Chapter 8

Front 1

Accident and Health Policy (A & H Policy)

Back 1

policy covering both injury and sickness

Front 2

Accidental Injury

Back 2

a spontaneous event, unforeseen and unintended resulting in injury

Front 3

Adverse Selection

Back 3

the tendency of more bad risks than good risks to purchase and
maintain insurance

Front 4

Morbidity Table

Back 4

table showing the mathematical probability of disability (illness or injury)

Front 5

Policy Period

Back 5

time interval when the policy is in force; A & H policy typically one year.

Front 6

Preexisting Conditions

Back 6

prior medical conditions for which the applicant has received,
or should have received, medical advice or treatment within a specified period before the
effective date of a policy

Front 7

Probationary Period

Back 7

a specified period of time, such as 30 days, that a newly hired employee must satisfy before being enrolled in a group health plan. It is intended for people who join the group after the policy effective date

Front 8

Sickness

Back 8

illness or disease which first manifests itself or which is first diagnosed and
treated while the policy is in force

Front 9

Loss of Income/Disability (Loss of Time)

Back 9

– valued contract that pays weekly or
monthly benefits due to injury or sickness. The benefit is a percentage of the insured’s
past earnings

Front 10

Medical Expense

Back 10

– contract that covers the various expenses which an insured may
incur due to a disability or illness. It may provide payment in a variety of ways:
a. Blanket – pays a set maximum overall limit with no itemizing.
b. Scheduled – pays benefits in the amount as listed for each specified expense.
c. Cash – pays a lump sum payment up to the stated maximum number of days.
d. Reimbursement – pays benefits directly to the insured, unless assigned to the
provider(s), then pays directly to the provider.
e. Fee-for-Service – pays directly to the provider for the medical services received.
f. Prepaid – provides and coordinates health care in return for predetermined
monthly premiums.

Front 11

Dental Expense

Back 11

– a form of Medical Expense Health Insurance covering the
treatment and care of dental disease and injury affecting the insured’s teeth.

Front 12

Long-Term Care Expense

Back 12

– product designed to provide coverage for necessary
diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services
provided in a setting other than an acute care unit of a hospital, such as a nursing home or even one’s own home.

Front 13

Accidental Death and Dismemberment

Back 13

– pays (principal amount) upon accidental
death, loss of sight, or loss of two limbs. It also pays a smaller amount (capital amount)
as per policy schedule for lesser accidental dismemberment losses. It may be added as a
rider to a Disability Income, Medical Expense or a Life Insurance Policy.

Front 14

Field Underwriting Nature and Purpose

Back 14

Field underwriting is very important due to the risk of a moral hazard. It is the initial step of
the total process of insuring a health risk. It includes the agent’s initial personal contact with
the applicant and the determination of insurability while assisting the applicant in recording
information on the application. Fundamentally, the purpose is to be certain that a prospective
insured individual or group has the same probability of loss for which the premium rate is based.

Front 15

Underwriting Factors

Back 15

1. Underwriting involves analysis of the applicant to determine if he/she is acceptable for
the insurance proposed under the conditions indicated. It also attempts to eliminate
conditions with more frequent and higher claims than the insurer’s rates anticipate.
2. Net insurance rates are obtained by multiplying claim frequency by the average value of claims.
3. Individual underwriting factors include:
a. Age.
b. Gender.
c. Smoking.
d. Occupation and hobbies (degree of risk).
e. Physical condition.
f. Moral hazard/financial hazard.
g. Health history.
h. Foreign travel/residence.
i. Other insurance.
j. Plan applied for.
4. Other factors in determining premiums include the geographical area in which the insured
lives; however, one’s political and religious preference is not considered in determining
rates. When an applicant has two occupations, the most hazardous will be used for rating.

