minimum benefit amount is reached).

Group Life Insurance—Term Coverage

Traditionally, most group life insurance plans were designed to provide coverage during an employee's working years, with coverage usually ceasing upon termination of employment for any reason. Today, the majority of employees are provided with coverage that will continue, often at a reduced amount, when termination is a result of retirement. Group term life insurance, which provides preretirement coverage.

The oldest and most common form of group life insurance is group term insurance. Coverage consists primarily of yearly renewable term insurance that provides death benefits only, with no buildup of cash values. The group insurance marketplace, with its widespread use of yearly renewable term coverage, contrasts with the individual marketplace, in which term insurance accounts for slightly more than one-third of coverage in force. This is primarily due to increasing annual premiums, which become prohibitive for many insureds at older ages. In group life insurance plans, the overall premium, in addition to other factors, is a function of the age distribution of the group's members. While the premium for any individual employee increases with age, the flow of younger workers into the plan and the retirement of older workers tend to result in a relatively stable age distribution and, thus, an average group insurance rate that remains constant or rises only slightly.

The Americans with Disabilities Act

The Americans with Disabilities Act (ADA), which deals with employment, public services, public accommodations, and telecommunications, is the most far-reaching legislation ever enacted in this country to make it possible for disabled persons to join the mainstream of everyday life.

At the time the act went into effect in 1992, it was estimated that almost 45 million Americans are disabled, and nearly $300 billion of government resources were devoted annually to this group. Fifteen million of the disabled were of working age, but only about 30 percent of these were in the workforce, compared with 80 percent of the nondisabled.

As with any social legislation, the act provides benefits, including a better quality of life, for many disabled persons and annual savings in the form of decreased government payments to the disabled. However, there are also costs, many of which are borne by employers and some of which take the form of increased expenditures for employee benefits.

Title I of the ADA, which pertains to employment, makes it unlawful for employers with 15 or more employees to discriminate on the basis of disability against a qualified individual with respect to any term, condition, or privilege of employment. This includes employee benefits.

Congress gave the responsibility for enforcing Title I to the EEOC, which has numerous regulations and a lengthy technical assistance manual to help qualified individuals understand their rights and to facilitate and encourage employer compliance.

While the act has resulted in significant improvements in public accommodations and the availability of telecommunications for the disabled, the percentage of disabled in the workforce has increased only slightly. However, it should be noted that many employers hired the disabled before ADA. Although intuition might suggest that the disabled would be more likely than other employees to have conditions requiring ongoing medical care, many employers who have made an effort to hire the disabled have not found this to be the case. In fact, some employers feel that the disabled make excellent workers and actually save them money. With jobs more difficult to obtain for the disabled, there is the feeling that the disabled are less likely to switch employers (thus minimizing costs to train new employees) and may actually work harder to keep the jobs they have. Whether this situation will continue as more severely disabled persons enter the workforce and have more opportunities to change jobs is an unanswered question.

Effect on Employment Practices
The ADA defines a disabled person as one who has a physical or mental impairment that substantially limits one or more major life activities, such as caring for oneself, performing manual tasks, walking, seeing, hearing, speaking, breathing, and learning. The EEOC specifically mentions the following as being disabilities: epilepsy, cancer, diabetes, arthritis, hearing and vision loss, AIDS, and emotional illness. A person is impaired even if the condition is corrected, as in the case of a person who is hearing-impaired and wears a hearing aid. The ADA does exclude from the definition of disability persons who are currently engaged in the illegal use of drugs. However, anyone who has successfully completed a supervised rehabilitation program or is currently in such a program is subject to the act's protection as long as he or she is not currently abusing drugs.

The act does not set quotas or require that the disabled be hired. It does, however, provide that a person cannot be discriminated against if he or she is able to perform the essential functions of a job with or without reasonable accommodation, which includes making existing facilities that employees use readily accessible and usable by individuals with disabilities. Reasonable accommodation may be as simple as rearranging furniture or changing the height of a work space to accommodate a wheelchair. (There are estimates that a significant percentage of the disabled can be accommodated with expenditures of $100 or less for each disabled person.) Reasonable accommodations do not include changes that would cause undue hardship for an employer. The act defines undue hardship as a significant difficulty or expense by the employer in light of such factors as the cost of the accommodation, the employer's financial resources, and the impact on other employees. With one exception, reasonable accommodation is for specific individuals for an individual job; it need not be made just because a disabled person may someday apply for work. The exception is that an employer must make facilities for applying for a job accessible to the handicapped and provide employment information that is usable by persons who are hearing-impaired or vision-impaired.

As a general rule, the ADA prohibits medical examinations or inquiries into a person's disability status prior to an offer of employment. Many questions that were previously asked of prospective employees are no longer allowed. For example, an employer cannot ask about prior illnesses or injuries, sick days used at a previous employer, prescription drugs taken, or the like.

The portion of the ADA pertaining to employment practices is lengthy and complex. However, it should be noted that this part of the act continues to be a source of many lawsuits and complaints to the EEOC. The vast majority of these lawsuits and complaints pertain to issues of hiring, termination of employment, and the failure to make reasonable accommodations. Employee benefits, on the other hand, have been a less significant issue.

Effect on Employee Benefits
The ADA was less precise with respect to employee benefits, and the original technical assistance manual was vague. However, the situation was significantly clarified in June 1993, when the EEOC issued interim enforcement guidance for EEOC investigators to use when investigating ADA claims pertaining to health insurance.

The ADA specifically allows the development and administration of benefit plans in accordance with accepted principles of risk assessment. The EEOC guidelines state that the purpose of the act is not to disrupt the current regulatory climate for self-insured employers or the current nature of insurance underwriting. Furthermore, its purpose is not to alter current industry practices in sales, underwriting, pricing, administrative and other services, claims, and related activities. The act allows these activities based on classification of risks as regulated by the states, unless these activities are being used as a subterfuge to evade the purpose of the ADA.

The 1993 guidelines stipulate that employees with disabilities be accorded equal access to whatever health insurance coverage the employer provides to other employees. Coverage for dependents is also subject to ADA rules, but the scope of coverage for dependents can be different from the scope of coverage that applies to employees. In addition, the guidelines state that decisions about the employment of a person cannot be based on concerns about the effect of the person's disability on the employer's health insurance plan.

The EEOC guidelines recognize that certain coverage limitations are acceptable. For example, a lower level of benefits than is provided for physical conditions is permissible for mental and nervous conditions. Even though such a limitation may have a greater impact on certain persons with disabilities, the limitation is not considered discriminatory because it applies to the treatment of many dissimilar conditions and affects individuals both with and without disabilities. Similarly, a lower level of benefits for eye care is singled out as acceptable. However, there have been a number of lawsuits on the issue of whether different benefits for mental and physical disabilities violates the ADA. The EEOC now feels that such disparities are a violation, but the courts that have heard these lawsuits have not agreed with this position.

The guidelines allow blanket preexisting-condition clauses that exclude from coverage the treatment of conditions that predate an individual's eligibility for benefits under a plan. The exclusion of experimental drugs or treatment and elective surgery is also permissible. The guidelines allow coverage limits for procedures that are not exclusively, or nearly exclusively, utilized for the treatment of a specific disability. This category includes, for example, limits on the number of blood transfusions or X-rays, even though such limits may adversely affect persons with certain disabilities.

However, disability-based provisions are not allowed. These include the exclusion or limitation of benefits for (1) a specific disability, such as deafness, AIDS or schizophrenia; (2) a discrete group of disabilities, such as cancer, muscular dystrophy, or kidney disease; and (3) disability in general.

If the EEOC determines that a health plan violates the ADA, the burden of proving otherwise is on the employer. However, the guidelines contain the following "noninclusive list of potential business/insurance justifications" that an employer can use to prove that a plan provision that has been challenged by the EEOC is not a violation of the ADA (Note that the quoted words are taken directly from the guidelines. While examples used in the guidelines answer some questions about the exact meaning of the words, their precise meaning is open to interpretation until clarified by regulation or the courts.):

The employer may prove that "it has not engaged in the disability-based disparate treatment alleged." For example, if it is alleged that a benefit cap for a particular catastrophic disability is discriminatory, the employer may prove that its health insurance plan actually treats all similarly catastrophic conditions in the same way.

