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March 3, 2004
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Good morning, Chairman Grassley, Ranking Member Baucus, and members of the
Committee. Thank you on behalf of the Department of Labor for inviting me to
testify on behalf of the Employee Benefits Security Administration (EBSA),
which has administered the Employee Retirement Income Security Act (ERISA)
for almost 30 years. I commend this Committee for focusing today on
insurance scams, and the effect they have on workers and their families, and
on business owners who wish to provide health benefits.
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Health insurance scam artists steal money from those who need it the most
– people with pressing health needs who generally are not able to sort
through the complicated world of health insurance and divert the funds to
their own enrichment. Often, the victims only find that they have no health
insurance after they have received care and the hospital or doctor bills
them for the full amount, or have requested approval of a medical procedure.
As we have heard from today’s witnesses, a major illness or surgery can
cost hundreds of thousands of dollars. These situations devastate workers
and their families and threaten the financial security of thousands. Given
their unique vulnerability, small employers and workers in small businesses
are the most susceptible to these scams.
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Small businesses are especially vulnerable to health insurance scams because
of cost and adverse market conditions, such as:
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High Costs – First and foremost, their costs
are higher. Small firms must pay as much as 20 to 30 percent more than
large firms for comparable coverage.(1)
And their costs are more volatile,
rising 17 percent on average in 2003 among firms with 3 to 9 employees,
compared with 13 percent among those with 200 or more.(2)
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Low Coverage – Small businesses’ difficulty
affording insurance translates into uninsured workers and families –
and disadvantages small firms in recruiting and retaining qualified
employees. Firms with fewer than 50 employees offer insurance at just 46
percent of their work sites, compared with 97 percent among larger
firms.(3) It is therefore troubling (but not surprising) that employees of
firms with fewer than 100 employees and their families make up about
one-half of all Americans without health insurance.(4)
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Few Options – In most States five or fewer
insurers control at least three-quarters of the small-group market.(5)
State mandated benefits further add to the cost and limit choice. Large
firms can elect to self-insure – by doing so they escape state benefit
mandates and other potentially costly state regulations. But small
businesses are ill equipped to self-insure, lacking sufficiently large
populations to pool risk and insufficient capital to assume the risk. As
a result, few do.
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Little Stability – Small businesses’
struggle to obtain and maintain insurance for their employees is also
evident in the large number that begin, drop, or change coverage each
year. Forty-one percent of firms with fewer than 10 employees dropped or
added coverage during a recent two-year period, compared to only about
10 percent of firms with more than 100 employees.(6) Thirty-three percent
of small firms changed carriers in the past year.(7)
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The Cost of Shopping – On top of all this,
small business owners face the daunting challenge of finding and
comparing whatever insurance products might be available. Large
companies devote human resources personnel and benefits specialists or
retain expert consultants to accomplish this. A small business owner
typically must rely on insurance agents and devote his or her own time
to the effort. In practice owners have neither sufficient time nor
expertise to fully protect their interests.
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In this environment it is no wonder that health insurance scam artists can
find small employers who are willing to jump at what looks like a great deal
– but which turns out to be, quite literally, too good to be true.
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To understand how scams happen, it is important to get an overview of the
regulatory environment governing health benefits. With the enactment of
ERISA in 1974, Congress intended to provide employers with uniform federal
standards in the administration and enforcement of laws that govern and
protect their employee benefit plans, including plans that offer health
benefits.(8) Thirty years later, more than 130 million Americans receive their
health insurance through employer-based coverage governed by ERISA and
overseen by EBSA.(9) Under ERISA, employers may offer their workers group
health plans that consist of health insurance products, which are governed
by state laws and regulations.(10) Each state has separate laws governing the
marketing, sales, solvency, rate-setting and benefit mandates for these
health insurance products. Employers may also offer group health plans that
are self-funded. When an employer self-funds the health benefits for their
workers, the employer’s health plan will not be deemed a health insurance
product, and will be solely governed by ERISA.(11)
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Employers may also obtain health coverage for their employees by purchasing
through a multiple employer welfare arrangement (MEWA). MEWAs are
arrangements that provide health benefits to employees of two or more
unrelated employers who are not parties to collective bargaining agreements.