Front 16

Underwriting Actions

Back 16

Upon receipt of an application for insurance, the insurer’s underwriter will take one of the following actions:

1. Issue standard – issue the coverage requested at the rate that was quoted.
2. Issued rated-up – issue the coverage requested but at a higher rate. (Same as
substandard in life insurance.) Higher premiums are required due to the greater
potential for a larger number of claims.
3. Issue with exclusions/limitations – may be temporary or permanent; limits the
insurer’s obligation to pay. The rider used to exclude coverage for existing conditions is
sometimes referred to as an Impairment Rider.
4. Rejection – policy is not issued, applicant is an excessive risk.

Front 17

Group Underwriting Process

Back 17

1. Most health insurance is issued on a group basis. Group underwriting is different than
individual underwriting; all eligible members of the group are covered regardless of
physical condition, age or gender.
2. Cost is determined by the type, size, average age, location, and the group’s claims
experience. In multi-state groups, cost is also determined by the state in which the
majority of the employees are located and the policyholder’s principal office location.
The insurer’s corporate office location is not a cost factor. Evidence of insurability is
not required since an annual re-evaluation makes premium adjustments possible, based
upon the group’s claims experience. Normally, the higher the group’s average age, the higher the average number of claims.
3. The insurer can require a minimum percentage of the group to enroll in the plan to
guard against “adverse selection.” Methods to reduce adverse selection are:
a. The group must be formed for a purpose other than obtaining insurance.
b. A minimum number of enrollees are required before underwriting.
c. Contributory plans require that both the employees and employer contribute to
the premium, and 75% participation is required.
d. Noncontributory plans require the employer to pay all premiums and 100%
participation is required.
e. Employees have to work a minimum number of hours weekly to be eligible.
Independent directors and contractors are not employees.
4. New employees are usually eligible to enroll after a probationary period. If they do
not enroll upon becoming eligible, and enroll later, the insurer may require proof of
insurability. If the employee does not initially enroll he/she may do so at the next
enrollment period, which is typically the plan’s anniversary date. Proof of insurability
is not required during an enrollment period.
5. Group insurance can be either Community or Experience rated. Community rating
is essentially geographical rating. The cost of medical care within a particular
geographical area or community determines how much the plan’s premium will be.
Experience rating is the utilization of the claim history of the group seeking to purchase
insurance to determine how much the plan’s premium will be.

Front 18

Group Plan Design Factors

Back 18

The group plan design factors that should be considered in formulating a group benefit plan are discussed below.

1. Employer’s objectives – the objectives will vary for each organization based upon
such factors as size, location, type of business, the result of collective bargaining and the
employer’s philosophy.
2. Types of benefits a plan should provide – in most cases the decision is ongoing
and involves either the offering of new or improved benefits or the redesigning of
existing benefits.
3. Plan provisions for controlling costs – these provisions can include probationary
periods, benefit limitations, and contributory financing.
4. Benefit plan communication – an effective communication program should create
an awareness of the way that current benefits improve the employee’s financial security;
provide a greater understanding of available benefits; encourage the wise use of benefits;
and assure that benefits comply with the legal requirements.
5. Benefit outsourcing – the types of functions that an employer may decide to
outsource are benefit administration such as in self-insured plans, and actuarial compliance such as in qualified retirement plans.