The employer may prove that "the disparate treatment is justified by legitimate actuarial data, or by actual or reasonably anticipated experience, and that conditions with comparable actuarial data and/or experience are treated in the same fashion."

The employer may prove that "the disparate treatment is necessary to ensure that the challenged health insurance plan satisfies the commonly accepted or legally required standards for the fiscal soundness of such an insurance plan." For example, the employer may prove that it limited coverage for the treatment of a discrete group of disabilities because continued unlimited coverage would have been so expensive as to cause the health insurance plan to become financially insolvent, and there was no nondisability-based health insurance plan alternative that would have avoided insolvency.

The employer may prove that "the challenged insurance practice or activity is necessary to prevent the occurrence of an unacceptable change either in the coverage of the health insurance plan, or in the premiums charged for the health insurance plan." An unacceptable change is a drastic increase in premium payments (or in copayments or deductibles) or a drastic alteration to the scope of coverage or level of benefits provided that would (1) make the health insurance plan effectively unavailable to a significant number of other employees, (2) make the health insurance plan so unattractive as to result in significant adverse selection, or (3) make the health insurance plan so unattractive that the employer could not compete in recruiting and maintaining qualified workers due to the superiority of health insurance plans offered by other employers in the community.

"If coverage for a disability-specific treatment is denied, the employer may prove by reliable scientific evidence that the disability-specific treatment does not cure the condition; slow the degeneration, deterioration or harm attributable to the condition; alleviate the symptoms of the condition; or maintain the current health status of disabled individuals who receive the treatment."

Nondiscrimination Rules
For many years, nondiscrimination rules have applied to employee benefit plans that provide retirement benefits. The purpose of these rules is to deny favorable tax treatment to plans that do not provide equitable benefits to a large cross section of employees. In effect, the owners and executives of a business cannot receive tax-favored benefits if a plan is designed primarily for them. Nondiscrimination rules in recent years have slowly been applied to various other types of employee benefit plans, but these rules, each of which is complex, have not been uniform.

Congress attempted to eliminate this lack of uniformity by adding Section 89 to the Internal Revenue Code as part of the Tax Reform Act of 1986. This code section was extremely far-reaching and complex, and it would have been very costly both for the government to implement and for employers to comply with. As a result, Section 89 was repealed in 1989, and all the old nondiscrimination rules it replaced were reinstated.

The Employee Retirement Income Security Act (ERISA)

The Employee Retirement Income Security Act (ERISA)
ERISA was enacted to protect the interests of participants in employee benefit plans as well as the interests of the beneficiaries. While all sections of the act—often referred to as the Pension Reform Act—generally apply to retirement plans, certain sections pertaining to fiduciary responsibility and reporting and disclosure also apply to employee welfare benefit plans, including most traditional group insurance plans. ERISA defines a welfare benefit plan as any plan, fund, or program established or maintained by an employer (or an employee organization) for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, any of the following:

- Medical, surgical, or hospital care or benefits

- Benefits in the event of sickness, accident, disability, death, or unemployment

- Vacation benefits

- Apprenticeship or other training programs

- Day care centers

- Scholarship funds

- Prepaid legal services

Any benefit described in Section 302(c) of the Labor Management Relations Act of 1947, such as holiday pay and severance pay

Because of its greater impact on retirement plans, the complete discussion of ERISA is contained in Part Five. The provisions of most relevance to employee welfare benefit plans—fiduciary responsibilities and reporting and disclosure requirements

The Pregnancy Discrimination Act

At one time, pregnancy usually was treated differently from other medical conditions under both individual and group insurance policies. However, the Pregnancy Discrimination Act (a 1978 amendment to the Civil Rights Act) requires that women affected by pregnancy, childbirth, or related medical conditions be treated the same for employment-related purposes (including receipt of benefits under an employee benefit plan) as other persons who are not so affected but who are similar in their ability to work. The act applies only to the benefit plans (both insured and self-funded) of those employers who have 15 or more employees. While employers with fewer employees are not subject to the provisions of the act, they may be subject to comparable or more stringent state laws. Similarly, because the act applies only to employee benefit plans, pregnancy may be treated differently from other medical conditions under insurance policies that are not part of an employee benefit plan.

While the act itself is brief, enforcement falls under the jurisdiction of the EEOC, which has detailed guidelines for interpreting the act. The highlights of these guidelines are as follows:

If an employer provides any type of disability income or sick-leave plan for employees, the employer must provide coverage for pregnancy and its related medical conditions on the same basis as for other disabilities. For example, an employer cannot limit disability income benefits for pregnancies to a shorter period than that applicable to other disabilities.

If an employer provides medical expense benefits for employees, the employer must provide coverage for the pregnancy-related conditions of employees (regardless of marital status) on the same basis as for all other medical conditions.

If an employer provides medical expense benefits for dependents, the employer must provide equal coverage for the medical expenses (including those arising from pregnancy-related conditions) of spouses of both male and female employees. The guidelines also allow an employer to exclude pregnancy-related benefits for female dependents other than spouses as long as such an exclusion applies equally to the nonspouse dependents of both male and female employees.

Extended medical expense benefits after termination of employment must apply equally to pregnancy-related medical conditions and other medical conditions. Thus, if pregnancy commencing during employment is covered until delivery, even if the employee is not disabled, a similar nondisability extension of benefits must apply to all other medical conditions.

Medical expense benefits relating to abortions may be excluded from coverage except when the life of the woman is endangered. However, complications from an abortion must be covered. In addition, abortions must be treated like any other medical condition with respect to sick leave and other fringe benefit plans.

The Age Discrimination in Employment Act

The Age Discrimination in Employment Act applies to employers with 20 or more employees and affects employees aged 40 and older. With some exceptions, such as individuals in executive or high policymaking positions, compulsory retirement is no longer allowed. Employee benefits, which traditionally ceased or were severely limited at age 65, must be continued for older workers. However, some reductions in benefits are allowed. While the federal act does not prohibit such discrimination in benefits for employees under age 40 or for all employees of firms that employ fewer than 20 persons, some states may prohibit such discrimination under their own laws or regulations.

The act permits a reduction in the level of some benefits for older workers so that the cost of providing benefits for older workers is no greater than the cost of providing them for younger workers. However, the most expensive benefit—medical expense coverage—cannot be reduced. The following discussion is limited to reductions after age 65, by far the most common age for reducing benefits, even though reductions can start at an earlier age if they are justified on a cost basis. It should be emphasized that these restrictions apply to benefits for active employees only; there are no requirements under the act that any benefits be continued for retired workers.

When participation in an employee benefit plan is voluntary, an employer can generally require larger employee contributions instead of reducing benefits for older employees, as long as the proportion of the premiums paid by older employees does not increase with age. Thus, if an employer pays 50 percent of the cost of benefits for younger employees, it must pay at least 50 percent of the cost for older employees. If employees pay the entire cost of a benefit, older employees may be required to pay the full cost of their coverage to the extent that this is a condition of participation in the plan. However, this provision does not apply to medical expense benefits. Employees over age 65 cannot be required to pay any more for their coverage than is paid by employees under age 65.

In cases where benefits are reduced, two approaches are permitted: a benefit-by-benefit approach or a benefit-package approach. Under the more common benefit-by-benefit approach, each employee benefit may be reduced to a lesser amount as long as each reduction can be justified on a cost basis. Under a benefit-package approach, the overall benefit package may be altered. Some benefits may be eliminated or reduced to a lesser amount than can be justified on a cost basis, as long as other existing benefits are not reduced or the benefit package is increased by adding new benefits for older workers. The only cost restriction is that the cost of the revised benefit package may be no less than if a benefit-by-benefit reduction had been used. The act also places two other restrictions on the benefit-package approach by prohibiting any reduction in medical expense benefits or retirement benefits.

In reducing a benefit, an employer must use data that approximately reflect the actual cost of the benefit to the employer over a reasonable period of years. Unfortunately, such data either have not been kept by employers or are not statistically valid. Consequently, the reductions that have taken place have been based on estimates provided by insurance companies and consulting actuaries. This approach appears to be satisfactory to the Equal Employment Opportunity Commission (EEOC), which enforces the act's provisions. The act allows reductions to take place on a yearly basis or to be based on age brackets of up to five years. Any cost comparisons must be made with the preceding age bracket. For example, if five-year age brackets are used, the cost of providing benefits to employees between the ages of 65 and 69 must be compared with the cost of providing the same benefits to employees between the ages of 60 and 64.

