Special Provisions | Managed Care Plan Designs

Mental Health/Substance Abuse Benefits

Special provisions and limitat ions historically have applied to mental illness and substance abuse (drug/alcohol treatment) benefits. These limitations were a very common plan design feature. In 1993 for example, 97 percent of participants in medium and large private establishment health plans were eligible for some level of outpatient mental health services, while only three percent had the same benefits as those for other illnesses. Similarly, while 98 percent of full-time participants in medium and large private establishment medical plans in 1993 were covered for inpatient detoxification for alcohol and drug abuse treatment, 28 percent and 29 percent, respectively, had the same level of coverage for these illnesses as they had for other illnesses. However, on September 26, 1996, the Mental Health Parity Act (MHPA) was signed into law. The MHPA required that annual or lifetime limits on mental health benefits be no lower than the dollar limits for medical and surgical benefits offered by the group health plan. The MHPA applied to group health plans for plan years beginning on or after January 1, 1998 and contained a "sunset" provision providing that the parity requirements did not apply to benefits received on or after September 30, 2001. These parity requirements were subsequently extended. The MHPA does not apply to benefits for substance abuse or chemical dependency.

In the past, substance abuse benefits were not separately delineated in many plans but covered under mental and nervous benefits. However, because new treatment approaches have been developed and because the federal government and some states have enacted legislation mandating minimum levels of treatment for mental and nervous benefits, more plans separate these benefits today into distinct categories. Most plans in the past had limitations on both mental/nervous and drug/alcohol benefits that resulted in greater cost sharing by the participant. There were two common forms of limitations on these benefits. The first was to set the coinsurance at a higher level, say 50 percent in a 20 percent reimbursement plan, and establish an annual maximum for this benefit, such as $1,500. Additionally, a different lifetime maximum applied to this benefit, say $10,000. A second form of limitation was to set a maximum number of outpatient visits per year, such as 20 visits, with a maximum covered charge, such as $50. Similarly with inpatient coverage on the basic hospitalization portion of the plan, it was common to have a lifetime cap on this specific type of care and a maximum number of days allowable per plan year or calendar year. Since the MHPA prohibited specific dollar limitations for mental and nervous benefits different from other medical and surgical benefits offered by the plan, many plans eliminated such provisions but kept limitations in terms of days of treatment and outpatient visits. Some plans have used this same approach for substance abuse benefits although dollar limitations are still permissible.

"Carve Out" and Separate Management of Costly Expense Items

Many organizations have "carved out" prescription drug benefits from their plans and are managing those benefits on a separate basis. This is because prescription drugs have been among the fastest growing cost components in many medical plans. The emergence of drug management firms provides opportunities for cost savings through pharmacy networks, mail-order discount programs, inclusion of generic drug substitutes, drug formulary management, prescription utilization review, and disease management programs. Mental health and substance abuse benefits also have been carved out and are separately managed by many medical plans.

FEDERAL TAXATION | Plan Provisions and Taxation

In many respects, the federal tax treatment of group medical (including group dental) expense premiums and benefits parallels that of other group coverage if they are provided through an insurance company, a Blue Cross—Blue Shield plan, an HMO, or a PPO. Contributions by the employer for an employee's coverage or the coverage of the employee's dependents are tax deductible to the employer, as long as the employee's overall compensation is reasonable. Employer contributions do not create any income tax liability for an employee. Moreover, benefits are not taxable to an employee except when they exceed any medical expenses incurred. The value of any employer-provided coverage for an employee's domestic partner, minus any employee contributions, represents taxable income to the employee unless the partner qualifies under IRS rules as the employee's dependent.

One major difference between group medical expense coverage and other forms of group insurance is that a portion of an employee's contribution for coverage may be tax deductible as a medical expense if that individual itemizes his or her income tax deductions. Under the Internal Revenue Code, individuals are allowed to deduct certain medical care expenses (including dental expenses) for which no reimbursement was received. This deduction is limited to expenses (including amounts paid for insurance) that exceed 7.5 percent of the person's adjusted gross income.

If a sole proprietorship or partnership pays the cost of medical expense coverage for a proprietor or partner (including dependent coverage), this amount constitutes taxable income to the proprietor or partner. However, the proprietor or partner may be entitled to an income tax deduction for a percentage of this amount. As a result of recent legislation, this deduction is 60 percent through 2001, 70 percent in 2002, and 100 percent thereafter. The deduction cannot exceed the individual's earned income from the proprietorship or partnership that provides the medical expense plan, and the deduction is available only if the proprietor or partner is not eligible to participate in any subsidized medical expense plan of another employer of the proprietor, the partner, or the proprietor's or partner's spouse. It is important to recognize that this is not an itemized deduction; rather, it is a deduction in arriving at adjusted gross income. The remainder of the cost of the medical expense coverage can be deducted as an itemized expense to the extent that it and other medical expenses exceed the 7.5 percent threshold previously described.

As of 1999, there is one circumstance under which a self-employed person, other than a more-than-2 percent owner-employee of an S corporation, can receive a 100 percent deduction for his or her medical expense coverage. This occurs only if the spouse is a bona fide employee of the self-employed person. The medical coverage is then provided to the spouse, who elects dependent coverage for the self-employed person. The self-employed person then pays the entire premium and takes a business deduction for the medical expense coverage provided to an employee. However, the IRS has indicated that such an arrangement will be challenged if the spouse's involvement in the business consists of nominal or insignificant services that have no economic substance or independent significance. Note that if there is a significant investment of the spouse's separate assets in the business, the spouse is employed in the business as a joint owner and treated as self-employed person rather than an employee for purposes of the medical expense insurance.

