OGC Op. No. 04-04-02

The Office of General Counsel issued the following opinion on April 1, 2004, representing the position of the New York State Insurance Department.

Re: Community Rating and Insurance Department Circular Letter 16 (September 4, 2002)

Questions Presented

1. In Circular Letter 16, what was meant by "benefits not covered" under Medicare and "individuals who are eligible for Medicare?"

2. In New York Insurance Law §§ 3231 (McKinney 2000 and 2004 Supplement) and 4317 (McKinney 2000 and 2004 Supplement), are dependents counted in determining whether a policy is issued to a "small group?"

3. In New York Insurance Law §§ 3231 and 4317, what is meant by "policy or contract form?"

4. How is the experience pool mandated by New York Insurance Law §§ 3231 and 4317 constituted?

5. May an insurer mandate the classifications of employees that an employer, as permitted by New York Insurance Law § 4235(c)(1)(A), may establish?

6. May an insurer discontinue a policy form?


1. While the insurer actions that generated Circular Letter 16 were based upon premium differentials for prescription drug coverage between Medicare eligible insureds and those not eligible for Medicare, other benefits may be provided under a health insurance policy or contract that would not be covered under Medicare and thus would be affected by Circular Letter 16. Medicare eligibility is determined under applicable Federal statutes.

2. Dependents are not included in such a calculation.

3. The term refers to the particular policy or contract form issued to the small group.

4. The pool consists of all insureds constituting the small groups which had been issued the policy or contract form by the insurer.

5. Any determination as to whether classify employees for health insurance purposes, which classifications are allowed by New York Insurance Law § 4235, is that of the employer/contractholder.

6. In accordance with New York Insurance Law § 4304(c) (McKinney 2000 and 2004 Supplement), a Health Service Corporation may discontinue a policy form upon giving sufficient notice.


The inquirer’s firm employs 5 individuals and provides health insurance to active employees and retirees. Among the retirees, is an individual who, as well as the individual’s spouse, is covered under Medicare. Among the active employees, is an individual with a dependent non-employed spouse who is covered under Medicare.

The inquirer’s firm has purchased several contracts from a Health Service Corporation licensed by the Department pursuant to New York Insurance Law § 4302 (McKinney 2000). The active employees are covered under a hospital benefits contract and a medical benefits contract with a major medical rider. Retirees are covered under limited benefit contracts that are intended to complement Medicare, with a major medical rider that is identical to that which is attached to the active employees’ contract.

After review of the Circular Letter, as well as statutes and regulations mentioned therein, the inquirer believes that the insurer is in violation of applicable statutes and regulations in its premium calculations. In addition, based upon the inquirer’s understanding of applicable statutes and regulations, the inquirer seeks clarification of several terms used in Circular Letter 16. In addition, the inquirer is concerned with a November 15, 2003 letter from the insurer, which in part, stated:

In the second half of 2004, we plan to eliminate our current Medicare primary contract and transition members to a new contract. The rates and benefits for the new Medicare contract will be the same as the rates and benefits for your current non-Medicare (active) contracts. . . . We will provide you and your affected employees with a five-month advance notice of when we will retire the current Medicare contract to allow for a smooth transition.

Based upon the material that the inquirer has received from the insurer, the inquirer believes that the proposed rates for retired employees with dependents will drastically increase because those retired employees are now charged for as two individuals and will, in the future, be charged for as a family. The inquirer further believes the discontinuance of the limited benefits contracts will have a detrimental effect upon Medicare eligible individuals insured under the contracts inquirer’s firm has purchased.


Interplay Between Medicare and Insurance

Medicare is a Federal program, the coverage parameters of and eligibility for being governed by statute, 42 U.S.C.A. § 1395 et seq. (West 1982 and 2003 Supplement). The program primarily covers individuals over age 65, although individuals who have been collecting Social Security Disability for 24 months are also eligible. After enrollment in the program, coverage for hospitalization, Part A, is automatic, while medical coverage, Part B, for which an additional premium is charged, is optional.

As part of a comprehensive regulation of health insurance policies (Regulation 62), the Department has allowed insurers, N.Y. Comp. Codes R. & Regs. tit. 11, § 52.16(c)(8) (2002), to exclude coverage of expenses covered by other types of insurance, including Medicare. The allowable exclusion for Medicare is not dependent upon the insured actually purchasing Medicare Part B. Accordingly, in order to secure coverage for procedures covered by Medicare, many individuals opt to pay the premium to the Federal government and purchase Medicare Part B.

An employed individual over age 65 is still eligible for Medicare, although for most employed individuals Medicare would be secondary. There is, however, an exception to the Medicare as Secondary Payor rule, 42 U.S.C.A. § 1395y(b)(1)(A)(ii) (West 1982 and 2003 Supplement), for those employed in a business, such as the inquirer’s, with less than 20 employees.

Since Medicare does not cover all health costs that may be incurred by an eligible individual, many Medicare beneficiaries purchase policies to supplement Medicare, commonly known as Medigap policies. The content of these policies are regulated both by the Federal government, through the Medicare Act, and the Department, primarily through Regulation 62, N Y. Comp. Codes R. & Regs. tit. 11, §§ 52.11 (1999) and 52.22 (2002). Since N.Y. Comp. Codes R. & Regs. tit. 11, § 52.11(a)(4) excludes group policies issued to employers to cover retirees, the policy in question is not a Medigap policy.

