New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on December 10, 2003, representing the position of the New York State Insurance Department.

Re: Group Health Insurance: Coverage of New York Residents

Issues:

1. In health insurance, what is community rating?

2. Does community rating require that employees resident in New York must receive benefits under a group health insurance policy that differ from those furnished to residents of other states?

Conclusions:

1. Community rating is defined in New York Insurance Law § 3231(a) (McKinney 2000 and 2003 Supplement) as "a rating methodology in which the premium for all persons covered by a policy or contract form is the same based on the experience of the entire pool of risks covered by that policy or contract form without regard to age, sex, health status or occupation."

2. Independent of community rating, if the employer/policyholder purchases a policy or contract issued for delivery in New York to cover New York residents, separate from the policy or contract that covers other employees, then New York mandated benefits would have to be included.

Facts:

The inquirer is employed by a firm located in New Jersey with approximately 86 employees, that provides health insurance benefits to its employees on a contributory basis, i.e. the employees pay a portion of the cost of the coverage through payroll deduction. The plan provides benefits to approximately 75 of the 86 employees, the bulk of whom reside in New Jersey. There are, however, four employees resident in New York and several reside in other states.

Prior to July 1, 2003, all employees resident in New York and New Jersey were covered under a contract whereby most benefits were provided by a Health Maintenance Organization, although employees could receive services from a non-participating provider under a Point of Service option. Effective July 1, 2003, under a new contract with the insurer covering New Jersey residents, a deductible of $1,000 has been imposed on outpatient hospital surgical procedures, the co-pay for emergency treatments was increased from $50 to $100, and other benefit reductions were made. The inquirer’s employer indicated that, because of New York’s community rating statute, New York residents must receive "richer" benefits, so these benefit reductions may not affect New York residents.

Based upon the "better" benefits provided to New York residents, the inquirer’s employer has increased the required payroll contribution for New York resident employees by $100 per month over the contribution required from all other covered employees.

Analysis:

Health insurance benefits for employees constitute an employee welfare benefit plan within the definition of the Employee Retirement Income Security Act (ERISA). 29 U.S.C.A. § 1002(1) (West 1999). ERISA, 29 U.S.C.A. § 1144(a) (West 1999), preempts all state laws governing employee welfare benefit plans. Accordingly, the Department has no jurisdiction over the contribution required by the employer from employees for the plan. The Department can, however, explain those requirements of the New York Insurance Law (McKinney 2000 and 2003 Supplement), which, in accordance with 29 U.S.C.A. § 1144(b)(2)(A), are not preempted by ERISA.

The contract covering New Jersey residents is governed by New Jersey law, N.J. Stat. Ann. § 17B:27-27 (West 1996), which authorizes:

A policy issued to an employer or to the trustees of a fund established by one or more employers, or issued to a labor union, or issued to an association formed for purposes other than obtaining such insurance, or issued to the trustees of a fund established by one or more labor unions or by one or more employers and one or more labor unions, insuring employees and members of associations or labor unions.

The definition of employee under New Jersey law, N.J. Stat. Ann. § 17B:27-31 (West 1996), would not preclude a policy of group health insurance issued for delivery in New Jersey from covering all employees of a New Jersey employer, including those resident in other states. There is nothing in the New York Insurance Law that would preclude a group health insurance policy validly issued to a New Jersey employer from covering employees resident in New York.

It is frequently the case that an HMO having subscribers in two contiguous states will have a network with providers in both jurisdictions. This may have been the case with the identical benefits provided to both New York and New Jersey residents prior to July 1, 2003.

Occasionally, however, if the HMO does not have a complete network under contract with a single HMO, or for other business reasons, the HMO may issue two separate contracts. Since only a New York corporation may operate an HMO in New York, N.Y. Comp. Codes R. & Regs. tit. 10, § 98-1.5 (2001), it is possible that identical contracts were issued by affiliates of the same corporation, one covering New York residents and the other covering New Jersey residents. While this may not have made a difference before July 1, 2003; when the benefits changed on that date, with lesser benefits to New Jersey residents, the two contracts would then have had to differ.

New York Insurance Law § 4235(c)(1)(A) (McKinney 2000 and 2003 Supplement) authorizes:

A policy issued to an employer or to a trustee or trustees of a fund established by an employer, which employer or trustee or trustees shall be deemed the policyholder, insuring with or without evidence of insurability satisfactory to the insurer, employees of such employer, and insuring, except as hereinafter provided, all of such employees or all of any class or classes thereof determined by conditions pertaining to the employment or a combination of such conditions and conditions pertaining to the family status of the employee, for insurance coverage on each person insured based upon some plan which will preclude individual selection. . . . The premium for the policy shall be paid by the policyholder, either from the employer's funds, or from funds contributed by the insured employees, or from funds contributed jointly by the employer and employees. If all or part of the premium is to be derived from funds contributed by the insured employees, then such policy must insure not less than fifty percent of such eligible employees or, if less, fifty or more of such employees.