The tax situation may be different if an employer provides medical expense benefits through a self-funded plan (referred to in the Internal Revenue Code as a self-insured medical reimbursement plan), under which employers either (1) pay the providers of medical care directly or (2) reimburse employees for their medical expenses. If a self-funded plan meets certain nondiscrimination requirements for highly compensated employees, the employer can deduct benefit payments as they are made, and the employee has no taxable income. If a plan is discriminatory, the employer still receives an income tax deduction. However, all or a portion of the benefits received by "highly compensated individuals," but not by other employees, are treated as taxable income. A highly compensated individual is defined as (1) one of the five highest-paid officers of the firm, (2) a shareholder who owns more than 10 percent of the firm's stock, or (3) one of the highest-paid 25 percent of all the firm's employees. There are no nondiscrimination rules if a plan is not self-funded and provides benefits through an insurance contract, a Blue Cross—Blue Shield plan, an HMO, or a PPO.

To be considered nondiscriminatory, a self-funded plan must meet certain requirements regarding eligibility and benefits. The plan must provide benefits (1) for 70 percent or more of "all employees" or (2) for 80 percent or more of all eligible employees if 70 percent or more of all employees are eligible. The following can be excluded from the all-employees category without affecting the plan's nondiscriminatory status:

• Employees who have not completed three years of service.

• Employees who have not attained age 25.

• Part-time employees. Anyone who works fewer than 25 hours per week is automatically considered a part-time employee. Persons who work 25 or more but fewer than 35 hours per week, may also be counted as part-time, as long as other employees in similar work for the employer have substantially more hours.

• Seasonal employees. Anyone who works fewer than seven months of the year is automatically considered a seasonal employee. Persons who work between seven and nine months of the year may also be considered seasonal, as long as other employees have substantially more months of employment.

• Employees who are covered by a collective-bargaining agreement if accident-and-health benefits were a subject of collective bargaining.

Even if a plan fails to meet the percentage requirements regarding eligibility, it can still qualify as nondiscriminatory, as long as the IRS is satisfied that the plan benefits a classification of employees in a manner that does not discriminate in favor of highly compensated employees. This determination is made on a case-by-case basis.

To satisfy the nondiscrimination requirements for benefits, the same type and amount of benefits must be provided for all employees covered under the plan, regardless of their compensation. In addition, the dependents of other employees cannot be treated less favorably than the dependents of highly compensated employees. However, because diagnostic procedures are not considered part of a self-funded plan for purposes of the nondiscrimination rule, a higher level of this type of benefit is permissible for highly compensated employees.

If a plan is discriminatory in either benefits or eligibility, highly compensated employees must include the amount of any "excess reimbursement" in their gross income for income tax purposes. If highly compensated employees receive any benefits that are not available to all employees covered under the plan, these benefits are considered an excess reimbursement. For example, if a plan pays 80 percent of covered expenses for employees in general but 100 percent for highly compensated employees, the extra 20 percent of benefits constitutes taxable income.

If a self-funded plan discriminates in the way it determines eligibility, highly compensated employees have excess reimbursements for any amounts they receive. The amount of this excess reimbursement is determined by a percentage that is calculated by dividing the total amount of benefits highly compensated employees receive (exclusive of any other excess reimbursements) by the total amount of benefits paid to all employees (exclusive of any other excess reimbursements). Using the previous example, assume a highly compensated employee receives $2,000 in benefits during a certain year. If other employees receive only 80 percent of this amount (or $1,600), the highly compensated employee has received an excess reimbursement of $400. If the plan also discriminates in the area of eligibility, the highly compensated employee incurs additional excess reimbursement. For example, if 60 percent of the benefits (ignoring any benefits already considered excess reimbursement) are given to highly compensated employees, 60 percent of the remaining $1,600 ($2,000 - $400), or $960, is added to the $400, for a total excess reimbursement of $1,360.

If a plan provides benefits only for highly compensated employees, all benefits received are considered an excess reimbursement, because the percentage is 100 percent.

CLAIMS | Plan Provisions and Taxation

Medical expense contracts that provide benefits on a service basis (such as HMOs and the Blues) generally do not require that covered persons file claim forms. Rather, the providers of services perform any necessary paperwork and are then reimbursed directly.

Medical expense contracts that provide benefits on an indemnity basis typically require that the insurance company (or other provider) be given a written proof of loss (that is, a claim form) concerning the occurrence, character, and extent of the loss for which a claim is made. This form usually contains portions that must be completed and signed by the employee, a representative of the employer, and the provider of medical services.

The period during which an employee must file a claim depends on the provider of coverage and any applicable state requirements. An employee generally has at least 90 days (or as soon as is reasonably possible) after medical expenses are incurred to file. Some insurance companies require that they be notified within a shorter time (such as 20 days) about any illness or injury on which a claim may be based, even though they give a longer time period for the actual filing of the form itself.

Individuals have the right under medical expense plans to assign their benefits to the providers of medical services. Such an assignment, which authorizes the insurance company to make the benefit payment directly to the provider, may generally be made by completing the appropriate portion of the claim form. In addition, the insurance company has the right (as it does in disability income insurance) to examine any person for whom a claim is filed at its own expense and with the physician of its own choice.

Most self-funded plans contain subrogation provisions. If state law allows, they are also commonly contained in the group medical expense contracts of HMOs, PPOs, the Blues, and insurance companies. A subrogation provision gives the plan (or the organization that provides plan benefits) the right to recover from a third party who is responsible through negligence or other wrongdoing for a covered person's injuries that result in claims being paid. If a covered person receives a settlement from the third party (or their liability insurance company) for medical expenses that the plan has already paid, the covered person must reimburse the plan. The plan also has the right to seek a recovery for benefits paid if legal action is not taken by the person who receives benefits.