Front 19

Group Provisions

Back 19

1. Group health is written to cover people currently working for the same employer. It
usually covers only nonoccupational injury or disease, and the contract is between the
employer and the insurer.
2. The group sponsor receives a Master Policy, while individual employees receive
a Certificate of Insurance showing a summary of benefits; all employees have the
same coverage. The group sponsor applies for coverage, provides information for
underwriting, maintains the policy, and makes premium payments. Group insurance
identifies the employee, employer relationship.
3. A Conversion Privilege allows an employee to convert the group coverage to an
individual policy, without proof of insurability, upon termination of eligibility or
termination of the group plan, providing the request is submitted to insurer within 31
days after the qualifying event.
4. Continuation of Coverage for Dependent Children – policies providing
coverage for a dependent child (until a specified age, usually 19) shall not terminate
that coverage if the child is dependent upon the insured and is incapable of self-support
because of a physical or mental handicap, provided the handicap occurred while the
policy was in force and the person agrees to pay for a physical exam at the request of the
insurer. Both incapacity and dependency must be proven. Coverage may be extended
to ages 21 through 25 (depending on insurer) for children attending an accredited
university.
5. Extension of Benefits – if a group Medical Expense policy is terminated for any
reason, the benefits to a disabled insured are extended three months for Basic Medical
Expense; 12 months for Major Medical Expense. If the coverage is terminated on an
individual basis, the Major Medical Expense extension of coverage is to the end of the
following calendar year after termination. The disability must occur while covered by
the terminated policy.
6. Coordination of Benefits – is a method of determining primary and secondary
coverage when an insured is covered by more than one group policy to help reduce
overinsurance. The insurer for the person with the claim is primary with the spouse’s
plan being secondary. In the event children are covered under two group plans, the
insurer for the parent whose birthday is first in the calendar year is primary. Secondary
carriers will not pay claims that are the primary carrier’s responsibility.

Front 20

Employment-Related Groups

Back 20

a. An Individual Employer Group for employees of an eligible employer.
b. Multiple Employer Trusts (METs) are groups formed by insurers, agents,
brokers, or third-party administrators who are called sponsors, thus allowing
employers, in states that require five to ten people in a group, to join with other
employers of the same industry for purposes of obtaining insurance.
1) The sponsor develops the plan, sets the underwriting rules, and administers the plan.
2) A non-insured plan operates without the services or funds of an insurance
company. The employer assumes legal responsibility for providing coverage
through a trust.
Chapter Eight - Health Basics
California Life and Health 72
3) The Trust is the Master Policyowner with certificates of insurance issued to
each employee.
c. Multi-Employer Welfare Associations (MEWAs) are small firms that are
grouped together for the purpose of forming an association in order to receive
excellent rates for health insurance. These groups are typically self-funded
employee health benefit plans. The formation and regulation of MEWAs can
vary by state.
d. The Taft-Hartley Trusts Act was passed to prevent employers of union members
from paying for the benefits directly to the group plan carrier. The Act
established a negotiated trust for the unions to receive benefits from. Under
the collective bargaining agreement, most employers pay a percentage of the
benefits per hour worked by the union member.
e. In California, the following items apply:
1) Multiple Employer Trusts (METs) that are unable to show that they are
subject to the jurisdiction of another agency of this or another state or the
federal government, must submit to an examination by the Commissioner
to determine their organization and solvency, and to determine whether they
are in compliance with applicable provisions of the code, and are required to
obtain a Certificate of Authority to do business in California and be required to
meet all appropriate reserve, surplus, capital and other necessary requirements
imposed by the code for all insurers.
2) Multiple Employer Welfare Arrangements (MEWAs) can be created as fully
insured or self-funded or partially self-funded benefit programs as an alternative
mechanism to traditional health insurance for small employers. In order for
the Department of Insurance to grant a MEWA a Certificate of Compliance, the
MEWA must adhere to standards set forth in the code that are not inconsistent
with the provisions of ERISA.

Front 21

Associations - Eligible Group

Back 21

a. The association must have at the outset a minimum number of members
(usually 100) and is organized for a purpose other than buying insurance.
b. The association is the group policyholder and handles all funds for the group.
c. Underwriting an association group is difficult if there is little or no claims history.

Front 22

Customer Groups

Back 22

Customer based groups include depositor groups, creditor/debtor
groups, etc

Front 23

Franchise Plans (Wholesale)

Back 23

a. These plans are for small employers who do not have enough employees to
qualify for group.
b. An individual policy is issued to each insured (no Master Contract).