Pursuant to New York Public Health Law § 4406(1) (McKinney 2002) a subscriber contract issued by a HMO must comply with the requirements of the New York Insurance Law applicable to Not-For-Profit Health Service Corporations, including the eligibility requirements of New York Insurance Law § 4235.

In order to effectuate New York Insurance Law § 4235(c)(1)(A), the Department has promulgated N.Y. Comp. Codes R. & Regs, tit. 11, § 52.18(f) (2002):

Conditions pertaining to employment under section 4235(c) of the Insurance Law includes geographic situs of employment, earnings, method of compensation, hours, and occupational duties.

In support of its decision to bifurcate the coverage between New York and New Jerseyresidents, the inquirer’s employer has cited the inclusion of "geographic situs of employment" within conditions pertaining to employment in N.Y. Comp. Codes R. & Regs. tit. 11, § 52.18(f). It is the position of this Department that the above phrase refers to the location of the employment, not the residence of the employee.

While ERISA does not impose substantive benefit mandates, in accordance with the ERISA "savings clause", 29 U.S.C.A. § 1144(b)(2)(a), New York may impose such substantive requirements on insurance policies and contracts issued to employee welfare benefit plans.

In New York, HMOs are regulated by New York Public Health Law Article 44 (McKinney 2000 and 2003 Supplement). New York Public Health Law § 4401 (2002) defines:

1. ‘Health maintenance organization’ . . . means any person, natural or corporate, or any groups of such persons who enter into an arrangement, agreement or plan or any combination of arrangements or plans which propose to provide or offer, or which do provide or offer, a comprehensive health services plan.

2. ‘Comprehensive health services plan’ . . . means a plan through which each member of an enrolled population is entitled to receive comprehensive health services in consideration for a basic advance or periodic charge. . . .

3. ‘Comprehensive health services’ means all those health services which an enrolled population might require in order to be maintained in good health, and shall include, but shall not be limited to, physician services (including consultant and referral services), in-patient and out-patient hospital services, diagnostic laboratory and therapeutic and diagnostic radiologic services, and emergency and preventive health services. Such term may be further defined by agreement with enrolled populations providing additional benefits necessary, desirable or appropriate to meet their health care needs.

Some of the cost containment measures imposed by the HMO on New Jersey insureds would not be considered to be "comprehensive" within the meaning of New York Public Health Law § 4401 and thus be precluded in a New York HMO contract. Thus, while prior to July 1, 2003 the HMO might have been able to issue a single contract covering both New York and New Jersey employees; since the benefits provided to each group of employees now differ, two contracts might now be required.

The inquirer asked about the requirement in N.Y. Ins. Law § 4235(c)(1)(A) that, because employer contributions are required, the policy must cover 50% of the eligible employees. Historically, New York has been strict about what groups it allows to qualify for group health insurance. The former requirement that the policy cover 75% of eligible employees, which was instituted to prevent anti-selection against the insurer through minimal participation requirements, was lowered to 50% by 1985 N.Y. Laws 369 to make group coverage more available. In the case of the group covering the employer’s New York employees, since there are four eligible employees, the policy would have to cover at least two such employees.

In order to make health insurance more available, since 1992, New York Insurance Law § 3231(a) has provided:

No . . . group health insurance policy covering between two and fifty employees or members of the group exclusive of spouses and dependents, hereinafter referred to as a small group, providing hospital and/or medical benefits . . . shall be issued in this state unless such policy is community rated and, notwithstanding any other provisions of law, the underwriting of such policy involves no more than the imposition of a pre-existing condition limitation as permitted by this article. Any . . . small group, including all employees or group members and dependents of employees or members, applying for . . . or small group health insurance coverage . . . must be accepted at all times throughout the year for any hospital and/or medical coverage offered by the insurer to . . . small groups in this state. . . . For the purposes of this section, ‘community rated’ means a rating methodology in which the premium for all persons covered by a policy or contract form is the same based on the experience of the entire pool of risks covered by that policy or contract form without regard to age, sex, health status or occupation.

Since the group composed of New York residents has only four insured employees, it is subject to the community rating requirements of New York Insurance Law § 3231(a).

For further information you may contact Principal Attorney Alan Rachlin at the New York City Office