Conversion | Plan Provisions and Taxation

Except when termination results from the failure to pay any required premiums, medical expense contracts usually contain (and are often required to contain) a conversion provision, whereby most covered persons whose group coverage terminates are allowed to purchase individual medical expense coverage without evidence of insurability and without any limitation of benefits for preexisting conditions. Covered persons commonly have 31 days from the date of termination of the group coverage to exercise this conversion privilege, and coverage is then effective retroactively to the date of termination.

This conversion privilege is typically given to any employee who has been insured under the group contract (or under any group contract it replaced) for at least three months, and it permits the employee to convert his or her own coverage as well as any dependent coverage. In addition, a spouse or child whose dependent coverage ceases for any other reason may also be eligible for conversion (for example, a spouse who divorces or separates, and children who reach age 19).

A person who is eligible for both the conversion privilege and the right to continue the group insurance coverage under COBRA has two choices when eligibility for coverage terminates. He or she can either elect to convert under the provisions of the policy or elect to continue the group coverage. If the latter choice is made, the COBRA rules specify that the person must again be eligible to convert to an individual policy within the usual conversion period (31 days) after the maximum continuation-of-coverage period ceases. Policy provisions may also make the conversion privilege available to persons whose coverage terminates prior to the end of the maximum continuation period.

The provider of the medical expense coverage has the right to refuse the issue of a "conversion" policy to anyone (1) who is covered by Medicare or (2) whose benefits under the converted policy, together with similar benefits from other sources, would result in overinsurance according to the insurance company's standards. These similar benefits may be found in other coverages that the individual has (either group or individual coverage) or for which the individual is eligible under any group arrangement.

The use of the word conversion is often a misnomer. In actuality, a person whose coverage terminates is given only the right to purchase a contract on an individual basis at individual rates. Most Blue Cross—Blue Shield plans and some HMO plans offer a conversion policy that is similar or identical to the terminated group coverage. However, most insurance companies offer a conversion policy (or a choice of policies) that contains a lower level of benefits than existed under the group coverage. Traditionally, the conversion policy contained only basic hospital and surgical coverages, even if major medical coverage was provided under the group contract. Now many insurance companies provide (and are required to provide in many states) a conversion policy that includes major medical benefits, which do not necessarily have to be as broad as those under the former group coverage.

Some plans offer a conversion policy that is written by another entity. For example, an HMO might enter into a contractual arrangement with an insurance company. In some cases, the HMO and insurance company are commonly owned or have a parent-subsidiary relationship.

Self-funded plans, which are exempt from state laws that mandate a conversion policy, may still provide such a benefit. Rather than providing coverage directly to the terminated employee, an agreement is usually made with an insurance company to make a policy available. This agreement is typically part of a broader contract with the insurer to also provide administrative services and/or stop-loss protection. Because the availability of a conversion policy results in a charge (such as $.65 per employee per month), most self-funded plans do not provide any continuation of coverage beyond what is required by COBRA.

Continuation of Coverage under COBRA | Plan Provisions and Taxation

The Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, requires that group health plans allow employees and certain beneficiaries to elect to have their current health insurance coverage extended at group rates for up to 36 months following a "qualifying event" that results in the loss of coverage for a "qualified beneficiary." The term group health plan as used in the act is broad enough to include medical expense plans, dental plans, vision care plans, and prescription drug plans, regardless of whether benefits are self-insured or provided through other entities, such as insurance companies, HMOs, or PPOs. COBRA applies even if the cost of a plan is paid solely by employees, as long as the plan would not be available at the same cost to an employee if he or she were not employed. There is one exception to this rule: Voluntary benefit plans under which the employer's only involvement is to process payroll deductions are not subject to COBRA.

Church and government plans are exempt from COBRA, but the act applies to all other employers who had the equivalent of 20 or more full-time employees on a typical business day during the preceding calendar year. For example, an employer who had 10 full-time and 16 half-time employees had the equivalent of 18 full-time employees and is not subject to COBRA. Failure to comply with the act results in an excise tax of up to $100 per day for each person denied coverage. The tax can be levied on the employer as well as on the entity (such as an insurer or HMO) that provides or administers the benefits.

Since the passage of COBRA, a qualified beneficiary has been defined as any employee, or the spouse or dependent child of the employee, who on the day before a qualifying event was covered under the employee's group health plan. HIPAA expanded the definition to include any child who is born to or placed for adoption with the employee during the period of COBRA coverage. This change gives automatic eligibility for COBRA coverage to the child as well as the right to have his or her own election rights if a second qualifying event occurs.

Under the act, each of the following is a qualifying event if it results in the loss of coverage by a qualified beneficiary or an increase in the amount the qualified beneficiary must pay for the coverage:

The death of the covered employee

The termination of the employee for any reason except gross misconduct (This includes quitting, retiring, or being fired for anything other than gross misconduct)

A reduction of the employee's hours so that the employee or dependent is ineligible for coverage

The divorce or legal separation of the covered employee and his or her spouse

For spouses and children, the employee's eligibility for Medicare

A child's ceasing to be an eligible dependent under the plan

The act specifies that a qualified beneficiary is entitled to elect continued coverage without providing evidence of insurability. The beneficiary must be allowed to continue coverage identical to that available to employees and dependents to whom a qualifying event has not occurred.