While reductions in group insurance benefits for older employees are permissible, they are not required. Some employers make no reductions for older employees, but most employers reduce life insurance benefits at age 65 and long-term disability benefits at age 60 or 65.

Group Term Life Insurance Benefits
Based on mortality statistics, most insurance companies feel that group term life insurance benefits can be reduced to the percentages of the amount of coverage provided immediately prior to age 65 as shown.

Age Percentage

65–69 65

70–74 45

75–79 30

Over 79 20

Therefore, if employees normally receive $40,000 of group term life insurance, those employees between the ages of 65 and 69 can receive only $26,000, employees between the ages of 70 and 74 can receive $18,000, and so forth. Similarly, if employees normally receive coverage equal to 200 percent of salary, this may be reduced to 130 percent of salary at age 65, with additional reductions at later ages.

Reductions may also be made on an annual basis. If an annual reduction is used, it appears that a reduction of up to 11 percent of the previous year's coverage can be actuarially justified, starting at age 65 and continuing through age 69. Starting at age 70, the reduction should be 9 percent.

In a plan with employee contributions, the employer may either reduce benefits as described above and charge the employee the same premium as those employees in the previous age bracket or continue full coverage and require that the employee pay an actuarially increased contribution.

Group Disability Income Benefits
The Age Discrimination in Employment Act allows reductions in insured short-term disability income plans, but no reductions are allowed in uninsured sick-leave plans. While disability statistics for those aged 65 and older are limited, some insurance companies feel a benefit reduction of approximately 20 percent is appropriate for employees between the ages of 65 and 69, with additional decreases of 20 percent of the previous benefit for each consecutive five-year period. However the laws of the few states that require that short-term disability income benefits be provided allow neither a reduction in benefits nor an increase in any contribution rate for older employees.

Under the act, two methods are allowed for reducing long-term disability income benefits for those employees who become disabled at older ages. Either the level of benefits may be reduced without altering benefit eligibility or duration or the benefit duration may be reduced without altering the level of benefits. These reductions again must be justified on a cost basis. Unfortunately, no rough guidelines can be given because any possible reductions will vary considerably, depending on the eligibility requirements and the duration of benefits under a long-term disability plan.

Group Medical Expense Benefits
The Age Discrimination in Employment Act requires that employers offer all employees over age 65 (and any employees' spouses who are also over age 65) the same medical coverage they provide for younger employees (and their spouses). Consequently, benefits cannot be reduced for older employees because of increasing cost to the employer. In addition, older employees cannot be required to contribute more than younger employees.

The employer's plan is the primary payer of benefits, with Medicare assuming the secondary-payer role. However, employees may reject the employer's plan and elect Medicare as the primary payer of benefits, but federal regulations prevent an employer from offering a health plan or option designed to induce such a rejection. This effectively prohibits an employer from paying the Part B premium or offering any type of supplemental plan to employees who elect Medicare as primary. (However, supplemental and carve-out plans can be used for retirees.) Therefore, most employees elect to remain with the employer's plan unless it requires large employee contributions. When Medicare is secondary, the employer may pay the Part B premium for those employees who elect Medicare, but the employer has no legal responsibility to do so.

STATE REGULATION : Taxation

Every state levies a premium tax on out-of-state insurance companies licensed to do business in its state, and most states tax the premiums of insurance companies domiciled in their state. These taxes, which are applicable to premiums written within a state, average about 2 percent.

The imposition of the premium tax has placed insurance companies at a competitive disadvantage with alternative methods of providing benefits. Premiums paid to HMOs are not subject to the tax, nor are premiums paid to Blue Cross and Blue Shield plans in some states. In addition, the elimination of this tax is one cost saving under self-funded plans. Because the trend toward self-funding of benefits by large corporations has resulted in the loss of substantial premium tax revenue to the states, there have been suggestions that all premiums paid to any type of organization or fund for the purpose of providing insurance benefits to employees be subject to the premium tax.

Where state income taxation exists, the tax implications of group insurance premiums and benefits to both employers and employees are generally similar to those of the federal government. Employers may deduct any premiums paid as business expenses, and employees have certain exemptions from taxation with respect to both premiums paid on their behalf and benefits attributable to employer-paid premiums.

Regulatory Jurisdiction
A group insurance contract will often insure individuals living in more than one state—a situation that raises the question of which state or states have regulatory jurisdiction over the contract. The issue is a crucial one because factors such as minimum enrollment percentages, maximum amounts of life insurance, and required contract provisions vary among the states.

Few problems usually arise if the insured group qualifies as an eligible group in all the states where insured individuals reside. Individual employer groups, negotiated trusteeships, and labor union groups fall into this category. Under the doctrine of comity, by which states recognize within their own territory the laws of other states, it is generally accepted that the state in which the group insurance contract is delivered to the policyholder has governing jurisdiction. Therefore, the contract must conform only to the laws and regulations of this one state, even though certificates of insurance may be delivered in other states. However, a few states have statutes that prohibit insurance issued in other states from covering residents of their state unless the contract conforms to their laws and regulations. While these statutes are effective with respect to insurance companies licensed within the state (that is, admitted companies), their effectiveness with respect to nonadmitted companies is questionable, because states lack regulatory jurisdiction over these companies.

This does not mean that the policyholder may arbitrarily seek out a situs (place of delivery) that is most desirable from a regulatory standpoint. Unless the place of delivery has a significant relationship to the insurance transaction, other states may seek to exercise their regulatory authority. Therefore, it has become common practice that an acceptable situs must be at least one of the following:

- The state where the policyholder is incorporated (or the trust is created if the policyholder is a trust)

- The state where the policyholder's principal office is located

- The state where the greatest number of insured individuals are employed

- Any state where an employer or labor union that is a party to a trust is located

While a policyholder may have a choice of situs if these locations differ, most insurers are reluctant to issue a group contract in any state unless a corporate officer or trustee who can execute acceptance of the contract is located in that state and unless the principal functions related to the administration of the group contract will be performed there.

The issue of regulatory jurisdiction is more complex for those types of groups that are not considered to be eligible groups in all states. METs are a typical example. If the state has no regulation to the contrary and if the insured group would be eligible for group insurance in other states, the situation is the same as previously described. In addition, most other states will accept the doctrine of comity and not interfere with the regulatory jurisdiction of the state where the contract is delivered. However, some states either prohibit coverage from being issued or require that it conform with the state's laws and regulations other than those pertaining to eligible groups.

STATE REGULATION : Contractual Provisions in Group Insurance & Benefit Limitations

Contractual Provisions in Group Insurance
Through its insurance laws, every state provides for the regulation of contractual provisions. In many instances, certain contractual provisions must be included in group insurance policies. These mandatory provisions may be altered only if they result in more favorable treatment of the policyholder. Such provisions tend to be most uniform from state to state in the area of group life insurance, primarily because of the widespread adoption of the NAIC model bill pertaining to group life insurance standard provisions. As a result of state regulation, coupled with industry practices, the provisions of most group life and health insurance policies are relatively uniform from company to company. In most instances, an insurance company's policy forms can be used in all states. However, riders may be necessary to bring certain provisions into compliance with the regulations of some states.

Traditionally, the regulation of contractual provisions has focused on provisions pertaining to such factors as the grace period, conversion, and incontestability rather than on factors pertaining to the types or levels of benefits. These latter provisions have been a matter between the policyholder and the insurance company. However, in recent years this has changed in many states. In some states, certain benefits—such as well-baby care and treatment for alcoholism or drug abuse—must be included in any group insurance contract; in other states, they must be offered to group policyholders as optional benefits. Still other state laws and regulations specify minimum levels for certain benefits if those benefits are included.

