For other versions of this document, see http://wikileaks.org/wiki/CRS-RL33402
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Order Code RL33402

Side-by-Side Description of
Small Business Health Insurance Proposals

May 1, 2006

Jean Hearne
Specialist in Social Legislation
Domestic Social Policy Division

Bernadette Fernandez
Analyst in Social Legislation
Domestic Social Policy Division
Side-by-side Description
of Small Business Health Insurance Proposals

Summary
The 109th Congress is considering a number of health insurance reforms
intended to improve access to health insurance for small businesses. Two of those
proposals, S. 2510, the Small Employers Health Benefits Program Act of 2006, and
S. 1955, the Health Insurance Marketplace Modernization and Affordability Act of
2006, take different approaches to addressing perceived problems with the current
market for health insurance.

S. 1955, introduced by Senators Michael Enzi and Ben Nelson, was approved
by the Senate Health, Education, Labor, and Pensions (HELP) Committee on March
15, 2006. The purpose of the bill is to expand health insurance access and reduce
costs through the establishment of small business health plans, and the
implementation of uniform health insurance standards across state lines. The bill
would establish Small Business Health Plans that would be offered by trade and
professional associations and franchise networks. In addition, the bill takes on
regulatory reform of health insurance products, market-wide. It would create federal
standards for benefits, the pricing of health plans, and a number of other particular
areas of health insurance law. In those areas, state laws could be preempted.

S. 2510, introduced by Senators Richard Durbin and Blanche Lincoln on April
5, 2006, has a similar purpose in that it proposes to improve access to health
insurance, although it has an entirely different approach. The bill would establish a
national health insurance program to offer private health benefits to small business
employees. The program would be based on the features of the Federal Employees
Health Benefits Program (FEHBP), and would be run alongside that program by the
federal Office of Personnel Management (OPM). In addition, S. 2510 includes
provisions intended to improve the affordability of health insurance, including tax
credits for small employers who contribute a significant share of certain employees'
premiums, and a re-insurance fund that would pay for certain very high claims.

This report provides a side-by-side comparison of these two bills. This report
will be updated in the event of major legislative activity.

For a discussion of small group health insurance and current legislative
proposals, see CRS Report RL31963, Association Sponsored Health Plans:
Legislation in the 109th Congress, by Jean Hearne.
Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Small Business Health Insurance Proposals . . . . . . . . . . . . . . . . . . . . . . . . . 2

List of Tables
Comparison of S. 2510, the Small Employers Health Benefits
Program Act of 2006, and S. 1955, the Health Insurance
Marketplace Modernization and Affordability Act of 2006 . . . . . . . . . . . . . 3
General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Pooled Purchasing for Health Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Regulation of Health Insurance Outside of Pools . . . . . . . . . . . . . . . . . . . . . . . . 10
Other Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Side-by-side Description of
Small Business Health Insurance Proposals

Background
Small employers face a number of disadvantages relative to larger employers
when seeking to provide health insurance as a benefit to their employees. While
most surveys suggest that the high cost of health insurance is the primary reason1 that
more than 40% of small firms2 do not offer health benefits, there are other barriers
as well. Small employers

! cannot leverage their size in negotiations with insurance carriers
over benefits and prices, like larger groups can;
! do not benefit from administrative economies of scale -- for
example, it is less costly for an insurer to market to and enroll one
large employer with 500 workers than to market to and enroll 150
smaller employers with a total of 500 workers; and
! employ lower-wage workers and workers who move among firms
more often than employees of large firms -- factors that also affect
coverage rates in the small group markets for insurance.

A significant contributor to the relatively higher cost of coverage for small
employers is their size. Smaller employers often face higher premiums than larger
employers for similar coverage3 because the size of the group does not allow for
broad spreading of risk. For example, an employer with 500 employees is able to
balance the risk that a few employees will have very expensive medical claims during
the year with the certainty that the remaining employees will have closer to average
or lower cost claims. A small employer, however, doesn't have the large number of
average or low-cost enrollees to balance the risk that one or more of its workers will
have expensive medical needs. Consequently, insurers charge higher premiums to
smaller employers to account for this phenomenon.4