Coverage for persons electing continuation can be changed when changes are made to the plan covering active employees and their dependents. The continued coverage must extend from the date of the qualifying event to the earliest of the following:

18 months for employees and dependents when the employee's employment has terminated or coverage has been terminated because of a reduction in hours. This period is extended to 29 months for a qualified beneficiary if the Social Security Administration determines that the beneficiary was or became totally disabled at any time during the first 60 days of COBRA coverage.

36 months for other qualifying events.

The date the plan terminates for all employees.

The date the coverage ceases because of a qualified beneficiary's failure to make a timely payment of premium.

The date a qualified beneficiary subsequently becomes entitled to Medicare or becomes covered (as either an employee or dependent) under another group health plan, provided the group health plan does not contain an exclusion or limitation with respect to any preexisting condition. If the new plan does not cover a preexisting condition, the COBRA coverage can be continued until the earlier of (1) the remainder of the 18- or 36-month period or (2) the time when the preexisting-conditions provision no longer applies. Note that COBRA coverage is not affected by entitlement to benefits under Medicare or coverage under another group plan if this entitlement or coverage existed at the time of the qualifying event.

If a second qualifying event (such as the death or divorce of a terminated employee) occurs during the period of continued coverage, the maximum period of continuation is 36 months. For example, if an employee terminates employment, the employee and family are eligible for 18 months of COBRA coverage. If the employee dies after 15 months, a second qualifying event has occurred for the employee's spouse and dependent children. The normal period of COBRA continuation resulting from the death of an employee is 36 months. However, because the spouse and children have already had COBRA coverage for 15 months, the second qualifying event extends coverage for an additional 21 months.

At the termination of continued coverage, a qualified beneficiary must be offered the right to convert to an individual insurance policy if a conversion privilege is generally available to employees under the employer's plan.

Notification of the right to continue coverage must be made at two times by a plan's administrator. First, when a plan becomes subject to COBRA or when a person becomes covered under a plan subject to COBRA, notification must be given to an employee as well as to his or her spouse. Second, when a qualifying event occurs, the employer must notify the plan administrator, who then must notify all qualified beneficiaries within 14 days. In general, the employer has 30 days to notify the plan administrator. However, an employer may not know of a qualifying event if it involves divorce, legal separation, or a child's ceasing to be eligible for coverage. In these circumstances, the employee or family member must notify the employer within 60 days of the event, or the right to elect COBRA coverage is lost. The time period for the employer to notify the plan administrator begins when the employer is informed of the qualifying event, as long as this occurs within the 60-day period.

The continuation of coverage is not automatic; it must be elected by a qualified beneficiary. The election period starts on the date of the qualifying event and may end not earlier than 60 days after actual notice of the event to the qualified beneficiary by the plan administrator. Once coverage is elected, the beneficiary has 45 days to pay the premium for the period of coverage prior to the election.

Under COBRA, the cost of the continued coverage may be passed on to the qualified beneficiary, but the cost cannot exceed 102 percent of the cost to the plan for the period of coverage for a similarly situated active employee to whom a qualifying event has not occurred. The extra 2 percent is supposed to cover the employer's extra administrative costs. The one exception to this rule occurs for months 19 through 29 if an employee is disabled, in which case the premium can then be as high as 150 percent. Qualified beneficiaries must have the option of paying the premium in monthly installments. In addition, there must be a grace period of at least 30 days for each installment.

COBRA has resulted in significant extra costs for employers. Surveys indicate that coverage is elected by approximately 20 percent of those persons who are entitled to a COBRA continuation. The length of coverage averages almost one year for persons eligible for an 18-month extension and almost two years for persons eligible for a 36-month extension. While significant variations exist among employers, claim costs of persons with COBRA coverage generally run between 150 percent and 200 percent of claim costs for active employees and dependents. Moreover, administrative costs are estimated to be about $20 per month for each person with COBRA coverage.

TERMINATION OF COVERAGE | Plan Provisions and Taxation

In the absence of any provisions for continuation or conversion, group medical expense coverage of an employee generally ceases on the earliest of the following:

The date on which employment terminates (In some plans, coverage ceases on the last day of the month in which employment terminates.)

The date on which the employee ceases to be eligible

The date on which the master contract terminates

The date on which the overall maximum benefit of major medical coverage is received

The end of the last period for which the employee has made any required contribution

Coverage on any dependent usually ceases on the earliest of the following:

The date on which he or she ceases to meet the definition of dependent

The date on which the coverage of the employee ceases for any reason except the employee's receipt of the overall maximum benefit

The date on which the dependent receives the overall maximum benefit of major medical coverage

The end of the last period for which the employee has made any required contribution for dependent coverage

However, coverage often continues past these dates because of federal legislation or employer practices.

RELATIONSHIP WITH MEDICARE | Plan Provisions and Taxation

Because most employees and their dependents are eligible for Medicare on reaching age 65 (and possibly under other circumstances), a provision that eliminates any possible duplication of coverage is necessary. The simplest solution is to exclude any person eligible for Medicare from eligibility under the group contract. However, in most cases this approach conflicts with the Age Discrimination in Employment Act, which prohibits discrimination in welfare benefit plans for active employees.

Medicare Secondary Rules
Medicare is often the secondary payer to employer-provided medical expense coverage. Employers with 20 or more employees must make coverage available under their medical expense plans to active employees aged 65 or older and to active employees' spouses who are eligible for Medicare. Unless an employee elects otherwise, the employer's plan is primary and Medicare is secondary. Except in plans that require large employee contributions, it is doubtful that employees will elect Medicare to be primary because employers are prohibited from offering active employees or their spouses a Medicare carve-out, a Medicare supplement, or some other incentive not to enroll in the employer's plan.