Front 24

Replacement of Group Policies

Back 24

When replacing a group policy, the agent should always provide a comparison of benefits
between the present and the proposed plan of coverage.
1. Level of Benefits – carriers replacing hospital, medical, or surgical benefits within 60
days of discontinuance must cover all employees and dependents covered by or eligible
for coverage under the previous policy as of the date of discontinuance.
2. Preexisting Conditions
a. The agent must assure the client understands this provision. It excludes
conditions for which the insured received or should have received medical
advice within a certain period of time (six months) prior to the effective date of
the replacing policy and it may reduce policy benefits.
b. A specified time limitation by number of days or months could be used in place
of excluding outright the preexisting condition.
c. When replacing a group policy, any employee with a preexisting condition must
be given credit for the time covered by the policy being replaced.
3. No Loss-No Gain – the No Loss-No Gain legislation requires that when group health
insurance is being replaced, ongoing claims under the former policy must continue to be
paid under the new policy, overriding any preexisting conditions exclusion; mandatory
risk transfer. This is also known as a Hold-Harmless Agreement, when the replacing
insurer assumes the claims liability relieving the original insurer of any present or future
liability of the claim.

Front 25

Business Group of One

Back 25

an individual, sole proprietor, or a single full-time
employee of an S Corporation, C Corporation, Limited Liability Company, or
partnership who has carried on business activities for at least one year prior to
the application date. Also, the business must have generated taxable income in
one of the previous two years.

Front 26

Small Employer

Back 26

– any person, firm, corporation, partnership, or association that is actively engaged in business. A Small Employer also includes a business
group that is limited to the number of people it employs.

In California, the definition of small employer in is any person, proprietary or
nonprofit firm, corporation, partnership, public agency, or association actively
engaged in business, that employs on at least 50% of it working days during
the preceding calendar quarter or year, at least 2, but not more than 50 eligible
employees the majority of whom are employed in California.

Front 27

Eligible Employee

Back 27

an employee who has a regular workweek (e.g. 30 hours). It
does not include an employee who works on a temporary or substitute basis.

In California, an eligible employee is any permanent employee who is actively
engaged on a full-time basis in the conduct of the business of the small
employer with a normal workweek of at least 30 hours.

Front 28

Small Employers

Back 28

Small employers offering group health must offer the plan to all eligible
employees. If dependent coverage is offered then the coverage must be offered
to all employees.

Front 29

Essential (Basic) and Standard Benefit Plans

Back 29

a. Every small employer carrier shall actively offer at least two health benefit
plans. One must be an Essential (Basic) Health plan and the second a Standard
Health plan; both must offer maternity benefits as directed by legislation.
b. The coverage provided under either plan is published by the state. Each plan
offers an indemnity version, an HMO version and a PPO version.

Front 30

Rating Factor

Back 30

a. Small employer carriers will apply rating factors consistent with all small employers. Rating factors shall produce premiums for identical groups that differ only by the amounts attributable to the plan design and not by the nature of the groups themselves.
b. A small employer carrier will treat all health benefit plans issued or renewed in
the same calendar month as having the same rating period.
c. A health benefit plan that contains a restricted provider network provision will
not be considered the same as a plan that does not contain such a provision, if
the restriction of benefits results in substantial differences in claim costs.
d. A small employer carrier will not use case characteristics other than age,
geographic area, family composition, or any other rating factors other than
actual claims experience.
e. Preexisting conditions may not be excluded for any longer than one year.

Front 31

Renewability of Coverage

Back 31

– A health benefit plan will be renewable with respect to
all eligible employees and dependents at the option of the small employer except in the
following cases:

a. Nonpayment of required premiums.
b. Fraud or misrepresentation of the small employer in the application.
c. Noncompliance with the carrier’s plan provisions.
d. An insufficient number of individuals under the plan to meet participation
requirements.
e. Insurer cannot cancel for frequency of claims.