1
P. Fronstin, and R. Helman, Small Employers and Health Benefits: Findings from the 2003
Small Employer Health Benefits Survey, EBRI Issue Brief No. 253, Employee Benefit
Research Institute (January 2003), at [http://www.ebri.org/pdf/briefspdf/0103ib.pdf].
2
Employer Health Benefits, 2005 Annual Survey, The Kaiser Family Foundation and Health
Research and Educational Trust, at [http://www.kff.org/insurance/7315/index.cfm].
3
U.S. General Accounting Office, Private Health Insurance: Small Employers Continue to
Face Challenges in Providing Coverage, GAO-02-8, Oct. 2001.
4
For more information on the basic principles of health insurance, see CRS Report
RL32237, Health Insurance: A Primer, by Bernadette Fernandez.
CRS-2

Finally, large employers are often able to self-insure their own health coverage
rather than purchase insurance from traditional insurance carriers or health
maintenance organizations. When large employers do so, their health coverage plans
are not subject to states' laws regulating the business of health insurance. As a result,
the plans are not subject to a myriad of state laws regulating the prices of the plans
for participating employees, the benefits covered by those plans, or the financial
solvency, to name a few areas of state insurance law. The relative regulatory burden
for small employers is seen by some as an additional disadvantage for smaller
employers seeking low-cost plans because it adds to the cost and complexity of
products in the small group market for insurance.

Small Business Health Insurance Proposals
The 109th Congress is considering a number of health insurance reforms
intended to improve access to health insurance for small businesses.5 Two of those
proposals, S. 2510, the Small Employers Health Benefits Program Act of 2006, and
S. 1955, the Health Insurance Marketplace Modernization and Affordability Act of
2006, take different approaches to addressing perceived problems with the current
market for health insurance.

S. 1955, introduced by Senators Michael Enzi and Ben Nelson, was approved
by the Senate Health, Education, Labor, and Pensions (HELP) Committee on March
15, 2006. The purpose of the bill is to expand health insurance access and reduce
costs through the establishment of small business health plans, and the
implementation of uniform health insurance standards across state lines. The bill
would establish small business health plans that trade and professional associations
and franchise networks could offer to their members. In addition, the bill takes on
regulatory reform of health insurance products, market-wide. It would create federal
standards for benefits, the pricing of health plans, and a number of other particular
areas of health insurance law. In those areas, state laws could be preempted.

The following description is based on a review of S. 2510 as introduced in the
Senate on April 5, 2006, and S. 1955, as reported.

5
For a discussion of small group health insurance and current legislative proposals, see CRS
Report RL31963, Association Sponsored Health Plans: Legislation in the 109th Congress,
by Jean Hearne.
CRS-3

Comparison of S. 2510, the Small Employers Health Benefits Program Act of 2006,
and S. 1955, the Health Insurance Marketplace Modernization and Affordability Act of 2006

General Provisions

S. 2510 S. 1955
Small Employers Health Benefits Program Act of 2006 Health Insurance Marketplace Modernization and
(Introduced on April 5, 2006) Affordability Act of 2006
(Reported by Senate HELP on April 27, 2006)

Type of reform approach:

-- Pooling Section 3 Title I
S. 2510 would establish a new, federally administered health S. 1955 would amend the Employee Retirement and Income
insurance program to offer private health benefits to individuals Security Act of 1974 (ERISA) to establish small business health
across the nation who are employees of small businesses. The plans (SBHPs) through which small and large employers and
program, the Small Employers Health Benefits Program (SEHBP), certain self-employed individuals could purchase health insurance.
is modeled after the Federal Employees Health Benefits Plan
(FEHBP), but would be administered and funded separately.

-- Regulatory reforms outside of pools No provision. Titles II and III
S. 1955 would amend the Public Health Service Act (PHSA) to
establish "harmonized" health insurance regulation in three
general areas: federal rating requirements, benefit choice
standards, and other harmonized regulatory reforms.
CRS-4

Scope Section 2 Title I would affect all employers purchasing health insurance
S. 2510 would affect SEHBP plans offered to small and mid-size through sponsors of SBHPs -- which would be offered
groups: firms with 1-100 workers, including the self-employed. predominantly by trade and professional associations, chambers
of commerce, and franchise networks.

Title II, Part I would affect all health insurance products sold to
small employer groups. Title II, Part II and Title III would affect
all health insurance products.