Prior to the enactment of the Medicare Prescription Drug, Improvement, and Modernization Act, Pub. L. No. 108-173, which will, effective January 1, 2006, provide prescription drug coverage under Medicare, Medicare, with limited exceptions, did not cover prescription drugs. Many insurers that issued policies and contracts that provided prescription drug coverage as part of their benefits made the assumption that utilization of such coverage would be higher by Medicare eligible individuals, and thus charged such individuals a premium for the prescription drug coverage in excess of that charged non-Medicare eligible individuals.

When the Department was made aware of these actions, it determined that such a premium differential constituted a violation of New York’s community rating requirements. It then issued Circular Letter 16 of 2002 to inform insurers of the Department’s interpretation. While the impetus behind Circular Letter 16 of 2002 was the differential in premiums for prescription drug coverage between Medicare eligible individuals and all others, it is possible that such improper differentials existed with respect to other coverages.

Community Rating

As part of a major reform of health insurance, 1992 N.Y. Laws 501, New York Insurance Law §§ 3231(a), regulating commercial health insurance, and 4317(a), regulating contracts of Health Service Corporations and Health Maintenance Organizations, were enacted. New York Insurance Law § 3231(a) provides in pertinent part:

No individual health insurance policy and no group health insurance policy covering between two and fifty employees . . . exclusive of spouses and dependents, hereinafter referred to as a small group, providing hospital and/or medical benefits, including medicare supplemental insurance, 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. . . . Once accepted for coverage, an individual or small group cannot be terminated by the insurer due to claims experience. . . . Termination of an individual or small group shall be based only on one or more of the reasons set forth in subsection (p) of section three thousand two hundred twenty-one of this article. 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. (emphasis added)

New York Insurance Law § 4317(a) has identical provisions, except for statutory cross-references.

Based upon the express language of New York Insurance Law §§ 3231(a) and 4317(a), only active employees, and not dependents, are counted to determine if a group is a small group.

In order to effectuate New York Insurance Law §§ 3231 and 4317, the Department promulgated a regulation (Regulation 145), N.Y. Comp. Codes R. & Regs, tit. 11, Part 360 (2000). In administering Regulation 145, the Department has considered a "a policy or contract form" to be the particular policy or contract issued to the group in question. The same form may be issued to both small and large groups.

N.Y. Comp. Codes R. & Regs. tit. 11, § 360.11(a) & (b) further provides:

(a) Pooling of experience of different community-rated policies will be required where the Superintendent determines that the policy form provides substantially similar benefits as another community-rated policy offered by the insurer in that market (individual or small group). Policies issued during different time periods under different forms may be determined to provide substantially similar benefits. Insurers should not develop separate community rates without substantial benefit variations. . . .

(b) The experience pool consisting of claims costs, marketing costs and administrative costs maintained for developing community rates for individuals may be separate from the experience pool maintained for developing community rates for groups. . . .

Classifications Among Employees

New York Insurance Law § 4235(c)(1) (McKinney 2000 and 2004 Supplement) specifies the groups to which health insurance policies and contracts may be issued for delivery in New York. It appears that the inquirer’s firm falls within the group described in New York Insurance Law § 4235(c)(1)(A):

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

The participation requirements are further regulated by New York Insurance Law § 4235(c)(2):

For the purpose of complying with the participation requirements prescribed in subparagraphs (A). . . of paragraph one of this subsection, the provisions of this subsection are to be construed as permitting the issuance of more than one policy or contract when offered as alternatives to the eligible employees or members.

The inquirer believes that the effect of the insurer’s actions is to force the inquirer to differentiate between those covered under the contract as active and retired employees and those with and without dependents. The inquirer further believes that the insurer’s actions are precluding the inquirer from offering different contracts, as the inquirer believes is required pursuant to New York Insurance Law § 4235(c)(2).

N.Y. Comp. Codes R. & Regs. tit. 11, § 360.11(c) provides:

Rate tiers for family units (e.g., different community rates for individuals, two-person families and larger families) are permitted. However, the rate differences must be based upon the cost differences for the different family units and the rate tiers must be uniformly applied. Different rate tiers may apply to individuals than apply to small groups.

As permitted by New York Insurance Law § 4308(g) (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11, § 360.11(c), the Health Service Corporation has opted to charge a family rate for two individuals who are both covered by Medicare.

The decision to differentiate between active and retired employees resides solely with the employer. Accordingly, the insurer is acting within its rights.

Contrary to the inquirer’s interpretation, the intent of New York Insurance Law § 4235(c)(2) is to allow employers to offer various plan options to their employees, i.e. both an indemnity product and a HMO product, not to require the insurer to offer various indemnity products at the option of the employer.

Discontinuance of Contract Forms

The inquirer believes that the discontinuance of the limited benefit contract forms may be detrimental to retirees because the new contracts may not provide equivalent benefits, especially prescription drug coverage.

New York Insurance Law § 4304(c) (McKinney 2000 and 2004 Supplement), provides:

Any such contract may be terminated in the following manner: . . . (2) At the option of the corporation, for one or more of the following reasons: . . . (C)(i) Discontinuance of a class of contract upon not less than five months" prior written notice . . . . In exercising the option to discontinue coverage pursuant to this item, the corporation must act uniformly without regard to any health status-related factor of enrolled individuals or individuals who may become eligible for such coverage and must offer to subscribers or group remitting agents, as may be appropriate, the option to purchase all other individual health insurance coverage currently being offered by the corporation to applicants in that market. . . .

(3) Every notice of termination shall be in a form satisfactory to the superintendent and shall include a statement of the conversion privileges, if any, upon such termination.

. . .

Accordingly, an insurer may terminate a policy subject to the above statute.

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