It is interesting to note that, with few exceptions, the regulation of contractual provisions affects only those employee benefit plans funded with insurance contracts. This is because provisions of ERISA seem to exempt employee benefit plans from most types of state regulation. However, there are exceptions to this exemption; these include insurance regulation and therefore the provisions in insurance contracts. As a result of this ERISA exemption, states have few laws and regulations applying to the provisions of uninsured benefit plans. However, ERISA does not exempt uninsured plans from state regulation in such areas as age and sex discrimination, and laws pertaining to these areas commonly apply to all benefit plans. A few states are also trying to mandate other types of benefits for uninsured plans, and ultimately the issue will probably have to be settled by Congress or the Supreme Court.

Benefit Limitations
Statutory limitations may be imposed on the level of benefits that can be provided under group insurance contracts issued to certain types of eligible groups. With the exception of group life insurance, these limitations rarely apply in situations involving an employer-employee relationship. In the past, most states limited the amount of group life insurance that could be provided by an employer to an employee. Today, only Texas still has such a restriction, but its limit is so high that the limit has little practical effect. However, several states limit the amount of coverage that can be provided under contracts issued to groups other than individual employer groups. In addition, some states limit the amount of life insurance coverage that may be provided for dependents.

STATE REGULATION : Eligible Groups

Even though the U.S. Supreme Court has declared insurance to be commerce and thus subject to federal regulation when conducted on an interstate basis, Congress gave the states substantial regulatory authority by the passage of the McCarran-Ferguson Act (Public Law 15) in 1945. This act exempts insurance from certain federal regulations to the extent that individual states actually regulate insurance. In addition, it provides that most other federal laws are not applicable to insurance unless they are specifically directed at the business of insurance.

As a result of the McCarran-Ferguson Act, a substantial body of laws and regulations has been enacted in every state. While no two states have identical laws and regulations, there have been attempts to encourage uniformity among the states. The most significant influence in this regard has been the National Association of Insurance Commissioners (NAIC), which is composed of state regulatory officials. Because the NAIC has as one of its goals the promotion of uniformity in legislation and administrative rules affecting insurance, it has developed numerous model laws. Although states are not bound to adopt these model laws, many states have enacted them.

Some of the more significant state laws and regulations affecting group insurance include those pertaining to the types of groups eligible for coverage, contractual provisions, benefit limitations, and taxation. Moreover, because many employers have employees in several states, the extent of the regulatory jurisdiction of each state is a question of some concern.

Eligible Groups
Most states do not allow group insurance contracts to be written unless a minimum number of persons are insured under the contract. This requirement, which may vary by type of coverage and type of group, is most common in group life insurance, where the minimum number required for plans established by individual employers is generally ten persons. A few states have either a lower minimum or no such requirement. A higher minimum, often 100 persons, may be imposed on other plans, such as those established by trusts, labor unions, or creditors. Only about half the states impose any minimum number requirement on group health insurance contracts. Where one exists, it usually is either five or ten persons.

Most states also have insurance laws concerning the types of groups for which insurance companies may write group insurance. Most of these laws specify that a group insurance contract cannot be delivered to a policyholder in the state unless the group meets certain statutory eligibility requirements for its type of group. In some states these eligibility requirements even vary by type of coverage. While the categories of eligible groups may vary, at least four types of groups involving employees are acceptable in virtually all states:

- Individual employer groups

- Negotiated trusteeships

- Trade associations

- Labor union groups

Other types of groups, including multiple-employer trusts, are also acceptable in some states. Some states have no insurance laws regarding the types or sizes of groups for which insurance companies may write group insurance. Rather, eligibility is determined on a contract-by-contract basis by the underwriting standards of the insurance company.

CHARACTERISTICS OF TRADITIONAL GROUP INSURANCE

Traditionally, group insurance has been characterized by a group contract, experience rating of larger groups, and group underwriting. Perhaps the best way to define group insurance is to compare its characteristics with those of individual insurance, which is underwritten on an individual basis.

Group Contract
In contrast to most individual insurance contracts, the group insurance contract provides coverage to a number of persons under a single contract issued to someone other than the persons insured. The contract, referred to as a master contract, provides benefits to a group of individuals who have a specific relationship with the policyholder. Most commonly, group contracts cover individuals who are full-time employees, and the policyholder is either their employer or a trust established to provide benefits for the employees. Although the employees are not actual parties to the master contract, they can legally enforce their rights. Consequently, employees are often referred to as third-party beneficiaries of the insurance contract.

Employees covered under the contract receive certificates of insurance as evidence of their coverage. A certificate is merely a description of the coverage provided and is not part of the master contract. In general, a certificate of insurance is not even considered to be a contract and usually contains a disclaimer to that effect. However, some courts have held the contrary to be true when the provisions of the certificate, or even the explanatory booklet of a group insurance plan, vary materially from the master contract.

In individual insurance, the coverage of the insured normally begins with the inception of the insurance contract and ceases with its termination. However, in group insurance, individual members of the group may become eligible for coverage long after the inception of the group contract, or they may lose their eligibility status long before the contract terminates.

Experience Rating
A second distinguishing characteristic of traditional group insurance is the use of experience rating. If a group is sufficiently large, the actual experience of that particular group will be a factor in determining the premium the policyholder will be charged. The experience of an insurance company will also be reflected in the dividends and future premiums associated with individual insurance. However, such experience will be determined on a class basis and will apply to all insured in that class. This is also true for group insurance contracts when the group's membership is small.

Group Underwriting
The applicant for individual insurance must generally show evidence of insurability. For group insurance, on the other hand, individual members of the group are usually not required to show any evidence of insurability when initially eligible for coverage. This is not to say that there is no underwriting, but rather that underwriting is focused on the characteristics of the group instead of on the insurability of individual members of the group. As with individual insurance, the underwriter must appraise the applicant, decide on the conditions of the group's acceptability, and establish a rating basis.

The purpose of group insurance underwriting is twofold:

- To minimize the problem of adverse selection (those who are most likely to have claims are also those who are most likely to seek insurance)

- To minimize the administrative costs associated with group insurance

- Because of group underwriting, coverage can be provided through group insurance at a lower cost than through individual insurance.

However, there are certain general underwriting considerations applicable to all or most types of group insurance that affect the contractual provisions contained in group insurance contracts as well as insurance company practices pertaining to group insurance. These general underwriting considerations include the following:

- The reason for the existence of the group

- The stability of the group

- The persistency of the group

- The method of determining benefits

- The provisions for determining eligibility

- The source and method of premium payments

- The administrative aspects of the group insurance plan

- The prior experience of the plan

- The size of the group

- The composition of the group

- The industry represented by the group

- The geographic location of the group

Reason for Existence
Probably the most fundamental group underwriting principle is that a group must have been formed for some purpose other than to obtain insurance for its members. Such a rule protects the group insurance company against the adverse selection that would likely exist if poor risks were to form a group just to obtain insurance. Groups based on an employer-employee relationship present little difficulty with respect to this rule.

Stability
Ideally, an underwriter would like to see a reasonable but steady flow of persons through a group. A higher-than-average turnover rate results in increased administrative costs for the insurance company as well as for the employer. If turnover exists among recently hired employees, these costs can be minimized by requiring employees to wait a period of time before becoming eligible for coverage. However, such a probationary period does leave newly hired employees without protection if their previous group insurance coverage has terminated.

A lower-than-average turnover rate often results in an increasing average age for the members of a group. To the extent that a plan's premium is a function of the mortality (death rates) and the morbidity (sickness and disability rates) of the group, such an increase in average age will result in an increasing premium rate for that group insurance plan. This may cause the better risks to drop out of a plan, if they are required to contribute to its cost, and may ultimately force the employer to terminate the plan because of its increasing cost.

Persistency
An underwriter is concerned with the length of time a group insurance contract will remain on the insurance company's books. Initial acquisition expenses, often including higher first-year commissions, frequently cause an insurance company to lose money during the first year the group insurance contract is in force. Only through the renewal of the contract for a period of time, often three or four years, can these acquisition expenses be recovered. For this reason, firms with a history of frequently changing insurance companies or those with financial difficulty are often avoided.

Determination of Benefits
In most types of group insurance, the underwriter requires that benefit levels for individual members of the group be determined in some manner that precludes individual selection by either the employees or the employer. If employees could choose their own benefit levels, there would be a tendency for the poorer risks to select greater amounts of coverage than the better risks would select. Similarly, adverse selection could also exist if the employer were able to choose a separate benefit level for each individual member of the group. As a result, this underwriting rule has led to benefit levels that are either identical for all employees or determined by a benefit formula that bases benefit levels on some specific criterion, such as position or salary.