Medicare is the secondary payer of benefits in two other situations. The first situation involves persons who are eligible for Medicare benefits to treat end-stage renal disease with dialysis or kidney transplants. Medicare provides these benefits to any insured workers (either active or retired) and to their spouses and dependent children, but the employer's plan is primary during the first 30 months of treatment only; after that time, Medicare is primary and the employer's plan is secondary. It should be noted that the employer's plan could totally exclude dialysis and/or kidney transplants, in which case Medicare would pay. However, the employer is prevented by law from excluding these benefits for the first 30 months if they are covered thereafter. This rule for renal disease applies to medical expense plans of all employers, not just those with 20 or more employees.

Medicare is also the secondary payer of benefits to disabled employees (or the disabled dependents of employees) under age 65 who are eligible for Medicare and who are covered under the medical expense plan of large employers (defined as plans with 100 or more employees). Medicare, however, does not pay anything until a person has been eligible for Social Security disability income benefits for two years. The rule applies only if an employer continues medical expense coverage for disabled persons; there is no requirement for such a continuation.

When an employer's plan is primary, Medicare payments are made for any expenses that are covered by Medicare but not by the employer's plan. For purposes of these payments, Medicare deductibles, copayments, and percentage participation generally do not apply, although Medicare benefits are limited to what would have been paid in the absence of the employer's plan.

Medicare Carve-Outs and Supplements
An employer's plan may cover certain persons aged 65 or older who are not covered by the provisions of the Age Discrimination in Employment Act—specifically, retirees and active employees of firms with fewer than 20 employees. Although there is nothing to prevent an employer from terminating coverage for these persons, many employers provide them with either a Medicare carveout or Medicare supplement.

With a Medicare carve-out, plan benefits are reduced to the extent that benefits are payable under Medicare for the same expenses. (Medicare may also pay for some expenses not covered by the group plan.) For example, if a person who incurs $1,000 of covered expenses is not eligible for Medicare, $720 in benefits is paid under a medical expense plan that has a $100 deductible and an 80 percent coinsurance provision. However, if the same person is eligible for Medicare and if Medicare pays $650 for the same expenses, the employer's plan pays only $70, for a total benefit of $720.

Some medical expense plans use a more liberal carve-out approach and reduce covered expenses (rather than benefits payable) by any amounts received under Medicare. In the previous example, the $650 paid by Medicare would be subtracted from the $1,000 of covered expenses, which would leave $350. After the deductible and coinsurance are applied to this amount, the employer's plan would pay $200, so the covered person would receive a total of $850 in benefits, or $130 more than a person not eligible for Medicare.

As an alternative to using a carve-out approach, some employers use a Medicare supplement that provides benefits for certain specific expenses not covered under Medicare. These include (1) the portion of expenses that is not paid by Medicare because of deductibles, coinsurance, or copayments and (2) certain expenses excluded by Medicare, such as prescription drugs. Such a supplement may or may not provide benefits similar to those available under a carve-out plan.

COORDINATION OF BENEFITS | Plan Provisions and Taxation

In recent years, the percentage of individuals having duplicate group medical expense coverage has increased substantially and is estimated to be about 10 percent. Probably the most common situation is the one in which a husband and wife both work and have coverage under their respective employers' noncontributory plans. If the employer of either spouse also provides dependent coverage on a noncontributory basis, the other spouse (and other dependents if both employers provide such coverage) is covered under both plans. If dependent coverage is contributory, it is necessary for a couple with children to elect such coverage under one of their plans. However, because a spouse is considered a dependent, he or she also has duplicate coverage when the election is made. Note that this duplicate coverage can be avoided if dependent coverage can be elected for children only. This option exists under many but not all plans. Duplicate coverage may also arise under the following circumstances:

An employee has two jobs.

Children are covered under both a parent's and a stepparent's plans.

An employee elects coverage under a contributory plan, even though he or she is covered as a dependent under another plan. This could result from ignorance or from an attempt to collect double the amount if a claim should occur. In many cases, this coverage is elected because it is broader, even though it still results in an element of duplicate coverage.

Duplicate coverage can also occur if an individual has coverage under a group plan that is not provided by an employer. A common example involves children whose parents have purchased accident coverage for them through their schools.

In the absence of any provisions to the contrary, group medical expense plans are obligated to provide benefits in cases of duplicate coverage as if no other coverage exists. However, to prevent individuals from receiving benefits that exceed their actual expenses, group medical expense plans contain a coordination-of-benefits (COB) provision, under which priorities are established for the payment of benefits by each plan covering an individual.

Most states do not require medical expense products of insurance companies, the Blues, HMOs, or PPOs to have a COB provision. If one is used, however, it must comply with the appropriate state rules. Most COB provisions are based on the Group Coordination of Benefits Model Regulation promulgated by the NAIC. This regulation, which applies to traditional insurance products and other products subject to insurance regulation, is periodically revised, and all or portions of one of the versions have now been adopted by almost all states. As with all NAIC model legislation and regulations, some states have adopted the COB provisions with variations. Most states also have adopted a virtually identical COB provision for use by HMOs.

Although some flexibility is allowed, virtually all COB provisions apply when other coverage exists through the group insurance plans or other group benefit arrangements (such as the Blues, HMOs, or self-funded plans) of another employer. They may also apply to no-fault automobile insurance benefits and to student coverage that is either sponsored or provided by educational institutions. However, these provisions virtually never apply (and cannot in most states) to any other coverages provided under contracts purchased on an individual basis outside the employment relationship.