Federal role/ Section 4 Title I
Preemption of state laws S. 2510 applies the minimum benefit standards under FEHBP to S. 1955 would preempt the application of state laws in the areas
SEHBP plans. For any nationwide health plan, the Office of of rating of health plans and benefits standards, for plans sold by
Personnel Management (OPM) would develop a benefit package SBHPs
that meets all state benefit mandates.
Titles II and III
Section 6 In states that adopt the federal standards, state laws would apply
The act establishes federal rating rules: community rating adjusted and states would retain regulatory authority over health insurance
for geography, family composition and size, and age. Federal products.
rules preempt application of state rating rules only in those states
where current rules are less stringent than the federal rules. States In states that do not adopt the federal standards, insurers may
with stricter rating rules may keep their rules. choose to follow the federal regulatory scheme. Once those
insurers have notified the state insurance department that they are
SEHBP plans must comply with state benefit mandates. offering coverage consistent with the federal standards, states'
laws in the areas of rate and form filing, market conduct, prompt
The act preempts state rules regarding pre-existing condition payment of claims, and internal review could be preempted.
exclusion limits. The act allows insurers to exclude coverage for Other state laws not in those areas would continue to apply.
pre-existing conditions for up to six months, reduced by the
CRS-5

equivalent number of days the individual had health coverage
prior to applying to SEHBP.

Other state health insurance laws, such as grievance and appeals
procedures and network adequacy laws, continue to apply.

Regulatory authority Section 3 Title I
S. 2510 gives OPM the authority to administer the new program, The authority to certify SBHPs would be with the Secretary of the
including development of enrollment methods, contracting Department of Labor (DOL). States would retain authority over
administrative functions, and prescribing regulations to apply SBHPs in all but two general areas: rating of plans and benefits
FEHBP rules, to the extent possible, to carriers, employers, and requirements. In those two areas, the federal regulatory authority
workers participating in SEHBP. would otherwise be with the Secretary of DOL.

Section 6 Title II
S. 2510 maintains state authority over health plans, except with In all states, states would retain authority over areas of insurance
respect to (1) rating rules in states with less stringent rules than law except with respect to rating of plans, benefits requirements,
those under SEHBP, (2) pre-existing condition exclusion limits, rate and form filing, market conduct, prompt payment of claims,
and (3) small business definition. and internal review. In states that adopt the federal standards in
those areas, states would retain all regulatory authority. In states
that do not adopt the federal standards, the Secretary of Health and
Human Services (HHS) would have authority over premium
rating, benefits standards, rate and form filing, market conduct,
prompt payment of claims, and internal review.
CRS-6

Pooled Purchasing for Health Plans

S. 1955
S. 2510
Health Insurance Marketplace Modernization and
Small Employers Health Benefits Program Act of 2006
Affordability Act of 2006
(Introduced on April 5, 2006)
(Reported out of Senate HELP Committee on March 15, 2006)

Pooling mechanism Section 3 Title I
New health insurance pool under the SEHBP. Association-sponsored health plans called Small Business Health
Plans (SBHPs)

Sponsorship Section 2 Title I -- new ERISA Section 801
Participating small employers (1-100 workers) sponsor coverage SBHPs may be sponsored by bona fide trade associations, industry
under SEHBP. associations, professional associations, chambers of commerce
and franchise networks that are organized for substantial purposes
Section 10 other than that of obtaining medical care. The bill includes a
This section includes a description of responsibilities for number of other requirements for plan sponsors, including board
employers participating in SEHBP. OPM would prescribe membership, fiduciary duty, and non-discrimination rules.
regulations regarding employer participation.

Administrative approval of participating Sections 3 and 4 Sections 101 and 103
plans S. 2510 authorizes OPM to contract with qualified insurers and The Secretary of DOL would be responsible for the certification
approve (and withdraw approval of) plans under SEHBP. (and the revocation of such certification when necessary) of
SBHPs. The bill includes provisions deeming certain plans as
SBHPs when the Secretary fails to act on a certification
application within a certain timeframe. In addition, certain
arrangements that have been in existence for more than 10 years
and that cover more than 200 employers are deemed to be SBHPs
upon filing an application for certification.

States would continue to apply any applicable laws relating to
CRS-7

solvency and funding standards. It is unclear how this process
would coordinate with the federal certification process.

Who is eligible to enroll in the pools? Section 5 Section 101 -- new ERISA Sections 804 and 805
Employees of participating small businesses and the self- Employers with two or more employees who are members of the
employed who are not eligible for FEHBP. plan sponsors must be allowed to enroll. In states that do not
require issuers of group health plans to guarantee the availability
of at least one plan option to individuals who are self-employed,
SBHPs would not be required to do so.