Benefits based on salary or position may still lead to adverse selection because disproportionately larger benefits are provided to the owner or top executives who may have been involved in determining the benefit formula. Consequently, most insurance companies have rules for determining the maximum benefit that may be provided for any individual employee without evidence of insurability. Additional coverage either is not provided or is subject to individual evidence of insurability.

The general level of benefits for all employees is also of interest to the underwriter. For example, benefit levels that are too high may encourage overutilization and malingering, while benefit levels that are unusually low may lead to low participation if a plan is voluntary.

Determination of Eligibility
The underwriter is also concerned with the eligibility provisions that are contained in the group insurance plan. Many group insurance plans contain probationary periods that must be satisfied before an employee is eligible for coverage. In addition to minimizing administrative costs, a probationary period also discourages persons with known medical conditions from seeking employment primarily because of a firm's group insurance benefits. This latter problem is also addressed by the requirement that an employee be actively at work before coverage commences or, particularly with major medical coverage, by limiting coverage for preexisting conditions to the extent allowed by federal and state laws.

Most group insurance plans normally limit eligibility to full-time employees because, from an underwriting standpoint, the coverage of part-time employees may not be desirable. In addition to having a high turnover rate, some part-time employees may be seeking employment primarily to obtain group insurance benefits. Similar problems exist with seasonal and temporary employees and, consequently, eligibility is often restricted to permanent employees.

Premium Payments
Group insurance plans may be contributory or noncontributory. Members of contributory plans pay a portion, or possibly all, of the cost of their own coverage. When employees pay the entire portion, the plans are often referred to as fully contributory or employee-pay-all plans. Under noncontributory plans, the policyholder pays the entire cost. Because all eligible employees are usually covered, noncontributory plans are desirable from an underwriting standpoint because adverse selection is minimized. In fact, most insurance companies and the laws of many states require 100 percent participation of eligible employees under noncontributory plans. In addition, the absence of employee solicitation, payroll deductions, and underwriting of late entrants into the plan results in administrative savings to both the policyholder and the insurance company, thus favoring the noncontributory approach to the financing of group insurance benefits.

Most state laws prohibit an employer from requiring an employee to participate in a contributory plan. The insurance company is then faced with the possibility of adverse selection because those who elect coverage will tend to be the poorer risks. From a practical standpoint, 100 percent participation in a contributory plan would be unrealistic because, for many reasons, some employees neither desire nor even need the coverage provided under the plan. However, insurance companies require that a minimum percentage of the eligible members elect to participate before the contract is issued. The common requirement is 75 percent, although a lower percentage is often acceptable for large groups and a higher percentage may be required for small groups. A 75 percent minimum requirement is also often a statutory requirement for group life insurance and sometimes for group health insurance.

A key issue in contributory plans is how to treat employees who did not elect to participate when first eligible but who later desire coverage or who dropped coverage and want it reinstated. Unfortunately, this desire for coverage may arise when these employees or their dependents have medical conditions that will lead to claims once coverage is provided. To control this adverse selection, insurance companies commonly require individual evidence of insurability by these employees or their dependents before coverage will be made available. However, there are two exceptions: First, some plans have short, periodic open enrollment periods during which the evidence-of-insurability requirement is lessened or waived. Second, the Health Insurance Portability and Accountability Act effectively eliminates the use of evidence of insurability for medical expense plans, but not for other types of group insurance.

Insurance companies frequently require that the employer pay a portion of the premium under a group insurance plan. This is also a statutory requirement for group life insurance in most states and occasionally for group health insurance. Many group insurance plans set an average contribution rate for all employees, which in turn leads to the subsidizing of some employees by other employees, particularly in those types of insurance where the frequency of claims increases with age. Without a requirement for employer contributions, younger employees might actually find coverage at a lower cost in the individual market, thereby leaving the group with only the older employees. Even when group insurance already has a cost advantage over individual insurance, its attractiveness to employees is enhanced by employer contributions. With constantly increasing health care costs, employer contributions help cushion rate increases to employees and thus minimize participation problems as contributions are raised. In addition, underwriters feel that the lack of employer contributions may lead to a lack of employer interest in the plan and, consequently, to poor cooperation with the insurance company and poor plan administration.

Administration
To minimize the expenses associated with group insurance, the underwriter often requires that the employer carry out certain administrative functions. These commonly include communicating the plan to the employees, handling enrollment procedures, collecting employee contributions on a payroll-deduction basis, and keeping certain types of records. In addition, employers are often involved in the claims process. Underwriters are concerned not only with the employer's ability to carry out these functions but also with the employer's willingness to cooperate with the insurance company.

Prior Experience
For most insurance companies, a large portion of newly written group insurance consists of business that was previously written by other insurance companies. Therefore, it is important for the underwriter to ascertain the reason for the transfer. If the transferred business is a result of dissatisfaction with the service provided by the prior insurance company, the underwriter must determine whether the insurance company can provide the type and level of service desired. Because an employer is most likely to shop for new coverage when faced with a rate increase, the underwriter must evaluate whether the rate increase was due to excessive claims experience. Often, particularly with larger groups, excessive claims experience in the past is an indication of the same type of experience in the future. Occasionally, however, the prior experience may be due to circumstances that will not continue in the future, such as a catastrophe or large medical bills for an employee who has died, totally recovered, or terminated employment.

Past excessive claims experience may not result in coverage denial for a new applicant, but it will probably result in a higher rate. As an alternative, changes in the benefit or eligibility provisions of the plan might eliminate a previous source of adverse claims experience.

The underwriter must determine the new insurance company's responsibility for existing claims. Some states prohibit a new insurance company from denying (by using a preexisting-conditions clause) the continuing claims of persons who were covered under a prior group insurance plan if these claims would otherwise be covered under the new contract. The rationale for this "no-loss, no-gain" legislation is that claims should be paid neither more liberally nor less liberally than if no transfer had taken place. Even in states that have no such regulation, an employer may still wish to provide employees with continuing protection. In either case, the underwriter must evaluate these continuing claims as well as any liability of the previous insurance company for their payment.

Finally, the underwriter must be reasonably certain that the employer will not present a persistency problem by changing insurance companies again in the near future.

Size
The size of a group is a significant factor in the underwriting process. With large groups, prior group insurance experience can usually be used as a factor in determining the premium, and considerable flexibility also exists with both rating and plan design. In addition, adjustments for adverse claims experience can be made at future renewal dates under the experience-rating process.

The situation is different for small groups. In many cases, coverage is being written for the first time. Administrative expenses tend to be high in relation to the premium. There is also an increased possibility that the owner or major stockholder might be interested in coverage primarily because he or she, or a family member, has a medical problem that will result in large immediate claims. As a result, contractual provisions and the benefits available tend to be standardized to control administrative costs. Also, because past experience for small groups is not necessarily a realistic indicator of future experience, most insurance companies use pooled rates under which a uniform rate is applied to all groups that have a specific coverage. Because excessive claims experience for a particular group is not charged to that group at renewal, more restrictive underwriting practices relating to adverse selection are used. These include less liberal contractual provisions and, in some cases, individual underwriting of group members.

Composition
The age, sex, and income of employees in a group will affect the experience of the group. As employees age, the mortality rate increases. Excluding maternity claims, both the frequency and duration of medical and disability claims also increase with age.

At all ages, the death rate is lower for females than for males. However, the opposite is true for medical expenses and disability claims. Even if maternity claims are disregarded, women as a group tend to be hospitalized and disabled more frequently and require medical and surgical treatment more often than men.

Employees with high income levels tend to incur higher-than-average medical and dental expenses. This is partly because practitioners sometimes base charges on a patient's ability to pay. In addition, persons with higher incomes are more likely to seek specialized care or care in more affluent areas, where the charges of practitioners are generally higher. On the other hand, low-income employees can also pose difficulties. Turnover rates tend to be higher, and there is often difficulty in getting and retaining proper levels of participation in contributory plans.