States and the federal government coordinate the regulation of MEWAs, with
the states primarily responsible for overseeing the financial soundness of
MEWAs and the licensing of MEWA operators. The Department of Labor enforces
the fiduciary provisions of ERISA against MEWA operators to the extent a
MEWA is an ERISA plan or is holding plan assets. State insurance laws, which
set standards requiring specified levels of reserves or contributions, are
applicable to MEWAs even if they are also covered by ERISA.
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While many MEWAs operate successfully and provide reliable benefits,
unscrupulous promoters have exploited the difficulties that small employers
face in obtaining coverage to operate Ponzi schemes that collect premiums
but intentionally default on benefit obligations. Fraud increases the cost
for everyone, and the fear of being taken in deters many small employers
from offering coverage at all.
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Because health insurance scams can operate in a variety of ways, EBSA takes
a three-pronged approach to put a stop to these abusive schemes. First, we
focus on prevention by educating employers and consumers. Our educational
materials provide information that assists employers to recognize fraud at
the outset so as not to get trapped in plans that take their money and leave
their employees without coverage. Second, we take an aggressive stance on
civil and criminal enforcement, working with the states and the National
Association of Insurance Commissioners (NAIC) to shut down insurance scams.
Third, the Bush Administration is proposing Association Health Plans (AHPs)
as part of the solution to health scams because AHPs have strong protections
against abuse, including a mandatory federal certification process, more
uniform oversight, and strong federal solvency standards for self-funded
arrangements. AHPs would also provide small employers with good
alternatives, and create more competition for MEWAs.
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Secretary Chao has released guidance to the leaders of America’s small
business community outlining steps they could take to avoid being taken in
by promoters of insurance scams. Entitled, “How to Protect Your Employees
When Purchasing Health Insurance,” this simple advice provides useful tips
that can help employers steer clear of coverage that is “too good to be
true.” Among the highlights:
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Compare insurance coverage and
costs. Always compare
the benefits and costs of multiple insurance products. If one product
appears to offer similar benefits at a dramatically lower cost, ask
questions.
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Confirm that the person offering the product is a
licensed insurance agent with a proven record of reliability. Check out
unknown agents with your state insurance department.
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Verify that your state insurance department approves
any unfamiliar company, organization or product.
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Examine the policy to determine the actual coverage and
whether the promised benefits are fully insured by a licensed insurance
company.
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There are several other helpful suggestions, and all of them can be found on
the attached copy of Secretary Chao’s guidance, and on EBSA’s Web site
at www.dol.gov/ebsa.
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In addition, DOL has also published technical assistance materials for
employers and service providers, including a booklet explaining federal and
state regulation of MEWAs and guidance on what to do when health coverage
can no longer pay benefits. Both the booklet and additional guidance are
attached, and are available on EBSA’s Web site under Publications
or through EBSA’s toll-free number at 1.866.444.EBSA (3272).
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Aggressive enforcement of insurance scams has long been a priority for DOL.
We conduct thorough investigations, exchange relevant information with
states and other agencies, file civil complaints and assist local U.S.
Attorneys in bringing criminal indictments. From FY 1990 through December
2003, DOL has conducted 621 civil and 107 criminal investigations of health
plans affecting 1.8 million participants and their families, and has
identified violations involving $139.5 million.
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Cooperation With States And Other Agencies: EBSA and NAIC exchange
case-specific information regarding ongoing MEWA investigations on a regular
basis. EBSA also participates in NAIC quarterly meetings to exchange
information about health issues that are of concern to government
regulators. Our close working relationships with state insurance departments
allow us to meet informally with them when the need arises. For instance,
EBSA recently met with the New York State Insurance Department to implement
procedures for EBSA to refer the names of brokers that sell unauthorized
insurance products that the New York Regional Office encounters in MEWA
investigations. Upon referral of the brokers, the Department of Insurance
will determine whether license suspension or revocation is appropriate. We
will continue to pursue these valuable cooperative relationships.
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Our field offices also regularly conduct MEWA training sessions with outside
agencies to discuss ongoing investigations. For example, the EBSA Atlanta
Regional Office sponsored a conference for nearly a dozen regional state
representatives to discuss technical issues regarding MEWAs. In August 2003,
EBSA enforcement staff made presentations to over 30 supervisors of the FBI
Health Care Fraud Task Force regarding fraudulent MEWAs. EBSA investigators
also conducted a MEWA training session at the Federal Law Enforcement
Training Center in February 2004. We undertake projects such as these on an
ongoing basis in order to keep our investigators and the outside entities we
work with up to date on the latest cases and issues.