Benefit standards Section 4 Title I -- new ERISA Section 805
S. 2510 applies the minimum benefit standards under FEHBP to No explicit benefit standard is described, although this section
SEHBP plans. For any nationwide health plan, OPM would would allow SBHPs to choose to offer benefits consistent with the
develop a benefit package that meets all state benefit mandates. Benefit Choice Standards described in Title II -- Part II, described
below. These provisions would allow SBHPs to offer to
Section 6 participating employers, a "basic option" plan that need not
SEHBP plans must comply with state benefit mandates. comply with state mandates combined with an "enhanced option"
plan which would be required to include, at a minimum, the
benefits, services, and categories of providers covered by a state
employee health plan in one of the five most populous states. For
more information on the Benefit Choice Standard, see below.

Rating requirements Section 6 Title I -- new ERISA Section 805
The act establishes federal rating rules: community rating adjusted SBHPs would be prohibited from varying contribution rates for
for geography, family composition and size, and age. Insurers any participating employer in relation to the health status of
would use OPM-established age brackets to adjust rates up to +/- employees or their dependents or the type of business or industry,
50% the community rate for attained age. Age-adjusted premiums but may base such rates on claims experience so long as the
CRS-8

would not vary within brackets. Rate adjustments based on health variation is consistent with the provisions of the "Model Small
status related factors, gender, class of business, or claims Group Rating Rules," with certain exceptions. Those rules are
experience would be prohibited. States with stricter rating rules described in Title II -- Part I of the bill and generally limit
may keep their rules. premium variation based on an NAIC model act for 1993. For a
more detailed description of the rating requirements in Title II, see
below. Exceptions for SBHPs include restrictions on rate bands
between classes of business to within 20% of an index rate and
provisions limiting the number of classes of businesses.

Other insurance laws Section 6 Title I -- new ERISA Section 808
The bill would allow insurers to exclude coverage for pre-existing The bill would preempt state laws insofar as they establish rating
conditions for up to six months, reduced by the equivalent number and benefit requirements. All other state laws are intended to
of days the individual had health coverage prior to applying to continue to apply. It is unclear how this provision would apply to
SEHBP. patient protections that do not require the offering of certain
benefits, but establish a standard for coverage for plans that
Other state health insurance laws, such as grievance and appeals include certain benefits.
procedures and network adequacy laws, continue to apply.

Employer subsidies Section 15 -- new Internal Revenue Code Section 36 No provision.
The bill would provide refundable tax credits to qualified
employers who make substantive contributions (at least 60% for
self-only policies, 50% for all others) for health coverage on
behalf of their low-wage workers. Tax credit amounts are
calculated based on the annual wages of covered employees,
among other variables. Full tax credits would be provided to
covered workers with wages between $5,000 and $25,000. Tax
credits would be reduced for wages exceeding $25,000 annually,
CRS-9

and phased out completely at $30,000. Bonus tax credits will be
awarded to employers who participate during the program's first
year, or cover more than 60% of the total premium.

Insurer incentives Section 7 No provision.
Applies 3% risk corridor to insurer gains/losses during first three
years of the program.

Establishes and operates a reinsurance fund to cover up to 80% of
the amount in claims exceeding $50,000.

Effective date Section 16 Section 103
This act would become effective beginning calendar year 2007. The SBHP provisions would become effective 12 months after the
date of enactment. The Secretary of DOL would be required to
issue all regulations within six months after the date of enactment.
CRS-10

Regulation of Health Insurance Outside of Pools

In general The provisions of S. 2510 apply only to SEHBPs. There are no Titles II and III
provisions regarding health insurance laws and regulations outside Titles II and III of S. 1955 would effectively replace state health
of SEHBP. insurance laws across the board in three general areas; pricing of
health plans, benefits standards, and other plan requirements such
as rate and form filing, market conduct, prompt payment of
claims, and internal review. The three separate sections of the bill
are referred to as "federal rating requirements," "benefit choice
standards," and "regulatory harmonization."

The bill would maintain each state's authority over all other areas
of health insurance regulations including the licensing of health
insurance plans. (The bill, however, includes in the regulatory
harmonization section a provision directing the Health Insurance
Consensus Standards Board -- see further description below --
to develop a process for eligible insurers to "self-certify.")
CRS-11

Plans subject to federal rules No provision. Titles II and III
States would choose to adopt or not adopt the federal rating
requirements, benefits choice standards, and regulatory
harmonization (which would include rate and form filing, market
conduct, prompt payment of claims, and internal review). In
non-adopting states, however, state laws in these areas would be
preempted. So insurers, regardless of whether they are operating
in adopting or non-adopting states, have the choice to use existing
state laws or the federal rules.