Determination of Primary Coverage
The usual COB provision stipulates that any other plan without the COB provision is primary and that any plan with it is secondary. If more than one plan has a COB provision, the following priorities are established:

Coverage as an employee is usually primary to coverage as a dependent. The exception to this rule occurs if a retired person is covered (1) by Medicare, (2) under a retiree plan of a former employer, and (3) as a dependent of a spouse who is an active employee. In this case, coverage as a dependent is primary, Medicare is secondary, and the retiree plan pays last.

Coverage as an active employee (or as that person's dependent) is primary to coverage as a retired or laid-off employee (or as that person's dependent). This rule is ignored unless both plans contain the rule.

Coverage as an active employee (or that person's dependent) is primary to a plan that provides COBRA continuation benefits. This rule is also ignored unless both plans contain the rule.

If the specific rules of a court decree state that one parent must assume responsibility for his or her child's health care expenses and the plan of that parent has actual knowledge of the terms of the court decree, then that plan is primary.

If the parents of dependent children are married or are not separated (regardless of whether they have ever been married) or if a court awards joint custody without specifying that one parent has the responsibility to provide health care coverage, the plan of the parent whose birthday falls earlier in the calendar year is primary and the plan of the parent with the later birthday is secondary.

If the parents of dependent children are not married, are separated (regardless of whether they have ever been married), or are divorced and if there is no court decree allocating responsibility for the child's health care expenses, the following priorities apply:

The plan of the parent with custody is primary.

The plan of the stepparent who is the spouse of the parent with custody is secondary.

The plan of the parent without custody is tertiary.

The plan of the stepparent who is the spouse of the parent without custody pays last.

If none of the previous rules establishes a priority, the plan covering the person for the longest period of time is primary. If this rule also fails to determine the primary plan, then allowable expenses are shared equally among the plans.

Benefits for Domestic Partners | Plan Provisions and Taxation

In the mid-1980s, the plans of a few employers began to define the term dependent broadly enough to include unmarried domestic partners. For example, one plan covers unmarried couples as long as they live together, show financial interdependence and joint responsibility for each other's common welfare, and consider themselves life partners. This type of requirement is fairly typical, as is the additional requirement that the employee's relationship must have lasted some specified minimum period of time, such as 6 or 12 months. The employee must usually give the employer an affidavit that these requirements have been satisfied.

By the late-1990s, an estimated 10 percent of employers provided medical expense benefits to domestic partners. (A smaller percentage of employers offer other types of group benefits.) Most plans provide benefits to domestic partners engaged in either heterosexual or homosexual relationships. Some plans provide benefits only to persons of the opposite sex of the employee, and a small number of plans limit benefits only to persons of the same sex. The rationale for the latter is that persons of opposite sexes can obtain benefits by marrying, whereas this option is not available to persons of the same sex.

The number of employees obtaining coverage for domestic partners has been relatively small, with many employers experiencing enrollment of less than 1 percent when only partners of the same sex are covered. Some employers have experienced enrollment of up to 4 percent if partners of either sex are covered. (Enrollments of partners of the opposite sex are more than double the enrollments of partners of the same sex.) This low enrollment is due primarily to two factors. First, the domestic partner is probably also working and has medical expense coverage from his or her employer. Second, some employees are unwilling to make their living arrangement or sexual preference known in the workplace.

Despite predictions that domestic partners would have adverse claims experience (primarily due to AIDS), the claims experience has been good. This is probably due in part to the fact that domestic partners, on the average, tend to be younger and therefore probably healthier than employees in general. Also, same-sex partners have few maternity claims. Most, if not all, insurers that levied surcharges on premiums for domestic partners when the coverage was new have now dropped the surcharges.

Portability | Plan Provisions and Taxation

Some of the most significant parts of HIPAA are the provisions dealing with "portability" of medical expense coverage. These provisions are not for the purpose of allowing an employee to take specific insurance from one job to another. Rather, they put limitations on preexisting-conditions exclusions and allow an employee to use evidence of prior insurance coverage to reduce or eliminate the length of any preexisting-conditions exclusion when the employee moves to another medical expense plan. These provisions should minimize job lock for employees by eliminating the fear that medical expense coverage will be lost if an employee changes jobs.

The portability provisions apply to almost all group health insurance plans (either insured or self-funded) as long as they have at least two active participants on the first day of the plan year. Note that the same definition of group health plan mentioned in the initial discussion of HIPAA applies to the portability provisions.

Limitations on Preexisting Conditions
Restrictions for preexisting conditions are limited to a maximum of 12 months (18 months for late enrollees). In addition, the period for preexisting conditions must be reduced for prior creditable coverage as defined below. It should be noted that there is nothing in the act that prohibits an employer from imposing a probationary period before a new employee is eligible to enroll in a medical expense plan. (Note: HIPAA refers to the probationary period as a waiting period. However, the term probationary is consistent with the terminology and is therefore used in this discussion.) However, any probationary period must be applied uniformly without regard to the health status of potential plan participants or beneficiaries. In addition, the probationary period must run concurrently with any preexisting-conditions period. For example, an employee might be subject to a preexisting-conditions period of seven months because of prior coverage. If the employer's plan had a three-month probationary period for enrollment, the length of the preexisting-conditions period after enrollment could be only four months. An HMO is also permitted to have an affiliation period of up to two months (three months for late enrollees) if the HMO does not impose a preexisting-conditions provision and if the affiliation period is applied without regard to health status-related factors.

Under the act, a preexisting condition is defined as a mental or physical condition for which medical advice, diagnosis, care, or treatment was recommended or received within the six-month period ending on the enrollment date. No preexisting-conditions exclusions can apply to pregnancy or to newborn children or, if under age 18, to newly adopted children or children newly placed for adoption, as long as they become covered for creditable coverage within 30 days of birth, adoption, or placement. In addition, the use of genetic information as a preexisting condition is prohibited unless there is a diagnosis of a preexisting medical condition related to the information.