Front 32

COBRA

(Consolidated Omnibus Budget Reconciliation Act of 1985)

Back 32

1. This Act states employers with 20 or more employees must provide a health coverage
continuation option to all covered employees and dependents up to 18 months in the
event of:
a. Termination of employee (unless it is for cause).
b. Reduction of hours for employee, so they no longer qualify as a full–time employee.
c. Coverage may continue up to 29 months if an individual qualifies for Social
Security disability.
2. Coverage may continue for dependents up to 36 months for certain qualifying events:
a. Death of employee.
b. Divorce or legal separation.
c. Employee’s entitlement to Medicare benefits.
d. Loss of dependent status.
3. Multiple location groups even if multi-state will not effect any COBRA benefits.
4. Employers may require a former employee or their surviving spouse to pay up to 102%
of the premium.
5. The premium for an employee disabled at the time of termination may be increased to
150% of the premium after the 18th month of continued coverage.
6. Employees must be notified of their right to continue coverage. The employee or the
beneficiary must notify the employer within 60 days if they elect to continue coverage.
7. The continuation coverage:
a. Requires no evidence of insurability and provides the same benefits as the group policy.
b. Covers preexisting conditions if covered under the group policy.
c. If insured carried dependent coverage on the group, dependent coverage must
be made available on the continuation policy.
8. Events that will cause termination of continuing health coverage by COBRA are:
a. Timely premium payments are not made.
b. Employer ceases to maintain any group health plan.
c. Employee becomes eligible for Medicare benefits; dependents remain under COBRA.
d. Employee becomes covered by any other group health plan.
e. Employee converts to an individual health plan.
9. OBRA (Omnibus Budget Reconciliation Act of 1989)
a. The primary purpose of the OBRA federal legislation was to extend the minimum
COBRA continuation of coverage from 18 to 29 months for qualified beneficiaries who
are disabled at the time of either termination or reduction in hours.
b. To qualify, the disability must meet the Social Security definition of disability and the
covered employee’s termination must not have been for gross misconduct.
c. According to OBRA, an employer may terminate COBRA coverage because
of coverage under another health plan provided the other plan does not limit or
exclude benefits for a beneficiary’s preexisting conditions.
d. OBRA also clarified that COBRA coverage may be terminated only because of
Medicare entitlement and enrollment, not merely eligibility.

Front 33

HIPAA

(Health Insurance Portability and Accountability Act of 1996)

Back 33

1. HIPAA was designed to provide coverage for people with preexisting conditions. Prior
to this legislation, an employee with preexisting conditions was normally unable to
obtain coverage when changing employers.
2. HIPAA guarantees the continuation of health benefits to individuals who have been
covered for 12 months immediately preceding a change of employment and who choose
to participate in the new employer’s group health plan.
3. People who have been insured for at least 12 months must be covered immediately
when they join a new group health plan, without regard to preexisting conditions.
Someone joining a group plan for the first time without previous coverage cannot be
excluded for preexisting conditions after 12 months.
4. This law also applies to employees leaving the employer to become self-employed.
They cannot be denied coverage.
5. If an insurer decides to remove all affected group plans from a state, the people
losing coverage may obtain coverage immediately with a personal health plan. These
situations do not require the new coverage to be underwritten by the same insurer.
6. Any coverage prior to a break in continued coverage of 63 days or more, within the 12-month
qualification period, will not be credited against a preexisting condition exclusion period.
7. Existing HIPAA coverage must be renewed unless one of the following exists:
a. Failure of the plan sponsor to pay premiums timely.
b. Failure of the plan sponsor to comply with a material provision, such as
maintaining a minimum required percentage of participation, as long as the
provision is permitted by state or federal law.
c. The plan sponsor committed an act of fraud or intentional misrepresentation of
a material fact regarding the terms of the plan.
d. The employer is no longer a member of the association that sponsors a plan.
e. There is no covered employee that lives or works in the service area of a
network plan.
f. The issuer of coverage ceases to offer coverage in a particular market. The
issuer must notify each plan sponsor, participant and beneficiary at least 90
days prior to discontinuation of coverage, and the issuer must offer each plan
sponsor the option to purchase other health insurance coverage being offered
by the issuer to a group health plan in the market. If the issuer exits the market
entirely, the period of notice is 180 days, and the issuer cannot reenter the
market for at least five years.