State Employees’ Comprehensive Major Medical Plan

November 10, 1982 State Departments, Institutions and Agencies; Health Insurance; Board of Trustees of the Teachers’ and State Employees’ Comprehensive Major Medical Plan.

Subject:

Requested By: Ray Sparrow Chairman Board of Trustees of the Teachers’ and State Employees’ Comprehensive Major Medical Plan

Question: What are the responsibilities of Blue Cross and Blue Shield Corporation of North Carolina and

E.D.S. Federal Corporation under their respective contracts with the State of North Carolina in regard to providing converted non-group health insurance to state employees who terminated employment between July 1, 1982, and September 30, 1982?

Conclusion: E.D.S. Federal Corporation has no responsibility under its contract with the state to provide any benefits to state employees who terminated employment prior to October 1, 1982, the effective date of the contract.

Although Blue Cross and Blue Shield of North Carolina has no obligation to provide a conversion privilege under the express provisions of its contract, Chapter 706 of the 1981 Session Laws (House Bill 983) requires that Blue Cross offer a converted, non-group, health insurance policy to all state employees who terminated employment between July 1, 1982, and September 30, 1982.

On September 14, 1979, the State of North Carolina entered into a contract with Blue Cross and Blue Shield Corporation of North Carolina ("Blue Cross") for the purpose of providing medical insurance to state employees and their dependents. Pursuant to the terms of the "Master Group Contract Between Blue Cross and Blue Shield of North Carolina and the Teachers and State Employees’ Retirement System of the State of North Carolina ("the Contract"), employees who left the employment of the State were offered the opportunity to convert their group coverage to a non-group policy under terms and conditions specified by Blue Cross. More specifically, Exhibit C, Section 503(G) of the Contract states:

"G. Conversion From Group to Non-group Coverage – When a certificate is held on a group payment basis and the subscriber leaves the employment of a group which continues coverage with the Corporation, the subscriber shall be entitled to be issued the then current non-group certificate designated by the Corporation, subject to regulation of the Corporation and provided the subscriber applies to the Corporation for continuous coverage and pays applicable fees within 30 days after termination of group eligibility (the Corporation customarily mails offers of continuous coverage to the last known address of the subscriber in order to facilitate the conversion. Failure to send or receive the offer shall not relieve the subscriber of the obligation to apply for continuous coverage)."

The contract was subsequently amended on October 1, 1980, October 1, 1981 and June 30, 1982. These amendments were primarily for the purpose of extending the coverage and contained only such benefit and rate changes as were necessary to match the funds appropriated for the program.

On February 15, 1982, a Request for Proposals for a new medical benefits plan was issued by the Department of Administration under the direction of the Board of Trustees of the Teachers’ and State Employees’ Retirement System ("Retirement Board") and the Legislative Committee on Employee Hospital and Medical Benefits ("Committee"). Proposals were received from Blue Cross and F.D.S. Federal Corporation ("E.D.S.F."). The General Assembly subsequently enacted House Bill 1669 (Chapter 1398 of the 1981 Session Laws) which directed the State Budget Officer to select from the two proposals submitted the lowest responsible bidder on a per transaction basis and to enter into a contract with the bidder. The State Budget Officer selected E.D.S.F., as directed. A contract was signed by E.D.S.F. and the Board of Trustees of the Teachers’ and State Employees’ Comprehensive Major Medical Plan ("Board") on August 31, 1982, which provided that E.D.S.F. would assume the responsibility of administering the contract on October 1, 1982.

Effective as of July 1, 1982, Blue Cross declined to issue any converted, non-group policies to terminated state employees. Although E.D.S.F. has provided for a conversion privilege for terminated state employees, as required by its contract, E.D.S.F. has declined to offer any benefits to state employees who terminated prior to the beginning date of the new contract. The result is that employees who terminated state employment between July 1, 1982, and September 30, 1982, are now able to convert to a non-group policy with either company.

The question to be analyzed is therefore whether either Blue Cross or E.D.S.F. is required to issue a non-group policy to the state employees terminating between July 1, 1982, and September 20, 1982. In order to answer this question, an investigation must be made as to the duties of each company (1) under their respective contracts, and (2) under applicable legislation.

E.D.S.F.

(A) Under the Contract

Section G of "The Plan Administration Contract For The State of North Carolina Comprehensive Major Medical Plan for Teachers and State Employees (the "Plan") states as follows:

"G. Conversion

Upon cessation of coverage due to termination of employment, an employee or dependent will be entitled to convert to non-group coverage without the necessity of a physical examination, and on a fully contributory basis. Such coverage will include hospitalization, surgical and medical benefits similar in scope to those provided under the Plan. The Board of Trustees, after consultation with the Committee on Employee Hospital and Medical Benefits shall approve the conversion plan, which shall be administered by the Plan Administrator through an insurance contract arranged by the Plan Administrator, or administered as otherwise directed by the Board of Trustees. The eligible individual must apply for coverage within 30 days after termination of group eligibility."