The 12-month limitation for preexisting conditions applies if an employee enrolls when he or she is initially eligible for coverage. It also applies in the case of special enrollment periods that are required by the act for employees and dependents who lose other coverage and for new dependents. Anyone who does not enroll in an employer's plan during the first period he or she is eligible or during a special enrollment period is a late enrollee and can be subject to a preexisting-conditions period of 18 months.

Creditable Coverage
The act defines creditable coverage as coverage under an individual policy, an employer-provided group plan (either insured or self-funded), an HMO, Medicare, Medicaid, or various public plans, regardless of whether the coverage is provided to a person as an individual, an employee, or a dependent. However, coverage is not creditable if there has been a break in coverage of 63 days or more.

In determining the length of a person's preexisting-conditions period, the period of prior creditable coverage must be subtracted. Assume, for example, that an employer's plan has a preexisting-conditions period of 12 months. If a new employee has 12 months or more of creditable coverage, the preexisting-conditions period is satisfied. If the period of creditable coverage is only seven months, then the preexisting-conditions period runs five more months. Note, however, that if the employee has been without coverage for at least 63 days between jobs, the full preexisting-conditions period applies.

Employers have two ways in which they can apply creditable coverage: on a blanket basis to all categories of medical expense coverage or on a benefit-specific basis. For example, if an employee had prior coverage that excluded prescription drugs, this particular coverage could be subject to the full preexisting-conditions period, while the period for other benefits would be reduced because creditable coverage had applied to them. For administrative ease, an employer usually picks the first method.

The act requires that an employer automatically give persons losing group coverage a certificate that specifies the period of creditable coverage under the plan they are leaving, including any period of coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). In addition, the employer must provide the certificate to anyone who requests it within 24 months after coverage ceases. If an individual is eligible for COBRA coverage, the certificate must be provided no later than the time when a COBRA election notice must be provided. In other cases, the employer must provide the certificate within a "reasonable" time. This certificate of creditable coverage must include the following information:

The date the certificate was issued

The name of the health plan that provided the coverage

The name and identification number of individual(s) whose coverage has ceased

The name, address, and telephone number of the administrator responsible for the certificate

A statement that the individual(s) had at least 18 months of creditable coverage or the date any probationary period began and the date coverage began

The date coverage ended

One certificate may include coverage for the employee and all dependents, or the employer may issue separate certificates for each person.

Sample certificates of creditable coverage are readily available, including blank ones that can be downloaded from the Internet. This has led to a high incidence of fraudulent certificates. As a result, many plans contact the prior employer to verify the accuracy of any certificates they are given.

State Options
The act's provisions on portability generally override state laws. However, state laws that provide greater portability are not overridden. For example, a look-back period of less than six months might be required, or the maximum preexisting-conditions period could be less than 12 months.

Federal Rules for Children's Coverage | Plan Provisions and Taxation

Until the passage of the Omnibus Budget Reconciliation Act of 1993 (OBRA '93), provisions regarding eligibility were determined by the employer, provider underwriting practices, and/or any applicable state laws. OBRA '93 brought the federal government into the picture with a series of rules designed to better guarantee that benefits are available to children. Some of these rules pertain to eligibility.

Coverage for Adopted Children
One rule is in the form of an amendment to ERISA. If a work-related group medical expense plan provides coverage for dependent children of participants or beneficiaries, it must provide benefits for adopted children or children placed for adoption under the same terms and conditions that apply to natural children. For purposes of this change, a child is defined as a person under the age of 18 at the time of adoption or placement for adoption. Placement for adoption occurs at the time in the adoption process when the plan participant or beneficiary assumes and retains the legal duty for the total or partial support of a child to be adopted.

In addition to providing coverage, a plan cannot restrict benefits because of a preexisting condition at the time coverage is effective as long as the adoption or placement for adoption occurs while the parent is eligible for plan participation.

Medical Child Support Orders
Two other rules have as their goal the shifting of Medicaid cost from the government to the private sector by requiring employer-provided benefit plans to pick up more of the cost of providing medical expense benefits to the children of divorced and separated parents. The first of these rules amended ERISA by requiring employer-sponsored medical expense plans to recognize qualified medical child support orders by providing benefits for a participant's children in accordance with the requirements of such an order.

The act defines a medical child support order as a court judgment, decree, or order that (1) provides for child support with respect to the child of a group plan participant or provides benefit coverage to such a child, is ordered under state domestic relations law, and relates to benefits under the plan or (2) enforces a state medical support law enacted under the new Medicaid rules discussed below. The support order then becomes qualified if two additional requirements are met. First, the order must create or recognize the right of the child to receive benefits to which the plan participant or other beneficiary is entitled under a group plan. Second, the order must include such information as the name and last known mailing address of the plan participant and the child, a reasonable description of the coverage to be provided the period for which coverage must be provided and each plan to which the order applies. However, a qualified order cannot require a plan to offer any benefit that is not already available under the plan unless the benefits are necessary to meet the requirements of a state medical child support law established under the Social Security Act.

When a plan administrator receives a medical child support order, the administrator must promptly notify the participant and each child named under the order and inform them of the plan's procedure for determining if the order is a qualified medical child support order. Under the act, all group plans must establish reasonable written procedures for determining whether these orders are qualified.