Adjustments often can be made for all of these factors when determining the proper rate to charge the policyholder. Some states, however, require the use of unisex rates, in which case the mix of employees by sex becomes an underwriting consideration. Also, major problems can arise in contributory plans: to the extent that higher costs for a group with a less-than-average mix of employees are passed on to these employees, a lower participation rate may result.

Industry
The nature of the industry represented by a group is also a significant factor in the underwriting process. In addition to different occupational hazards among industries, employees in some industries have higher-than-average health insurance claims that cannot be directly attributed to their jobs. Therefore, insurance companies commonly make adjustments in their life and health insurance rates based on the occupations of the employees covered as well as the industries in which they work.

In addition to occupational hazards, the underwriter must weigh other factors as well. Certain industries are characterized by a lack of stability and persistency and thus may be considered undesirable risks. The underwriter must also be concerned with what impact changes in the economy will have on a particular industry.

Geographic Location
The size and frequency of health insurance claims varies considerably among geographic regions and must be considered in determining a group insurance rate. For example, medical expenses tend to be higher in the Northeast than in the South, and higher in large urban areas than in rural areas. Certain geographic regions also tend to have a higher frequency of disability claims.

A group with geographically scattered employees also poses more administrative problems and probably results in greater administrative expense than a group in a single location. In addition, the underwriter must determine whether the insurance company has the proper facilities to service policyholders at their various locations.

The Group Insurance Environment

The term group insurance, like the term employee benefits, can have different meanings to different persons. Most employees view group insurance in a very broad sense as any arrangement under which an employer makes benefits available to employees for life insurance, disability income, medical and dental expenses, legal expenses, and property and liability insurance. To employees, it usually makes little difference whether a benefit plan is funded with a traditional insurance contract or through some type of alternative arrangement; it still is group insurance.

Even though the broad meaning of group insurance is used, it is important to make a distinction between group insurance plans that are funded with traditional insurance contracts and those that use alternative funding methods. Although alternative funding methods, including total self-funding, are becoming more common, the majority of group insurance is still fully insured through insurance contracts.

The character of group insurance has been greatly influenced by the numerous laws and regulations that state governments and the federal government have imposed. The major impact of state regulation has been felt through the insurance laws governing insurance companies and the products they sell. Traditionally, these laws have affected only those benefit plans funded with insurance contracts. However, as a growing number of employers are turning toward self-funding of benefits, there has been increasing interest on the part of state regulatory officials to extend these laws to plans using alternative funding methods. The federal laws affecting group insurance, on the other hand, have generally been directed toward any benefit plans that are established by employers for their employees, regardless of the funding method used.

WORKERS' COMPENSATION LAWS : Problems and Issues

Problems and Issues
As with unemployment insurance, there are problems and issues associated with workers' compensation insurance. These involve the extent of coverage, the size of benefit payments and increasing costs. One often-discussed issue is whether a system of 24-hour coverage would be an improvement.

Extent of Coverage
Labor unions have been particularly critical of workers' compensation insurance because of its incomplete coverage of workers. State laws do not cover all workers because of elective laws, numerical exemptions and exclusions, or less-than-full coverage for certain groups, such as agricultural, domestic, and casual workers. It is estimated that, nationally, between 10 percent and 15 percent of workers are without coverage and that this figure is as high as 30 percent in some states.

Adequacy of Benefits
Benefits have been criticized as inadequate because they seldom exceed two-thirds of a worker's earnings prior to injury, and most states do not adjust income benefits for inflation. However, some lower-paid workers may have little incentive to return to work because benefits may actually exceed their prior take-home pay. This results from relatively high minimum benefits and the fact that workers' compensation benefits are not subject to Social Security and Medicare taxes or personal income taxes. In terms of the replacement of lost income, the situation is worse for higher-paid employees because of the maximum dollar limits on benefits.

Increasing Costs
A major concern of employers is the soaring cost of workers' compensation coverage. Estimates are that costs have tripled over the past decade. This increase is the result of a combination of several factors, including the following:

Soaring increases in the cost of medical care.

Increased benefits. Most states have increased benefits faster than average wages have increased. One interesting result of higher benefit levels is that they tend to result in an increased number of claims filed and an increase in the duration of claims.

Expansion of coverage to additional workplace injuries and diseases, such as mental stress.

Increased litigation. Estimates are that approximately one-quarter of workers' compensation costs are associated with attorneys' fees and other legal costs.

These increasing costs have resulted in large underwriting losses for many insurance companies, leading in turn to higher premiums and more stringent underwriting. As underwriting has tightened, more employers have been forced into the substandard insurance market, where costs are even higher. These higher costs are ultimately passed on to consumers and increase inflationary pressures. Some firms, particularly small ones, are also finding their financial survival threatened by these high costs.

At the state level, there always seems to be talk of workers' compensation reform. However, labor equates reform with increased benefits, and employers equate it with lower costs. As a result, fundamental changes often do not occur.

The Concept of 24-Hour Coverage
When workers' compensation laws were first passed, most employees did not have employer-provided benefits for medical expenses or disability income. Today both types of benefits are common. As a result, it has been suggested that the old systems are obsolete and that the concept of 24-hour coverage should be adopted. Under this concept, employees would have a single benefit plan that would respond to injuries whether they occurred on or off the job. This concept could be applied to medical expense coverage only or to medical expense coverage and some or all types of disability income coverage. Arguments in favor of 24-hour coverage include the following:

The financial needs of employees are the same regardless of whether an injury or illness is work-related.

It is often impossible to determine whether an injury or illness is work-related.

Medical costs would be better managed because cost-containment techniques used in group insurance could also be used for work-related claims.

The current system is fragmented and may contain both gaps and overlapping benefits. A single comprehensive system may be able to provide better benefits at a lower cost.

Naturally, there are also arguments against 24-hour coverage:

The principle of liability without fault would be violated if employees were required to assume deductibles, copayments, or a percentage of work-related claims.

Smaller firms that have few employee benefits could not afford 24-hour coverage and might be forced out of business.

The strong emphasis on loss control that is associated with workers' compensation insurance might be jeopardized if the program were merged with traditional group insurance programs.

The concept of 24-hour coverage continues to receive a considerable amount of attention. It is an integral part of some proposals for reforms to the nation's health care system. In addition, some states now allow 24-hour coverage to be written for medical expenses, with the employer purchasing a workers' compensation policy to provide benefits other than medical expenses.

WORKERS' COMPENSATION LAWS : Benefits, Disability Income, Death Benefits

Benefits
Workers' compensation laws typically provide four types of benefits:

- Medical care

- Disability income

- Death benefits

- Rehabilitative services

Medical Care
Benefits for medical expenses are usually provided without any limitations on time or amount. In addition, they are not subject to a waiting period.

Disability Income
For an employee to collect disability income benefits under workers' compensation laws, his or her injuries must result in one of the following four categories of disability:

Temporary total. The employee cannot perform any of the duties of his or her regular job. However, full recovery is expected. Most workers' compensation claims involve this type of disability.

Permanent total. The employee will never be able to perform any of the duties of his or her regular job or any other job. Several states also list in their laws certain disabilities (such as loss of both eyes or both arms) that result in an employee's automatically being considered permanently and totally disabled even though future employment might be possible.

Temporary partial. The employee can perform only some of the duties of his or her regular job but is neither totally nor permanently disabled. For example, an employee with a sprained back might be able to work part-time.

Permanent partial. The employee has a permanent injury, such as the loss of an eye, but may be able to perform his or her regular job or may be retrained for another job.

Most workers' compensation laws have a waiting period for disability income benefits that varies from two to seven days. However, benefits are frequently paid retroactively to the date of the injury if an employee is disabled for a specified period of time or is confined to a hospital.

Disability income benefits under workers' compensation laws are a function of an employee's average weekly wage over some time period, commonly the 13 weeks immediately preceding the disability. For total disabilities, benefits are a percentage (usually 66⅔ percent) of the employee's average weekly wage, subject to maximum and minimum amounts that vary substantially by state. Benefits for temporary total disabilities continue until an employee returns to work; benefits for permanent total disabilities usually continue for life but have a limited duration (such as ten years) in a few states.