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Historically, DOL has had difficulty identifying fraudulent MEWAs before
problems developed and individuals were hurt. In response, DOL exercised its
authority under the Health Insurance Portability and Accountability Act (HIPAA)
to require annual reporting of information about MEWAs through the Form M-1.
This new reporting requirement provides DOL with information about a MEWA's
compliance with the requirements under Part 7 of ERISA (HIPAA), the Mental
Health Parity Act (MHPA), the Newborns' and Mothers' Health Protection Act
(Newborns’ Act) and the Women's Health and Cancer Rights Act (WHCRA). It
also serves as a de facto registry of MEWAs that are attempting to comply
with the law. The Form M-1 helps DOL coordinate more effectively with the
States to protect small employers and their employees who may be subject to
abuse by health insurance scams. The public, including State regulators, can
electronically access all Form M-1s on the DOL Web site or by visiting EBSA’s
Public Disclosure Room.
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Civil Enforcement Process: When EBSA uncovers a corrupt MEWA operation, we
determine what court action is needed, and seek a Temporary Restraining
Order (TRO) from a federal court to freeze the assets of both the MEWA and
its promoters. The goal is to shut the scam artists down. Working closely
with state insurance departments and the NAIC, we may also ask the court to
appoint independent fiduciaries to operate the plan, marshal assets for the
payment of claims, and hold individuals personally liable for losses. We
also share our investigative findings with the states to help them obtain
“Cease and Desist” orders for cases falling under their jurisdiction.
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Federal And State Cooperation In Civil Cases: As an example of our work with
the states, cooperation proved crucial in the investigation of Employers
Mutual LLC, a MEWA that enrolled more than 23,000 participants and
beneficiaries in all 50 states. An EBSA investigation of Employers Mutual
LLC disclosed that the MEWA operators transferred to themselves in the form
of excessive fees, or were unable to account for, millions of dollars in
plan assets rather than using those assets to pay benefits to participants.
Unpaid claims for the MEWA totaled approximately $27 million. With the help
of information obtained through EBSA’s investigation, “Cease and Desist”
orders were issued by the departments of insurance in Florida, Nevada,
Illinois, Texas, Iowa, Washington, Pennsylvania, Massachusetts, Arizona, and
Colorado. In addition, DOL obtained a temporary restraining order and a
preliminary injunction and order appointing an independent fiduciary to
manage the health plans operated by Employers Mutual LLC and affiliated
associations. On September 10, 2003, DOL succeeded in its first step towards
making workers whole when a federal court in Nevada entered a judgment
requiring the principals of Employers Mutual LLC and affiliated companies to
pay $7.3 million of the losses suffered by health plans.
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Federal And State Cooperation In Criminal Cases: Criminal cases also often
require the participation of many governmental entities, including, at the
Federal level, DOL’s Office of the Inspector General, the IRS, the
Department of Justice and the FBI. For example, in United States v.
Timothy Smith, EBSA, the Office of Inspector General, and the Georgia
Department of Insurance conducted a joint investigation of a bogus health
insurance product provided to more than 50 employers in Alabama and
Georgia. On September 3, 2003, Timothy Smith pled guilty to embezzlement
of $217,388 and was sentenced to 40 months imprisonment, 3 years probation
and was ordered to pay restitution of the amount embezzled.
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The following civil and criminal cases are fairly typical of the health
insurance fraud schemes that DOL encounters. A few case summaries will
demonstrate the types of arrangements that often defraud health plan
sponsors, as well as the actions we take to recover benefits due to plans
and plan participants.
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Mutual Employees Benefit Trust (MEBT): On November 15, 2001, DOL filed a
lawsuit against the trustees, corporations and principals affiliated with
MEBT for diverting more than $2.2 million in assets of their health and
welfare plan to benefit sham labor unions and corporations. MEBT is a MEWA
that provided group health and other benefits to as many as 1,900
participants. On May 4, 2002, the Court appointed an independent fiduciary
to manage the plan, and on September 13, 2003, DOL obtained an order
requiring the owners of MEBT to restore $1.7 million to the plan.
