Arizona Senate Research Staff, 1700 W. Washington Street, Phoenix, AZ 85007
Arizona State Senate
Issue Brief
August 3, 2018
SMALL BUSINESS HEALTH
INSURANCE
INTRODUCTION
Overview
Health insurers include numerous types of organizations and the
structure of the insurance issued by these organizations, including the
scope, duration and choice of benefits offered, varies. Examples of
health insurers include disability, group disability and blanket
disability insurers, healthcare services organizations (also known as
health maintenance organizations, or HMOs) and hospital and
medical service organizations.
Small businesses in Arizona may purchase any type of private
health insurance that they can obtain at an affordable price. Because
small businesses cannot spread their risk, and thus their costs, over a
large number of individuals, the per person costs to insure their
employees are often higher than comparable costs for large
employers. Small businesses may also have a difficult time absorbing
increases in health insurance costs. Furthermore, small businesses
often do not have the same bargaining power when negotiating rates
and do not have the manpower to devote to the administration of a
health insurance benefit. These factors may dissuade small businesses
from offering health insurance.
What is a Small Business?
The federal Small Business Act defines a small business as, “one
that is independently owned and operated and which is not dominant
in its field of operation.” Based on this definition, the U.S. Small
Business Administration (SBA) has developed standards for what is
considered a small business in any given industry. The SBA has
established two widely used size standards for small businesses – 500
employees for most manufacturing and mining industries and $7.5
million in average annual receipts for nonmanufacturing industries.
Arizona statute has several varied definitions of small businesses.
In statutes related to health insurance, the most common definition of
Note to Reader:
The Senate Research Staff
provides nonpartisan, objective
legislative research, policy
analysis and related assistance
to the members of the Arizona
State Senate. The Research
Briefs series is intended to
introduce a reader to various
legislatively related issues and
provide useful resources to
assist the reader in learning
more on a given topic. Because
of frequent legislative and
executive activity, topics may
undergo frequent changes.
Nothing in the Brief should be
used to draw conclusions on
the legality of an issue.
Arizona Senate Research Staff, 1700 W. Washington Street, Phoenix, AZ 85007
Small Business Health Insurance
2
a small business or small employer is a business
with 50 or fewer employees. Although the
majority of businesses in Arizona have fewer
than 20 employees, more than half of Arizona
workers are employed by firms with more than
500 employees.
To increase the affordability and availability
of health insurance for small businesses, Arizona
has developed several options, which are
discussed below.
ACCOUNTABLE HEALTH PLANS
The Department of Insurance (DOI) reports
that any Arizona health insurer that wants to offer
group health insurance must also qualify as an
accountable health plan (AHP). AHPs are
statutorily required to offer at least one health
plan to small employers (known as a “guaranteed
issue” requirement). Effectively, this requires any
insurer that offers coverage to medium and large-
sized employers to also offer its health benefits
plan to small employers, if those employers agree
to pay the premiums offered.
In addition, if an AHP offers more than one
health benefits plan to small employers, the AHP
must offer a choice of all its plans and must
accept any small employer that applies for any of
the plans and is willing to pay the premium. For
the purposes of an AHP, a small employer is any
employer that employs at least 2 but not more
than 50 employees on a typical business day in
one calendar year.
The guaranteed issue requirement applies to
insurers that offer most types of coverage,
including hospital and medical service
corporation policies or certificates, healthcare
services organization contracts, multiple
employer welfare arrangements or any other
product through which health services or health
In Arizona, health insurers are required to pay
a 1.95 percent tax on the premiums they collect.
Laws 2016, Chapter 358 reduces the rate .05
percent per year until the rate reaches 1.70
percent in 2021.
2
However, AHPs are exempt
from this requirement on premiums attributable to
small businesses. Statute also restricts AHP
premiums offered to small businesses; premiums
may only vary by 60 percent of the index rate and
increases are limited.
3,4
Premium Tax Credit and State Subsidy for
Small Business Health Insurance
The Legislature established a premium tax
credit beginning January 1, 2007, for health
insurers that provide individual coverage or
coverage for small business with 2 to 25
employees that have been in existence in Arizona
for at least one calendar year and have not
provided health insurance to their employees for
at least six months. For coverage issued to small
businesses, the tax credit is the lesser of: 1) $1000
for single coverage or $3000 for family coverage
or 2) 50 percent of the health insurance premium.