In response to this requirement, E.D.S.F. has established in North Carolina an insurance subsidiary for the purpose of offering the terminated state employee a non-group policy with benefits similar in scope to those provided under the Plan. This program was presented to the Board and the Committee. The conversion plan was approved by the Board, after consultation with the Committee, on September 17, 1982.

It is therefore clear that E.D.S.F. has complied with its contractual responsibilities under the Plan. Although it may be asserted that the Board and the Committee could have refused to approve any conversion plan which did not offer the privilege to employees terminated after July 1, 1982, acceptance and approval of the conversion plan has rendered this point moot.

No provision of the contract requires that E.D.S.F. provide conversion benefits to employees who are not employed by the state on the date the contract becomes effective. There is therefore no legal basis under the Plan for requiring E.D.S.F. to offer a non-group policy to employees terminated between July 1, 1982, and September 30, 1982.

(B): Applicable Legislation
(1): Part 3 of the House Bill 1669 (Chapter 1398 of the 1981 Session Laws) sets out the benefits which the state’s self-insured medical benefits plan will provide. Section 135-40.12 provides:

"§ 135-40.12. Conversion. — (a) Upon cessation of coverage due to termination of employment, an employee or dependent will be entitled to convert to non-group coverage without the necessity of a physical examination, and on a fully contributory basis. Such coverage will include hospitalization, surgical and medical benefits similar in scope to those provided under the Plan. The Board of Trustees, after consultation with the Committee on Employee Hospital and Medical Benefits shall approve the conversion plan, which shall be administered by the Plan Administrator through an insurance contract arranged by the plan Administrator, or administered as otherwise directed by the Board of Trustees. The eligible individual must apply for coverage within 30 days after termination of group eligibility.

The Board of Trustees shall provide for the continuation of conversion privilege exercised under the predecessor plan, on a fully contributory basis. The Board of Trustees shall consult with the Committee on Employee Hospital and Medical Benefits before taking action under this subsection."

As required, Section G of the Plan, as discussed above, is basically identical to subsection (a) of this statutory provision. And, as previously discussed, E.D.S.F. has arranged a conversion plan which has been approved by the Board after consultation with the Committee. Subsection (b) of Section 135-40.12 does not place an affirmative duty on E.D.S.F. to provide a conversion privilege. There is therefore no statutory requirement in House Bill 1669 that E.D.S.F. offer a converted non-group policy to state employees terminating between July 1, 1982, and September 30, 1982.

(2) House Bill 983 (Chapter 706 of the 1981 Session Laws) requires that group policies issued in North Carolina contain continuation and conversion privileges which may be exercised under certain conditions. Section 2 of this bill, however, specifically states:

"The provisions of this act shall not apply to hospital, surgical or major medical plans offered by employers on a self-insured basis."

E.D.S.F. has no obligations under this legislation for the obvious reason that E.D.S.F. is not the "insurer" of the employees as that term is defined in Part I, Section 58-254.40(4):

"(4) "Insurer" means the entity issuing a group policy or an individual or converted policy."

E.S.D.F. is only the administrator of the state’s self-insured policy. It is thus clear that neither

E.D.S.F. nor the state is bound by the provisions of House Bill 983.

BLUE CROSS

A. Under the Contract

As previously discussed, Exhibit C, Section 503(g) of the Contract described a conversion privilege which Blue Cross offered to state employees prior to July 1, 1982, ". . . subject to regulation of the corporation. . . ." Other pertinent provisions of the Contract are set out as follows:

(2): Section 12:

"12. Termination of this Master Group Contract automatically terminates all subscriber certificates subject hereto. Issuance of a non-group contract to affected subscribers will be at the option of the Corporation and upon the terms offered by the Corporation." (Emphasis added.)

(3) Exhibit C, Section 245(D):

"D. When Major Medical Benefits are provided under a master group contract, continuation of coverage after the subscriber leaves the group, or upon termination of the group, shall be only at the option of the Corporation and upon such terms as the Corporation may determine." (Emphasis added.)

The provisions demonstrate on their face that the conversion, and even continuation, privileges under this Contract were offered by Blue Cross at its option and subject to its regulations. None of the three amendments to the Contract alters this factor. The decision made by Blue Cross to discontinue the conversion privilege after July 1, 1982, was therefore within its legal rights under the Contract.

B. Applicable Legislation

House Bill 983, Section 2, states:

"Sec. 2. This act shall apply only to group policies delivered, issued for delivery, or amended on or after the effective date of this act. The provisions of this act shall not apply to hospital, surgical or major medical plans offered by employers on a self-insured basis." (Emphasis added.)

As previously noted, the third amendment to the Contract was signed on June 30, 1982, and became effective on July 1, 1982. The provisions of House Bill 983 therefore became incorporated into the Contract, as a matter of law, on that date. See Fuller v. Lockhart, 209 N.C. 61 (1935).

House Bill 983 was enacted for the primary purpose of requiring that insurers who offer group health insurance policies in North Carolina include provisions in those policies which allow members of the Group who terminate their membership to continue their coverage for a specified period of time and then convert their coverage to an individual policy without being penalized for pre-existing physical conditions. Without this requirement, persons with medical disabilities would be required to pay extremely high premiums in order to purchase an individual policy upon termination of employment, and in many cases such persons would be unable to purchase insurance at all.