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U.S. Alliance, Inc. And Alliance Administrators (Alliance): On July 12,
2001, DOL obtained a restraining order freezing the assets of Alliance,
which had operated numerous associations that marketed health plans to
employers on the East Coast. DOL alleged that the health plan sponsored by
Alliance resulted in more than $2.8 million of unpaid medical claims for at
least 1,500 participants, and that plan officials and corporate executives
diverted over $1 million of plan assets for their personal use. Following a
court order freezing assets and appointing an independent fiduciary, DOL
obtained a final judgment on May 16, 2003 holding the plan administrators of
Alliance liable for $2.8 million.
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TRG Marketing, LLC: On October 28, 2003 DOL sued executives of TRG
Marketing, LLC (TRG) for failing to prudently manage the firm’s health
plan, and for diverting plan assets to pay personal expenses for themselves
and family members resulting in up to $17.5 million in unpaid health claims.
TRG is a MEWA plan covering catastrophic health expenses for over 11,000
participants nationwide. DOL seeks payment of all health claims, removal of
the defendants from their positions and a permanent bar to their serving as
fiduciaries to any ERISA-based plan.
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Provider Medical Trust: On January 30, 2004, DOL sued the fiduciaries of the
Provider Medical Trust, a MEWA, for allegedly charging excessive fees and
making misrepresentations that resulted in workers incurring millions of
dollars in medical bills while believing they had health plan coverage. The
suit seeks restitution, an accounting of plan assets, removal of the
fiduciaries, and a permanent bar of the plan fiduciaries from serving on any
ERISA-based plan.
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Criminal Cases
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United States v. Frank Rousseau: Following an investigation by EBSA and the
FBI, Frank Rousseau was convicted on March 6, 2003 of wire fraud and
embezzlement from a health care benefit program. He was sentenced on
September 11, 2003 to 30 months imprisonment and 3 years probation. Between
January and July 1997, Rousseau embezzled over $1 million of client funds
while serving as the CEO of L&H Administrators (L&H), a third party
administrator hired to pay health care claims for employees. DOL is
continuing to seek restitution from Rousseau.
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United States v. Robert David Neal: In another criminal case the joint
efforts of EBSA, the IRS and state and local agencies resulted in the
indictment of Robert David Neal for health care fraud. The February 5, 2002
indictment alleged that Neal completed false and fraudulent employee
applications in marketing and selling health care benefit programs in Texas
and Florida. Neal pled guilty and was sentenced on August 2, 2002 to 27
months in prison, 26 months probation and restitution of $568,042.
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United States v. Pereira: Paul Pereira was sentenced March 30, 2000 to 24
months in prison, 3 years of supervised release, and ordered to make
restitution of $880,746 after pleading guilty to health care fraud and
embezzlement. He established a phony insurance plan called Ameri-Med, and
collected more than $1.6 million in premiums but only paid $360,000 in
claims. The investigation by EBSA and the FBI revealed that Pereira diverted
more than $900,000 in premiums to his personal and business use.
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United States v. Jerry A. Burnett: On April 23, 2002, following an
investigation by EBSA and the IRS, Jerry Burnett was sentenced to 24 months
imprisonment, 3 years supervised release and ordered to make restitution of
$381,052 after pleading guilty to wire fraud and making false statements on
an income tax return. Burnett operated an “employee leasing” company
known as PROsera, which had over 60 clients representing almost 600
employees. PROsera agreed to establish and maintain a work-related injury
and illness plan and group health insurance. Between April 1994 and December
1997, clients paid more than $1.4 million to the employee benefit plan.
Burnett failed to hold the contributions in trust and converted nearly
$250,000 of these funds to his own use.
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EBSA’s enforcement strategy supports the Secretary ‘s strategic goal of
a secure workforce by deterring and correcting violations of ERISA with
respect to health benefit programs. Finding and shutting down insurance
scams is a national enforcement priority. Since President Bush took office,
EBSA’s investigative staff has increased by 14 percent. The President’s
proposed budget for FY 2005 continues this commitment, by including a
request for 30 additional investigators for our regional offices, 10 of whom
will be used to fill a newly created position of regional criminal
coordinator. These investigative resources will further enhance EBSA’s
ability to address health scam issues.