Total credits are capped at $5 million per calendar
year.
5
The Department of Revenue determines
whether the small business meets the criteria to
allow the health insurer to claim the tax credit for
providing coverage to the business. Business may
only be determined eligible for three years (initial
eligibility plus two annual redeterminations).
Health insurers are then required to deduct the
amount of the tax credit from the premium paid
by the small business for health insurance. In this
way, the state subsidizes the cost of the small
business’s health insurance in the amount of the
tax credit.
benefits are provided to two or more individuals;
certain types of coverage such as worker’s
compensation, automobile medical payment
insurance and limited benefit coverage are
excluded.
1
1
A.R.S. § 20-2304
2
Laws 2016, Chapter 358, A.R.S. § 20-224
3
Statute defines a “base premium rate” as the lowest premium rate
that could have been charged by an AHP for each rating period and
an “index rate” as the arithmetic average of the applicable base
premium rate and the highest premium rate that could have been
charged under a rating system by the AHP.
4
A.R.S. § 20-2311
5
Laws 2006, Chapter 378, A.R.S. §§ 20-224.05, 43-210
Arizona Senate Research Staff, 1700 W. Washington Street, Phoenix, AZ 85007
Small Business Health Insurance
3
“MANDATE-LITE” INSURANCE OPTIONS
Statute provides requirements for health
insurance, including mandates to cover specific
services or supplies, offer a choice of providers
for some services and allow access to certain
services without prior authorization. Every
mandate does not apply to every type of insurer
and the requirements vary for each type of
insurer.
Beginning in September 2006, health
insurance that is issued to certain small
businesses does not have to include specified
coverage requirements. Those requirements
include mandated coverage for contraceptives
and certain medical foods and supplies, provider
choice requirements, and prescription drug
authorization and nonformulary drug access
procedures. Because this type of health insurance
is not required to include certain mandated
coverage, it is commonly referred to as “mandate
-lite.”
Originally, the enacting legislation allowed
mandate-lite insurance to be issued to businesses
that employ 2 to 25 persons and that have been
uninsured for at least six months.
6
In 2007, the
applicability of mandate-lite was expanded to
include businesses that employ 2 to 50 persons.
7
HEALTHCARE GROUP
Introduction
In 1981, the Legislature authorized the
Arizona Health Care Cost Containment System
(AHCCCS) to provide affordable healthcare
coverage to self-employed individuals, small
businesses with 50 or fewer employees, including
sole proprietorships, and political subdivisions
(state, counties, cities, towns, school districts and
agricultural districts) within the state. In 1985,
the Legislature established Healthcare Group
(HCG) as a prepaid guaranteed issue medical
coverage program for eligible employers, and the
program, administered by AHCCCS, began
operation the following year.
HCG State Subsidies and Program Expansion
According to AHCCCS, HCG’s enrollment
peaked in 1997, but began to decline when the
general healthcare market started to experience
problems because of steep cost increases. As
enrollment declined, HCG was left with a
membership that was predominantly high acuity,
with costly chronic illness management needs.
The cost of coverage continued to grow, far
exceeding the revenue from premiums. The HCG
health plans could not sustain growing program
losses. As a result, in FY 2000 the Legislature
began to subsidize the program with an
appropriation of $8 million to reconcile the health
plans’ medical costs incurred in excess of
premiums collected. Subsidies continued but were
cut in half to $4 million in FY 2004.
Despite efforts to increase enrollment and
remedy financial hardships, HCG continued to
struggle with program losses. In 2007, the
Legislature created the HCG Study Committee to
study the financial and operational issues
associated with HCG and to identify changes
necessary to ensure financial stability (Laws
2007, Chapter 263).
8
Specifically, the Study
Committee was charged with examining the
feasibility of continuing HCG, establishing a high
-risk pool or both. In 2013, the Legislature passed
legislation that prohibited HCG from enrolling
new members after August 1, 2013, repealed
HCG effective January 1, 2014, and repealed the
HCG Fund effective January 1, 2015.