Part I of the bill requires that terminated employees be allowed to continue their group coverage by making a written election to continue and by paying the full cost of the premium in advance of a monthly basis. The employee must have been insured under the group plan for at least three months immediately prior to termination and not be eligible for coverage under any other group plan within 31 days after termination.

Continuation coverage under the group plan ends on the earliest of the following dates:

The date three months after the date on which the employees’ insurance would have ended had it not been continued; or
The date ending the period for which the employee made his last required contribution; or,
The date ending the period for which the employee made his last required contribution; or,
The date the group policy is terminated.

As related to the present situation, Blue Cross is therefore required to allow terminated employees to continue their coverage through September 30, 1982, which is the date the Contract expires.

§ 58.254.47(4) further provides that in the case of employees who have elected to continue their coverage, if the group policy is terminated prior to the end of the normal three month continuation period, the employee will be entitled to convert to a non-group policy under the terms and conditions of Part 2 of the bill. Therefore, a state employee whose employment was terminated after July 1, 1982, would be entitled to purchase a non-group policy from Blue Cross in accordance with the provisions of Part 2.

Part 2 of House Bill 983 requires any insurer under a group plan to issue a non-group policy to members of the group whose insurance has terminated ". . . without evidence of insurability. . . ." The insurer is not required to issue the converted policy, however, if the employees’ insurance under the group plan was terminated because:

The employee terminated membership and either wasn’t eligible for continuation or failed to elect to continue the coverage; or,
The employee failed to make the payments required by Part 1 of the bill in order to continue the coverage; or,
The employee had not been continuously insured under the group plan for the three months immediately preceding termination; or,
The group policy was terminated by was replaced by a similar group policy within 30 days.
The employee failed to continue his insurance for the maximum three-month period following termination in accordance with the provisions of Part 1 of the Bill.

Blue Cross has apparently taken the position that an employee who terminates employment after July 1, 1982, cannot continue coverage for the entire three-month period required by § 58254.50(5) as stated above, because all group coverage, including continuation, terminates on September 30, 1982. For this reason, Blue Cross refuses to offer a converted policy to any employee terminated after July 1, 1982. Such a strained interpretation of that restriction is inconsistent with the clear intent of the statute and with accepted principles of statutory construction.

As discussed previously, § 58-254.47(4) of Part 1 states that if continuation of coverage under a group plan is terminated because the group plan itself is terminated ". . . the employee or member shall have the privilege described in G.S. 58-254.49 if the date of termination precedes that on which his actual continuation of insurance under the policy would have terminated". More clearly stated, this provision says that if an ex-employee has elected to continue his group insurance for three months and the group policy itself is terminated before the maximum three-month period ends, then the employee is entitled to purchase a non-group policy under the same conditions as would have been in effect had the group policy not been terminated. It is clearly implied in that

provision that the ex-employee is entitled to the converted policy even though he cannot continue his coverage for the maximum three-month period.

It would therefore be totally inconsistent to provide in Part 1 for a conversion privilege where the group policy is terminated before the ex-employee has continued his coverage for three months and then to state in Part II that the ex-employee cannot purchase a converted policy if he had been unable to continue coverage for three months. The restriction is § 58-254.50(5) states:

"(5) He failed to continue his insurance for the entire maximum period of three consecutive months following termination of active employment as provided for in Part 1 of this Article." (Emphasis added.)

The word "failed" clearly implies an action, or absence of action, by the ex-employee which has cut off his right of continuation under the terms of Part 1. To construe this provision as applying to a situation where continuation was interrupted by the termination of the group policy would be to ignore the language of the restriction itself, and would be contrary to the express language of § 58-254.47(4) of Part 1.

CONCLUSION

The contract between E.D.S.F. and the Board became effective on October 1, 1982. Neither the contract nor House Bill 1669 requires that E.D.S.F. assume responsibility for ex-employees who terminated state employment prior to that date. House Bill 983 does not apply to the administrative services being performed by E.D.S.F. under the contract. It is therefore our opinion that E.D.S.F. has no responsibility to provide converted, non-group coverage to employees who terminate between July 1, 1982, and September 30, 1982.

The contract between Blue Cross and the state contains no provision which mandates that a converted policy be offered to all terminated state employees. House Bill 983, however, does require that Blue Cross issue a converted policy to terminated employees so long as the employee takes affirmative action to continue his coverage and apply for conversion as required by Part 2 of the bill. The fact that employees terminating after July 1, 1982, cannot continue their coverage for the full three-month period normally required under the bill does not extinguish Blue Cross’ obligation. It is therefore the opinion of this Office that Blue Cross is required by House Bill 983 to offer a converted, non-group policy to all eligible former state employees whose termination of employment occurred between July 1, 1982, and September 30, 1982.

Rufus L. Edmisten Attorney General

Grayson G. Kelley Assistant Attorney General