Rating requirements No provision. Title II -- Part I
This part would establish "Model Small Group Rating Rules" that
states could choose to adopt instead of their existing laws related
to rating in the small group market for health insurance. If states
do not adopt this standard, however, insurers in those
non-adopting states selling policies in the small group market
could choose to adopt the federal rating requirements after
notifying the Secretary of DOL and the state of their intention.

The federal standard would be based on the National Association
of Insurance Commissioners' (NAIC) "Adopted Small Employer
Health Insurance Availability Model Act of 1993." The rules
would establish limits on premium variation for new policies, and
on the amount that premium rates could increase upon renewal of
existing policies. The risk factors that an insurer in the small
group market would be allowed to use to differentiate among
covered groups and to vary premiums based on those differences
CRS-12

would be specified.

This part also requires the Secretary to promulgate "Transitional
Model Small Group Rating Rules" to help states transition from
existing state rating laws to the federal model.

Benefit choice standards No provision. Title II -- Part II
This section describes federal benefit standards that states could
choose to adopt. If states do not adopt this standard, however,
insurers in those non-adopting states selling policies in the group
and individual markets could choose to adopt the federal benefit
standards after notifying the Secretary of DOL and the state of
their intention.

The federal standard would be comprised of a "basic option" plan
that need not comply with state mandates regarding covered
benefits, services, or categories of providers. Those insurers
offering a basic option must also offer to purchasers an "enhanced
option" plan which would be required to include, at a minimum,
the benefits, services, and categories of providers covered by a
state employee health plan in one of the five most populous states
(CA, TX, NY, FL, or IL).

The Secretary would be required to publish, no later than three
months after enactment and each year thereafter, in the Federal
Register, the benefits, services and categories of providers covered
in those five states' coverage plans.
CRS-13

Regulatory harmonization No provision. Title III
Would require the Secretary, in consultation with the NAIC, to
establish the "Health Insurance Consensus Standards Board" to
develop recommendations that harmonize inconsistent state laws
applying to health insurance plans sold in the group and individual
markets in the following four areas: rate and form filing, market
conduct, prompt payment of claims, and internal review. This
section describes the membership and administration of the Board,
and processes by which the Board will operate. The Board would
be required to submit its recommendations to the Secretary no
later than 18 months after all members of the Board have been
selected. Once the Board makes its recommendations, the
Secretary would be required to certify and issue the standards
through the regulatory process.

Similar to the rating and benefit requirements, states could choose
to adopt these harmonized standards. If they do not, insurers
selling policies in the group and individual markets could choose
to follow the federal standards upon notification of the Secretary
of DOL and the state.

Effective dates The bill would become effective on the date of enactment and Title II -- new PHSA Section 2913(c)
would apply to contracts for calendar year 2007 and thereafter. The federal rating requirements would become effective for the
first plan year or calendar year following the issuance of final
rules by the Secretary of HHS under the Model Small Group
Rating Rules or the Transitional Model Small Group Rating rule
-- but not earlier than 12 months after the date of enactment.
CRS-14

Title II -- new PHSA Section 2922(b)
The benefit choice standards would become effective, with respect
to SBHPs, 12 months after the date of enactment, and for all other
health insurance products, 15 months after the date of enactment.

Title III -- new PHSA Section 2932(d)(3)
The regulatory harmonization standards would become effective
18 months after the date on which the Board adopts the
harmonized standards.
CRS-15

Other Provisions

Financing Section 3 Title III -- new PHSA Section 2935
Participating employer and employee contributions would cover Authorizes an appropriation of such sums as are necessary to carry
premium amounts. out the provisions of Titles II and III of S. 1955.

Section 14
Authorizes appropriations of such sums as are necessary to
establish and administer the new program described in this bill.

Civil actions/available remedies No provision. Titles II and III -- new PHSA Sections 2914, 2924, 2934
Allows an insurer to sue for relief against state officials who
violate the federal preemption rules.

Studies Section 13 Title II -- new PHSA Section 2915
OPM would be required to submit reports to Congress about The Secretary would be required to submit a report to Congress
OPM's pubic education campaign one year and two years after every five years that assesses the impact of the federal model for
implementation of that campaign. rating premiums on access, cost, and market functioning in the
small group market.

Title III -- new PHSA Section 2932(f)
The Secretary would be required to submit a report to Congress
every three years that assesses the impact of the harmonized
standards on access, cost, and market functioning.

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