You asked (1) what rules govern small group health insurance plans; (2) whether small group carriers can refuse coverage for applicants with a preexisting condition; and (3) for an explanation of the change to, rationale for, and effect of community rating on the small group insurance market. You also want to know whether a self-employed person can deduct health insurance premiums for federal income tax purposes.

SUMMARY

Both federal and state laws govern small group health insurance plans. Federal law sets baseline standards for state compliance; individual states can establish more "generous" regulations.

Small group insurers must offer eligible applicants a policy but may deny coverage for a preexisting condition for a limited period of time.

Small group plan premiums were capped and later phased out in 1995. After that, small group plan premiums were set according to the adjusted community rating method.

Health insurance premiums are deductible from adjusted gross income as a business expense.

FEDERAL LAW

The federal Health Insurance Portability and Accountability Act (HIPPA) was designed to increase the access, portability, and renewability of private health insurance by setting minimum standards for individual, small group (including fully insured and self-insured groups) and large group health insurance plans nationwide.

Minimum federal standards set by HIPPA include those relating to guaranteed issue and renewal, limits on preexisting condition exclusion clauses, nondiscrimination, and portability.

HIPPA defines a small group employer as one having an average of two to 50 employees. The law requires small group carriers to

1. make all plans available and issue coverage to any small employer that applies, regardless of the group's claims history or health status;

2. limit to no more than 12 month following the effective date of coverage the time period in which carriers may deny, exclude or limit an insured's benefits arising from a preexisting condition, i. e. , a condition for which medical advice, diagnosis, or care was received or recommended during the six months preceding the effective date of coverage;

3. renew policies with small groups regardless of claims experience, but allow them to discontinue coverage if the small employer fails to pay premium or engages in fraudulent activity;

4. give enrollees credit against its preexisting condition period for any period of prior coverage that was consecutive with no break of more than 63 days, and

5. include all members within a group for coverage and ban exclusion of any member based on his or her health status, medical condition or history, claims experience, genetic information, insurability, or disability.

STATE LAW

Connecticut's Blue Ribbon Health Care Plan law applies to small employers with one to 50 employees and self-employed individuals (CGS § 38a-564(4)). The law mirrors federal law regarding guaranteed availability and renewal of small group policies, preexisting condition clause restrictions, and credit for prior coverage (CGS § 38a-567).

Premium Rates

Small employer premium from 1993 to 1995 were capped at 135%, 130%, and 120% of the base premium, respectively. After July 1, 1995, premium rates were established on the basis of a community rate, adjusted to reflect one or more of the following characteristics:

1. age,

2. gender,

3. geographic area,

4. industry,

5. group size, and

6. family composition

The National Association of Insurance Commissioners' (NAIC) original model small employer rating law permitted carriers to define up to nine business classes and allowed claims experience as an adjustment factor for determining a group's premium rate but not for determining any individual employee's rate. Although, Connecticut was one of the first states to enact small group health insurance reforms in 1990, it did not adopt the NAIC's approach because of its complexity and the belief that it was too lax in restricting carriers' rating flexibility. Instead, Connecticut adopted percentage caps on base premium rates that were gradually phased-out by 1995.

In place of premium caps, Connecticut adopted adjusted community rating, a much simpler methodology. Community rating requires carriers to charge everyone within a geographic area the same premium rate. It eliminates various business classes, claims history, and other adjustment factors. Most importantly, premiums cannot vary according to the actuarial risk presented by the group. Adjusted community rating is essentially community rating with adjustments for such factors as age, gender, family composition, group size, industry. And in some states, including Connecticut, the rate attributable to an adjustment factor is

restricted. The general effect of the rating change has been to eliminate rate variation from one small employer group to another and moderate premium increases.

INCOME TAX DEDUCTION

Taxpayers can deduct 60% of amounts paid in 2001 for health insurance covering themselves, their spouse, and their dependents if they are self-employed and receive a net profit from the business for which they established the insurance plan. Taxpayers cannot take the deduction for any month if either they or their spouse were eligible to participate in any employer-subsidized health plan at any time during that month.

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