9
CONTINUATION COVERAGE
The federal Consolidated Omnibus Budget
Reconciliation Act (COBRA) requires most
private sector group health plans that are
maintained by certain employers to offer
6
Laws 2006, Chapter 229 A.R.S § 20-2341
7
Laws 2007, Chapter 263 A.R.S. §§ 20-2341 et. seq.
8
Laws 2007, Chapter 263
9
Laws 2013 1
st
S.S., Chapter 10
Arizona Senate Research Staff, 1700 W. Washington Street, Phoenix, AZ 85007
Small Business Health Insurance
4
continuation coverage to covered employees,
former employees, spouses, former spouses and
dependent children who lose coverage due to
certain qualifying events, including: 1) the death
of a covered employee; 2) termination or
reduction in the hours of a covered employee’s
employment for reasons other than gross
misconduct; 3) a covered employee becoming
eligible for Medicare; 4) divorce or legal
separation of a covered employee from their
spouse; and 5) a dependent child’s loss of
dependent status. Group health plans that are
subject to continuation coverage requirements
under the federal COBRA law are those that are
maintained by employers with the equivalent of
20 or more employees on more than 50 percent of
the employers’ typical business days in the
previous calendar year.
10
Group health plans that
are sponsored by employers with the equivalent
of fewer than 20 employees are currently not
subject to these same requirements.
11
Effective January 1, 2019, Laws 2018,
Chapter 164 requires group health plans offered
by a small employer with at least 1 but not more
than 20 employees to offer continuation coverage
to enrollees. The same qualifying events for
continuation coverage under the federal COBRA
law apply to small employers, with one
additional qualifying event including when an
employer files for bankruptcy within one year
before or after an enrollee retires from said
employer. If an enrollee chooses to opt in to
continuation coverage, they must pay the full cost
of coverage plus a maximum 5 percent
administrative fee. Continuation coverage may be
utilized for no longer than 18 months, 29 months
if the enrollee has a disability, or 36 months for
qualified dependents that meet certain
requirements. Coverage may also end if an
enrollee becomes eligible for Medicare, Medicaid
or some other form of health insurance.
12
ASSOCIATION HEALTH PLANS
On June 19, 2018, the U.S. Department of
Labor issued a final rule on Association Health
Plans in response to President Trump's executive
order encouraging the expansion of such
healthcare plans.
13
Most notably, the final rule
expanded the definition of employer under the
Employee Retirement Income Security Act
(ERISA) to allow more employer groups or
associations to sponsor a single group health plan
under ERISA. Specifically, the rule broadens the
criteria for a group or association to satisfy the
commonality of interest requirement. Members of
the same trade, industry, line of business, or
profession, or those that maintain principal places
of business within a particular state or
metropolitan area would be able to offer single
group health plans. The rule also established
criteria under which working owners, such as sole
proprietors and other self-employed individuals
could participate in Associations Health Plans.
Since Associations Health Plans do not have a
prominent presence in the healthcare market
currently, it will be up to state legislatures to
determine the extent to which these plans will be
regulated in relation to premium rates, fraud
prevention and budgetary impacts, among other
things. The final rule will become effective on
September 1, 2018, for fully-insured
Association Health Plans; January 1, 2019, for
existing self-insured Association Health Plans;
and April 1, 2019, for new self-insured
association health plans.
14
10
U.S. Department of Labor, Health Plans and Benefits:
Continuation of Health Coverage-COBRA
11
29 U.S.C. §§ 1161-1169
12
Laws 2018, Chapter 164, A.R.S. § 20-2330
13
Executive Order 13813
14
U.S. Department of Labor, 29 C.F.R. Part 2510
Arizona Senate Research Staff, 1700 W. Washington Street, Phoenix, AZ 85007
Small Business Health Insurance
5
ADDITIONAL RESOURCES
• Arizona Department of Insurance
http://www.id.state.az.us/
• Insurance Statutes: Arizona Revised Statutes,
Title 20
• National Conference of State Legislatures
http://www.ncsl.org/programs/health/
SmallBusiness.htm
• “Statistics of U.S. Businesses,” U.S. Census
Bureau
http://www.census.gov/econ/susb/
• Related Arizona Revised Statutes: A.R.S. §§
20-2304, 20-2311, 20-224.05, 20-2341, 36-2912,
36-2912.01 and 43-210