Benefits for partial disabilities are calculated as a percentage of the difference between the employee's wages before and after the disability. In most states, the duration of these benefits is subject to a statutory maximum. Several states also provide lump-sum payments to employees whose permanent partial disabilities involve the loss (or loss of use) of an eye, an arm, or other body member. These benefits, which are determined by a schedule in the law, may be in lieu of or in addition to periodic disability income benefits.

Death Benefits
Most workers' compensation laws provide two types of death benefits:

- Burial allowances

- Cash income payments to survivors

Burial allowances are a flat amount in each state and vary from $300 to $5,000 with benefits of $1,000 and $1,500 being common.

Cash income payments to survivors, like disability income benefits, are a function of the worker's average wage prior to the injury resulting in death. Benefits are usually paid only to a surviving spouse and children under age 18. In some states, benefits are paid until the spouse dies or remarries and all children have reached age 18. In other states, benefits are paid for a maximum time, such as ten years, or until a maximum dollar amount has been paid, such as $50,000.

Rehabilitation Benefits
All states have provisions in their workers' compensation laws for rehabilitative services for disabled workers. Benefits are included for medical rehabilitation as well as for vocational rehabilitation, including training, counseling, and job placement.

A difficulty faced in providing vocational rehabilitation is that employers are reluctant to hire workers with permanent physical impairments because a subsequent work-related injury may result in their total disability and thus an increased workers' compensation premium. For example, a worker who lost an arm in a previous work-related accident would probably be totally and permanently disabled if the other arm was lost in a later accident. Consequently, most states have established second-injury funds. If a worker is disabled by a second injury, the employer is responsible only for providing benefits equal to those that would have been provided to a worker who had not suffered the first injury. Any remaining benefits are provided by the second-injury fund.

WORKERS' COMPENSATION LAWS : Type & Eligibility

WORKERS' COMPENSATION LAWS
Prior to the passage of workers' compensation laws, it was difficult for employees to receive compensation for their work-related injuries or diseases. Group benefits were meager, and the Social Security program had not yet been enacted. The only recourse for employees was to sue their employer for damages. In addition to the time and expense of such actions (as well as the possibility of being fired), the probability of a worker's winning such a suit was small because of the three common-law defenses available to employers. Under the contributory negligence doctrine, a worker could not collect if his or her negligence had contributed in any way to the injury. Under the fellow-servant doctrine, the worker could not collect if the injury had resulted from the negligence of a fellow worker. And finally, under the assumption-of-risk doctrine, a worker could not recover damages if he or she had knowingly assumed the risks inherent in the trade.

To help solve the problem of uncompensated injuries, workers' compensation laws were enacted to require that employers provide employee benefits for losses resulting from work-related accidents or diseases. These laws are based on the principle of liability without fault. Essentially, an employer is absolutely liable for providing the benefits prescribed by the workers' compensation laws, regardless of whether the employer would be considered legally liable in the absence of these laws. However, benefits, with the possible exception of medical expense benefits, are subject to statutory maximums.

All states have workers' compensation laws. In addition, the federal government has enacted several similar laws. The Federal Employees Compensation Act provides benefits for the employees of the federal government and the District of Columbia. Railroad employees and seamen aboard ships are covered under the Federal Employer's Liability Act, and stevedores, longshoremen, and workers who repair ships are covered under the U.S. Longshore and Harbor Workers' Act.

Type of Law
Most workers' compensation laws are compulsory for all employers covered under the law. A few states have elective laws, but the majority of employers do elect coverage. If they do not, their employees are not entitled to workers' compensation benefits and must sue for damages resulting from occupational accidents or diseases. However, the employers lose their right to the three common-law defenses previously described.

Financing of Benefits
Most states allow employers to comply with the workers' compensation law by purchasing coverage from insurance companies. Several of these states also have competitive state funds from which coverage may be obtained, but these funds usually provide benefits for fewer employers than insurance companies do. Six states have monopolistic state funds that are the only source for obtaining coverage under the law.

Almost all states, including some with monopolistic state funds, allow employers to self-insure their workers' compensation exposure. These employers must generally post a bond or other security and receive the approval of the agency administering the law. While the number of firms using self-insurance for workers' compensation is small, these firms account for approximately one-half the employees covered under such laws.

In virtually all cases, the full cost of providing workers' compensation benefits must be borne by the employer. Obviously, if an employer self-insures benefits, the ultimate cost will include the benefits paid plus any administrative expenses.

Employers who purchase coverage pay a premium that is calculated as a rate per $100 of payroll and that is based on the occupations of their workers. For example, rates for office workers may be as low as $.10, and rates for workers in a few hazardous occupations may exceed $50. Most states also require that, when their total workers' compensation premiums exceed a specified amount, employers be subject to experience rating; that is, employers' premiums become a function of benefits paid for past injuries to their workers. To the extent that safety costs are offset or eliminated by savings in workers' compensation premiums, experience-rating laws encourage employers to take an active role in correcting conditions that may cause injuries.

Covered Occupations
Although it is estimated that about 90 percent of workers in the United States are covered by workers' compensation laws, the percentage varies among the states from less than 70 percent to more than 95 percent. Many laws exclude certain agricultural, domestic, and casual employees. Some laws also exclude employers with a small number of employees. Furthermore, coverage for employees of state and local governments is not universal.

Eligibility
Before an employee can be eligible for benefits under a workers' compensation law, he or she must work in an occupation covered by that law and be disabled or killed by a covered injury or illness. The typical workers' compensation law provides coverage for accidental occupational injuries (including death) arising out of and in the course of employment. In all states, this includes injuries arising out of accidents, which are generally defined as sudden and unexpected events that are definite in time and place. Most workers' compensation laws exclude self-inflicted injuries and accidents resulting from an employee's intoxication or willful disregard of safety rules.

Every state has some coverage for illnesses resulting from occupational diseases. While the trend is toward full coverage for occupational diseases, some states cover only those diseases that are specifically listed in the law.

TEMPORARY DISABILITY LAWS : Eligibility & Benefits

TEMPORARY DISABILITY LAWS
At their inception, state unemployment insurance programs were usually designed to cover only unemployed persons who were both willing and able to work. Benefits were denied to anyone who was unable to work for any reason, including disability. Some states amended their unemployment insurance laws to provide coverage to the unemployed who subsequently became disabled. However, five states—California, Hawaii, New Jersey, New York, and Rhode Island—and Puerto Rico went one step farther by enacting temporary disability laws under which employees can collect disability income benefits regardless of whether their disability begins while they are employed or unemployed. While variations exist among the states, these laws (often referred to as nonoccupational disability laws because benefits are not provided for disabilities covered under workers' compensation laws) are generally patterned after the state unemployment insurance law and provide similar benefits.

In the six jurisdictions with temporary disability laws, most employers are required to provide coverage for their employees. In most jurisdictions, except Rhode Island, which has a monopolistic state fund, coverage may be obtained from either a competitive state fund or private insurance companies. Self-insurance is also generally permitted. Private coverage must provide at least the benefits prescribed under the law, but it may be more comprehensive. Depending on the jurisdiction, the cost of an employer's program may be borne entirely by employee contributions, entirely by employer contributions or by contributions from both parties.

Eligibility
Before an employee is eligible for benefits under a temporary disability law, the employee must satisfy (1) an earnings or employment requirement, (2) the definition of disability, and (3) a waiting period.

Earnings or Employment Requirement
Every jurisdiction requires that an employee must have worked for a specified time and/or have received a minimum amount of wages within some specific period prior to disability to qualify for benefits.

Definition of Disability
Most laws define disability as the inability of the worker to perform his or her regular or customary work because of a nonoccupational injury or illness including maternity. As with workers' compensation laws, certain types of disabilities are not covered. In most jurisdictions, these include disabilities caused by self-inflicted injuries or by illegal acts.

Waiting Period
The usual waiting period for benefits is seven days. However, in some jurisdictions the waiting period is waived if the employee is hospitalized.

Benefits
Benefits are a percentage, usually ranging from 50 percent to 66⅔ percent, of the employee's average weekly wage for some period prior to disability, subject to maximum and minimum amounts. Benefits are generally paid for at least 26 weeks if the employee remains disabled that long.