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I have discussed our efforts to educate small employers about how to avoid
health insurance scams and our comprehensive enforcement efforts. The third
prong of our program to address health insurance fraud is to provide an
alternative source of secure health insurance coverage, Association Health
Plans (AHPs). Last year the House of Representatives passed the bipartisan
H.R. 660, which would allow small employers to join together through bona
fide trade and industry associations to provide health insurance coverage
for their employees under the protective umbrella of ERISA and we urge the
Senate to take up the legislation.
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This is not the forum to discuss the many advantages of AHPs, but it is
important that the Committee be aware of the provisions in the legislation
designed to combat fraud and prevent the type of tragic situation that
occurs when fraudulent health insurance is sold. First, AHPs would be
required to obtain Department of Labor certification. Only bona fide trade
or industry associations that have been in operation for at least three
years for a purpose other than offering health insurance will be allowed to
sponsor such arrangements.
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Furthermore, certified AHPs – both self-insured and those that purchase
commercial insurance coverage – would be subject to rigorous DOL
oversight. EBSA has the experience to effectively regulate AHPs. We
currently have exclusive oversight of 275,000 self-funded health plans
covering 67 million individuals. ERISA's fiduciary and disclosure
requirements have helped make self-funded plans strong and successful
providers of health benefits to working Americans. Passage of AHP
legislation would provide the same effective EBSA oversight of plans that
cover small employers and their workers.
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In order to be certified, a self-insured AHP would have to demonstrate that
its premiums are adequate to cover its claims and operating expenses, that
it has sufficient assets to ensure stability, and that it has secured backup
(I.E., Stop Loss) insurance to cover unexpectedly high losses. In addition,
a fund will be established under DOL oversight to continue to pay stop-loss
indemnity insurance premiums to cover outstanding claims in the event that
an AHP becomes insolvent and unable to maintain its coverage. These three
layers of protection, reserves, stop loss insurance, and the premium
continuation fund will protect workers from the risk of unpaid health
claims.
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These provisions generally parallel the requirements that states impose on
health insurers, and are vital to ensure that AHPs deliver on their
promises. Finally, as a consumer protection backstop, AHP legislation would
give the Secretary the authority to impose additional solvency requirements
as she considers appropriate.
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Taken together, these financial protections, along with EBSA’s ongoing
oversight, will help assure employers and employees in AHPs that their
claims for benefits will be covered.
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Health insurance scams are a real threat for small business employers and
employees. Insurance failures hurt real people – workers and their
families – who are seldom equipped to absorb large dollar losses. We at
EBSA always remember that our job is not about abstract statistics. Our
mission is to protect hard working Americans and their families. EBSA is
committed to combating fraudulent health insurance schemes through education
and enforcement. In addition, Association Health Plans are an important part
of the solution to the problem. The Bush Administration is committed to
shutting down health insurance scams and stands ready to expand access to
affordable quality health insurance coverage for working Americans and their
families. Thank you for the opportunity to testify today.
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“Study of Administrative Costs and
Actuarial Values of Small Health Plans,” Actuarial Research
Corporation for the U.S. Small Business Administration, January 2003.
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Kaiser Family Foundation and Health
Research and Education Trust, “Employer Health Benefits, 2003 Annual
Survey.”
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U.S. Agency for Healthcare Research
and Quality, based on the Medical Expenditure Panel Survey, Insurance
Component, 2001.
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Estimated for EBSA by Actuarial
Research Associates, based on the Census Bureau’s annual March Current
Population Survey and other data.
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U.S. General Accounting Office,
Private Health Insurance: Small Employers Continue to Face Challenges in
Providing Coverage, GAO-02-8; and Private Health Insurance: Number and
Market Share of Carriers in the Small Group Health Insurance Market,
GAO-02-536R.
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Williams, Claudia and Jason Lee (2003,
September). Are Health Insurance Premiums Higher for Small Firms,
The Synthesis Project – Policy Brief Number 2, Robert Wood Johnson
Foundation, 4 pp.
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Kaiser Family Foundation and Health
Research and Education Trust, “Employer Health Benefits, 2003 Annual
Survey.”
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29 U.S.C. § 1001, et. seq.; Section 2
of ERISA.
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Estimated for EBSA by Actuarial
Research Corporation.
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29 U.S.C. 1144(b)(2)(A); Section 514
(b)(2)(A) of ERISA.
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29 U.S.C. 1144(b)(2)(B); Section 514
(b)(2)(B) of ERISA.
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