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Association Health Plans to the rescue? An in-depth look at the latest effort to expand health coverage
By Employee Benefits Practice Group on January 22, 2018 at 9:15 AM

Health insurance application form on a wooden table with glassesIn Executive Order 13813, President Donald Trump made it the official policy of the executive branch to find ways to expand the use of Association Health Plans (AHPs) as a means of providing quality, affordable coverage across state lines.

On January 4, 2018, the U.S. Department of Labor issued a proposed rule designed to do just that. Based on 2015 figures, the proposed rule has the potential to impact the health coverage of about 44 million people, whether by expanding coverage to the uninsured, by making more affordable coverage available to sole proprietors and small employers, or by cutting back some individuals’ benefits.

This blog discusses: (1) existing law and how it limits the formation of AHPs; (2) the changes in the proposed rule; and (3) the potential benefits and drawbacks of the administration’s approach to AHPs.

1. AHPs Under Existing Law

Under the Employee Retirement Income Security Act of 1974 (ERISA), “employee welfare benefit plans” that provide medical benefits — generally known as “group health plans” — can be established by both employers and employee organizations.

The term “employer” includes, however, “a group or association of employers acting for an employer.” Under current law, only a “bona fide” employer association can act as an employer and establish a group health plan. A bona fide employer association must consist of individual member employers who:

  • Join together for reasons other than providing health coverage;
  • Have one or more common law employees (besides a sole owner and his or her spouse or a partner in a partnership and his or her spouse);
  • Control the association; and
  • Share a “commonality of interest,” which generally means the member employers and the association share a sufficiently close economic or representational interest, such as operating in the same industry.

These requirements suffer from several limitations, mainly: they prevent employers from joining together for the purpose of providing health coverage and instead require employers to first come up with another reason justifying their existence; they bar sole proprietors and partnerships with no common law employees from joining; and they prevent employers from joining together if they are not closely related, even if they are in the same geographic area.

Bona fide employer associations have a distinct advantage compared to non-bona fide associations when it comes to providing group health coverage. Specifically, under the Patient Protection and Affordable Care Act (more commonly known as the ACA or Obamacare), plans in the individual and small group markets (50 or fewer employees) must provide the following “essential health benefits”:

  • Ambulatory patient services
  • Emergency services
  • Hospitalization
  • Maternity and newborn care
  • Mental health and substance use disorder services, including behavioral health treatment
  • Prescription drugs
  • Rehabilitative and habilitative services and devices
  • Laboratory services
  • Preventive and wellness services and chronic disease management
  • Pediatric services, including oral and vision care

In contrast, plans in the large group market (51 or more employees) are not required to provide essential health benefits (although they may of course choose to do so). Instead, they are only required to provide “minimum value,” which means: (1) the plan covers at least 60 percent of the cost of covered benefits; and (2) the plan provides substantial coverage for inpatient hospitalizations and physician services. Large group plans are also exempt from other market reforms under the ACA, such as the rules that bar insurers from rating premiums based on anything other than location, age, family size, and tobacco use.

A group health plan established or maintained by a bona fide employer association is considered a single plan, and assuming there at least 51 employees in the aggregate among all member employers, the plan will fall into the large group market, and thus the plan will not be required to provide essential health benefits.

In contrast, if it is not a bona fide employer association, then each member employer is considered to have established its own, individual plan, and every sole proprietor and small employer that joins is still providing coverage in the individual and small group markets, and consequently must still provide essential health benefits.

An AHP is also a “multiple employer welfare arrangement” (MEWA) under ERISA. A MEWA is a group of two or more unrelated employers that join together to offer or provide welfare benefits (such as medical benefits), whether through a group health plan (sponsored by a bona fide employer association or employee organization) or through some other arrangement. MEWAs have their own reporting and disclosure requirements under ERISA (primarily Form M-1) in addition to those applicable to every group health plan.

There is a long history of financial mismanagement, fraud and abuse of MEWAs, which has sometimes led to insolvency and left participants and health care providers with unpaid claims. To combat this, Congress gave states greater freedom to prevent MEWA abuse. Specifically, under ERISA’s preemption rules: (1) if a MEWA — including an AHP — is fully insured, state insurance regulations can require the MEWA to maintain specified levels of reserves and/or contributions; and (2) if a MEWA is self-funded, in whole or in part, any state insurance regulation may apply to the MEWA so long as it is not inconsistent with ERISA.

This has the benefit of allowing states to protect employers from MEWA fraud, but it has the drawback of making MEWAs subject to sometimes complex legal requirements in each state in which they operate.

2. Proposed Changes to AHPs.

The main purpose of the Department of Labor’s proposed rule — to be codified at 29 C.F.R. Section 2510.3-5 — is to allow more employer associations to qualify as bona fide employer associations. This, in turn, will allow more AHPs to operate as single group health plans in the large group market, which do not have to provide essential benefits and may be rated on different criteria.