Changes in Medicaid Rules
Under the final rule that is discussed, states were encouraged (under threat of losing some Medicaid reimbursement) to adopt a series of laws relating to medical child support. One of these laws prohibits plan administrators from denying enrollment of a child under a parent's insurance plan on the grounds that (1) the child was born out of wedlock, (2) the child is not claimed as a dependent on the parent's federal income tax return, or (3) the child does not reside with the parent or in the insurer's service area. In addition, a second law provides that if a court orders a parent to provide medical support, the parent's plan must enroll the child without regard to any enrollment restrictions. If the parent fails to enroll the child, enrollment can be made by the child's other parent or by the state Medicaid agency. The employer is required to withhold from the parent's compensation any payments that the parent must make toward the cost of coverage.

ELIGIBILITY | Plan Provisions and Taxation

The eligibility requirements for medical expense coverage are essentially the same as those discussed earlier for group term insurance—an employee must usually be in a covered classification, must satisfy any probationary period, and must be a full-time employee. Coverage is rarely made available to part-time employees. In addition, medical expense contracts often contain an actively-at-work provision. This provision may be waived, particularly for larger employers for whom adverse selection tends to be less of a problem than for smaller groups because any adverse selection for a large group is reflected in future premiums through the experience-rating process.

Eligibility requirements may vary somewhat if an employer changes providers for a plan's benefits. Note that the following discussion refers to the employer's plan with benefits paid by the previous provider as the "old plan" and the employer's plan with benefits paid by the new provider as the "new plan." In actuality, the employer still has the same medical expense plan. It has only been modified with the use of a new provider and, possibly, a different level of benefits. This is a material modification to a group health plan, and ERISA requires that participants be notified of this change by a summary of material modification.

Even though it has been adopted by only a few states, most providers follow the procedures established by the National Association of Insurance Commissioners (NAIC) Group Coverage Discontinuance and Replacement Model Regulation for medical expense coverage (and possibly other group coverages). This regulation stipulates that coverage be provided (but possibly limited) under a new plan to anyone who (1) was covered under the old plan at the date it was discontinued and (2) is in an eligible classification of the new plan. Employees actively at work on the date coverage is transferred are automatically covered under the new plan and are exempt from any probationary periods. If the new plan contains a preexisting-conditions provision, benefits applicable to an individual's preexisting conditions are limited to the lesser of (1) the maximum benefits of the new plan (ignoring the preexisting conditions) or (2) the maximum benefits of the old plan.

Employers often negotiate with the provider of benefits to ensure that for employees who are covered under the old plan but who are not actively at work on the date coverage is discontinued (such as an employee disabled by illness or injury or employees suffering temporary interruptions of employment) are included in the new plan. However, their benefits are frequently limited to the old plan's level until they meet the new plan's actively-at-work requirement.

Two final points should be made concerning the transfer of coverage. First, the new plan will not pay benefits for expenses covered by the old plan under an extension-of-benefits provision (discussed later); second, when applying any deductibles or probationary periods under the new plan, credit is often given for the satisfaction (or partial satisfaction) of the same or similar provisions during the last three months of the old plan. For example, assume that coverage is transferred in the middle of a calendar year and the new plan contains the same $200-a-year calendar deductible as the old plan. If an employee has already satisfied the deductible under the old plan, no new deductible is required for the remainder of the calendar year, provided that (1) the expenses used to satisfy the deductible under the old plan satisfy the deductible under the new plan and (2) the expenses were incurred during the last three months of the old plan. If only $140 of the $200 was incurred during those last three months, an additional $60 deductible is required under the new plan for the remainder of the calendar year.

Dependent Eligibility
Typically, the same medical expense benefits that are provided for an eligible employee are also available for that employee's dependents. Conversely, however, dependent coverage is rarely available unless the employee also has coverage. As long as any necessary payroll deductions have been authorized, dependent coverage is typically effective on the same date as the employee's coverage. If coverage under a contributory plan is not elected within 31 days after dependents are eligible, future coverage is available only during an open enrollment period or when satisfactory evidence of insurability is provided. However, if an employee was previously without dependents (and therefore had no dependent coverage), any newly acquired dependents (by birth, marriage, or adoption) are eligible for coverage as of the date they gain dependent status.

The term dependents most commonly refers to an employee's spouse who is not legally separated from the employee and any unmarried dependent children (including stepchildren and adopted children) under the age of 19. However, coverage is usually provided for children to age 23 if they are full-time students. In addition, coverage may also continue (and is required to be continued in some states) for children who are incapable of earning their own living because of a physical or mental infirmity. Such children are considered dependents as long as this condition exists, but periodic proof of the condition may be required. If an employee has dependent coverage, all newly acquired dependents (by birth, marriage, or adoption) are automatically covered.

Some persons that meet the definition of a dependent may be ineligible for coverage because they are in the armed forces or they are eligible for coverage under the same plan as the employees themselves. This latter restriction, however, may not apply to a spouse unless the spouse is actually covered under the plan. Some plans also exclude coverage for any dependents residing outside the United States or Canada.

Medical expense plans may contain a "nonconfinement" provision for dependents, which is similar to the actively-at-work provision for employees. Under this provision, a dependent is not covered if he or she is confined for medical care or treatment in a hospital or at home at the time of eligibility. Coverage, however, becomes effective when the dependent is released from such confinement. Until the passage of HIPAA, a nonconfinement provision was commonly found in medical expense plans. However, many legal and benefit experts feel that such a provision violates HIPAA, because it involves the use of health status as a basis for eligibility. In addition, some states do not allow the provision in insured contracts. As a result, many providers no longer include a nonconfinement provision, and an employee's dependents are eligible for coverage at the same time the employee is eligible.

When coverage is transferred, dependents are treated the same as employees, except that any actively-at-work provision may be replaced by a nonconfinement provision.