UNEMPLOYMENT INSURANCE : Benefits, Problems and Issues

Benefits
The majority of states pay regular unemployment insurance benefits for a maximum of 26 weeks; the remaining states pay benefits for slightly longer periods. In most states, the amount of the weekly benefit is equal to a specified fraction of a worker's average wages for the calendar quarter of the base period during which the highest wages were earned. The typical fraction is 1/26, which yields a benefit equal to 50 percent of average weekly earnings for that quarter. Other states determine benefits as a percentage of average weekly wages or annual wages during the base period. Some states also modify their benefit formulas to provide relatively higher benefits (as a percentage of past earnings) to lower-paid workers. Benefits in all states are subject to minimum and maximum amounts. Minimum weekly benefits typically fall within the range of $20 to $75, maximum benefits in the range of $200 to $375, and the average benefit in the range of $150 to $225. In addition, a few states currently provide additional benefits if there are dependents who receive regular support from the worker.

States also provide reduced benefits for partial unemployment. Such a condition occurs if a worker is employed less than full-time and has a weekly income less than his or her weekly benefit amount for total unemployment.

Since 1970, there has been a permanent federal-state program of extended unemployment benefits for workers whose regular benefits are exhausted during periods of high unemployment. The availability of these benefits is automatically triggered by a state's unemployment rate exceeding a specifed level. The benefits are financed equally by the federal government and the states involved, and they can be paid for up to 13 weeks, as long as the total of regular and extended benefits does not exceed 39 weeks. This program is operable when the insured unemployment rate in a state exceeds a specified level. The insured unemployment rate is the percentage of workers covered by unemployment insurance who are receiving regular benefits. Benefits can also be triggered if a state's total unemployment rate exceeds specified criteria. In this case, an additional 20 weeks of benefits can be paid.

In periods of severe unemployment, the federal government often enacts legislation to provide additional benefits that are financed with federal revenue. The last such program expired in 1994.

Problems and Issues
The current system of unemployment insurance has become increasingly subject to criticism, especially regarding the level of benefits. At current levels, the majority of employees would receive benefits that are less than half of their former wages. Because of maximum limits on the amounts of benefits, higher-income employees would receive proportionately smaller benefits than lower-paid employees.

In addition to the level of benefits, the percentage of persons receiving benefits at any point in time has dropped over the last two decades. Typically, fewer than 40 percent of the unemployed are receiving benefits. Some persons have benefits denied because of more stringent rules, particularly those dealing with initial benefit disqualification. Other persons exhaust the benefits that are available. Of course, there are those who argue that without disqualifications and limits on benefits, there would be little incentive for many of the unemployed to seek work.

Few employers provide any type of supplemental unemployment benefits. The plans that do exist are in highly unionized industries and result from collective bargaining.

There seems to be a feeling among economists that unemployment insurance programs today are less effective in dealing with unemployment issues than they were in the past. In theory, unemployment compensation insurance should be a counterbalance against recessions. In practice this is often not the case, perhaps because of the low percentage of persons receiving benefits. In addition, the degree of experience rating has declined over time, reducing the incentive for employers to retain employees in bad times rather than laying them off. It also has shifted an increasing burden for financing the program to employers in industries with stable employment.

UNEMPLOYMENT INSURANCE : Eligibility for Benefits

Eligibility for Benefits
In order to receive unemployment benefits, a worker must meet the following eligibility requirements:

- Have a prior attachment to the labor force

- Be able to work and be available for work

- Be actively seeking work

- Have satisfied any prescribed waiting period

- Be free of disqualification

Prior Attachment to the Labor Force
The right to benefits depends on the worker's attachment to the labor force within a prior base period. In most states, this base period is the 52 weeks or four quarters prior to the time of unemployment. During this base period, the worker must have earned a minimum amount of wages or worked a minimum period of time or both.

Able to Work and Available for Work
The right to benefits is also contingent on an unemployed worker's being both physically and mentally capable of working. The worker must also be available for work. Benefits may be denied if suitable work is refused or if substantial restrictions are placed on the type of work that will be accepted.

Actively Seeking Work
In addition to registering with a local unemployment office, most states require that a worker make a reasonable effort to seek work.

Waiting Period
Most unemployment programs have a one-week waiting period before benefits commence. Benefits are not paid retroactively for that time of unemployment.

Free of Disqualification
All states have provisions in their laws under which a worker may be disqualified from receiving benefits. This disqualification may take the form of (1) a total cancellation of benefit rights, (2) the postponement of benefits, or (3) a reduction in benefits. Common reasons for disqualification include the following:

- Voluntarily leaving a job without good cause.

- Discharge for misconduct.

- Refusal to accept suitable work.

- Involvement in a labor dispute.

- Receipt of disqualifying income. This includes dismissal wages, workers' compensation benefits, benefits from an employer's pension plan, or primary insurance benefits under the Social Security program.

UNEMPLOYMENT INSURANCE : Financing of Benefits

Prior to the passage of the Social Security Act in 1935, relatively few employees had any type of protection for income lost during periods of unemployment. The act stipulated that a payroll tax was to be levied on covered employers for the purpose of financing unemployment insurance programs that were to be established by the states under guidelines issued by the federal government. Essentially, the federal law levied a federal tax on certain employers in all states. If a state established an acceptable program of unemployment insurance, the state taxes used to finance its program could be offset against up to 90 percent of the federal tax. If a state failed to establish a program, the federal tax would still be levied, but no monies collected from the employers in that state would be returned for purposes of providing benefits to the unemployed there. Needless to say, all states quickly established unemployment insurance programs. These programs (along with a federal program for railroad workers) now cover more than 95 percent of all working persons, but major gaps in coverage exist for domestic workers, agricultural workers, and the self-employed.

There are several objectives of the current unemployment insurance program. The primary objective is to provide periodic cash income to workers during periods of involuntary unemployment. Benefits are generally paid as a matter of right, with no demonstration of need required. While federal legislation has extended benefits during times of high unemployment, the unemployment insurance program is basically designed for workers whose periods of unemployment are short-term; the long-term and hard-core unemployed must rely on other measures, such as public assistance and job-retraining programs, when unemployment insurance benefits are exhausted.

A second major objective of unemployment insurance is to help the unemployed find jobs. Workers must register at local unemployment offices, and unemployment benefits are received through these offices. Another important objective is to encourage employers to stabilize employment. As will be described later, this is accomplished through the use of experience rating in determining an employer's tax rate. Finally, unemployment insurance contributes to a stable labor supply by providing benefits so that skilled and experienced workers are not forced to seek other jobs during short-term layoffs and thereby remain available to return to work when called back.

Financing of Benefits
Unemployment insurance programs are financed primarily by unemployment taxes levied by both the federal and state governments. The federal tax is equal to 6.2 percent of the first $7,000 of wages for each worker, but this tax is reduced by up to 5.4 percentage points for taxes paid to state programs. The practical effect of this offset is that the federal tax is actually equal to .8 percent of covered payroll. A few states levy an unemployment payroll tax equal to only the maximum offset (5.4 percent on the first $7,000 of wages), but most states have a higher tax rate and/or levy their tax on a higher amount of earnings.

No state levies the same tax on all employers. Rather, states use a method of experience rating whereby all employers, except those in business for a short time or those with a small number of employees, pay a tax rate that reflects their actual experience, within limits. Thus, an employer who has laid off a large percentage of employees will have a higher tax rate than an employer whose employment record has been stable.

An employer with "good experience" will often pay a state tax of less than 1 percent of payroll and possibly as little as .1 percent. Other employers may pay a state tax as high as 9 percent or 10 percent. Regardless of the actual state tax paid, the employer will still pay the .8 percent federal tax.

The major argument for experience rating is that it provides a financial incentive for employers to stabilize employment. Those opposed to its use contend that many employers have little control over economic trends that affect employment. In addition, they argue that tax rates tend to rise in bad economic times and, in so doing, may actually thwart economic recovery.

The entire unemployment insurance tax is collected by individual states and deposited in the Federal Unemployment Insurance Trust Fund, which is administered by the secretary of the treasury. Each state has a separate account that is credited with its taxes and its share of investment earnings on assets in the fund. Unemployment benefits in the state are paid from this account. The federal share of the taxes received by the fund is deposited into separate accounts and is used for administering the federal portion of the program and for giving grants to the states to administer their individual programs. In addition, the federal funds are available for loans to states whose accounts have been depleted during times of high unemployment.