In a nutshell, the proposed rule would loosen existing requirements but maintain certain protections designed to prevent adverse consequences and ensure AHPs resemble employer-sponsored arrangements and not commercial insurance.

First, AHPs will be able to form for the exclusive purpose of sponsoring a group health plan. No more do they have to have some other reason justifying their existence.

Second, sole proprietors and other joint owners of businesses with no common law employees (such as partners in a partnership) will now be able to participate, provided any such “working owner”:

  • Has an ownership interest in the business;
  • Earns wages or self-employment income for personal services provided to the business;
  • Is not eligible to participate in a subsidized group health plan maintained by any other employer of the working owner or his or her spouse;
  • Either: (1) works at least 30 hours per week or 120 hours per month providing personal services to the business; or (2) has earned income from the business that at least equals the cost of covering the owner and any of his or her dependents on the group health plan.

In addition, the association is allowed to accept a working owner’s written representations that it meets the above criteria, so long as the association does not know differently.

Third, member employers can establish a commonality of interest if they:

  • Are in the same trade, industry, line of business, or profession, regardless of state boundaries; or
  • Have principal places of business within the same state or the same metropolitan area (even if the metropolitan area includes more than one state).

Expanding the criteria to include geographical regions in addition to industries will significantly enlarge the field of eligible employers.

Fourth, to combat adverse selection and ensure there remains a close connection between the AHP and the employer relationship, bona fide employer associations must comply with certain nondiscrimination requirements set forth in 29 C.F.R. Section 2590.702. These include the following:

  • Employer membership must not be conditioned on any health factor of any employee, former employee, or family member or beneficiary who may be covered by the AHP;
  • Eligibility rules under the AHP may not discriminate within a group of similarly situated individuals based on any health factor; and
  • Required premiums and contributions may not discriminate within a group of similarly situated individuals based on any health factor.

For these purposes, member employers may not be treated as distinct groups of similarly situated individuals. Thus, for example, if Employer A has a sick employee with high health care costs, Employer A cannot be excluded from the association, be subject to stricter eligibility rules, or be charged higher premiums, unless Employer A happens to fall into a bona fide employment-based classification subject to those different requirements (e.g., if Employer A is in Region X, and all member employers in Region X are subject to higher premiums). Even then, if the classification is a pretense and is actually directed at individual participants or beneficiaries, it will not be permitted.

Finally, several additional requirements will apply:

  • Health coverage can only be made available to employees, former employees, and their family members or beneficiaries;
  • The association cannot be an insurance company, insurance service, or insurance organization licensed by a state to issue insurance and subject to state insurance regulations;
  • The employer organization must have a formal organizational structure, such as having a governing body and by-laws (this is not a significant change); and
  • The member employers must control the association, whether directly or through the election of officers (also not a significant change).

3. Potential Benefits and Drawbacks.

The Department of Labor acknowledges that the overall effect of the proposed rule is not yet known. However, some potential benefits and drawbacks were identified.

Potential benefits include:

  • Lower health care costs for sole proprietors and small employers, whether through (1) having a larger risk pool that is more attractive to insurers or leads to more stable self-funded coverage, (2) greater negotiating power with insurance companies (for insured AHPs) and/or health care providers (for self-funded AHPs), and/or (3) reduced administrative costs through economies of scale.
  • Greater freedom of choice for AHPs to customize their benefits packages and reduce costs by offering less comprehensive coverage (in particular, by excluding certain essential health benefits that would otherwise have to be covered in the individual and small group markets).

Potential drawbacks include:

  • The expansion of AHPs may lead to adverse selection, in which employers with comparatively younger and healthier employees are drawn to AHPs with less favorable coverage and cheaper premiums, while older and sicker individuals remain in the individual and group markets. This may contribute to rising costs in the individual and small group markets.
  • The rules allowing state regulation of MEWAs remain intact, and having to comply with the insurance regulations of a single or multiple states — which may be very different and even inconsistent with each other — may discourage the formation of AHPs, limit their geographic scope, and/or make their administration significantly more burdensome. In addition, AHPs may be required to provide some benefits pursuant to state law, which may limit the ability of AHPs to provide less comprehensive coverage.
  • The prohibition on treating different employers as distinct groups of similarly situated individuals may discourage the formation of AHPs, as member employers may not want to subsidize the coverage of other members with high health care costs.
  • Even with certain protections in place, AHPs, like other MEWAs, may continue to disproportionately experience financial mismanagement, fraud and abuse.
  • The Department of Labor estimates the proposed rule will add to the federal deficit, primarily by reducing tax revenues when employers take advantage of tax deductions by providing health coverage.

Sole proprietors, small employers, trade associations and regional associations interested in exploring AHPs should take a close look at the proposed rule and provide comments by March 6, 2018.

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