What’s in the Association Health Plan Final Rule? Implications for States
Sabrina Corlette, Georgetown Center on Health Insurance Reforms
Updated March 29, 2019
On March 28, the Federal District Court for the District of Columbia invalidated the U.S. Department of Labor’s (DOL) Association Health Plan (AHP) rule. The Court found that DOL had exceeded its authority under ERISA by failing to set meaningful limits on AHPs. In particular, the Court took issue with the provision that allows AHPs to be formed solely on the basis of geography or for the purpose of selling insurance. Further, the Court found that Congress did not intend for self-employed individuals (“working owners”) without employees to be considered employers under ERISA.
The administration may either now appeal the ruling or revise its AHP regulation. In the meantime, the District Court decision means that AHPs that have formed under the DOL’s new standards are not “bona fide” ERISA employers and may be out of compliance with individual or small-group market rules. If the administration appeals, it could ask that the lower court’s ruling be stayed, in which case the rule remains in effect. Regardless of a decision to appeal, DOL may also issue guidance to AHPs about that agency’s enforcement stance, pending a final court decision or regulation.
State departments of insurance will likely receive questions about the fate of AHPs formed under the new DOL rule and their current enrollees. At this point, state regulators lack grounds on which to approve new AHPs under this rule. States should also prohibit existing AHPs formed under the rule from marketing themselves to potential new members. Other issues, such as the fate of current enrollees, are questions for states to consider in the context of potential new guidance from DOL, their own laws, and the interests of the small businesses and individuals enrolled in this coverage.
President Trump issued an executive order on October 12, 2017 to encourage the expansion of association health plans (AHPs) for small businesses and the self-employed. On June 19, 2018 the U.S. Department of Labor (DOL) released a final regulation to implement that order. The final rule is similar to a draft version that the administration issued in January 2018. The new AHP policy raises numerous issues affecting state regulators, insurance markets, and the consumers and small businesses who buy coverage.
The Final AHP Rule: What State Officials Need to Know
The DOL rule significantly loosens the conditions under which a group of employers – or the self-employed – can join together under an AHP and be considered a “single employer” under the Employee Retirement Income Security Act (ERISA). Such AHPs would be regulated under federal law as large-group coverage, making them exempt from Affordable Care Act (ACA) and other federal and state requirements that apply only to the individual and small-group insurance markets. Key highlights of the rule include:
- Staggered but rapid implementation timeline: Although the NAIC and several states asked DOL to delay implementation of this rule to 2020, DOL’s new standards will apply to fully insured AHPs as early as September 1, 2018, to existing self-funded AHPs by January 1, 2019, and to newly formed, self-funded AHPs by April 1, 2019. AHPs may choose to follow DOL’s prior, stricter standards for gaining single employer plan status, or they can follow the new, more flexible pathway, described below.
- A “flexible” pathway for AHPs to gain single employer status under ERISA.
- An AHP can have as its primary purpose the provision of insurance benefits, although it must have at least one substantial business purpose unrelated to providing benefits, such as public relations or educational activities.
- AHPs must include employer-members that are either (1) in the same trade, industry, line of business or profession or (2) located within the same geographic region, either within a state or a metropolitan region that includes more than one state. In the former case, the AHP could sell coverage nationwide.
- Member employers must control the functions and activities of the group or association.
- Allowance of AHPs to enroll the self-employed. Self-employed members do not need to have any employees but must work a minimum number of hours or earn a minimum income. The rule provides wide latitude, and minimal guidance, to AHPs regarding how to enforce this requirement.
- Rules against health discrimination. AHPs that gain single employer plan status under the DOL’s new flexible pathway cannot discriminate in eligibility, benefits, or premiums based on a health factor either within or across employer groups – including any self-employed members – that make up the AHP. Importantly, AHPs that meet DOL’s previous, stricter rules for qualifying as a single employer plan will continue to be allowed to use health factors to differentiate among employer members.
- Clarifications that AHPs are subject to some but not all ACA protections. AHPs under this rule are considered group health plans and thus, under the ACA, must cover preventive health benefits without enrollee cost-sharing, cap enrollees’ annual out-of-pocket costs for covered benefits, and cannot impose annual or lifetime dollar limits on covered benefits. Plans must also provide consumers with a summary of benefits and coverage (SBC) that details any limits and exclusions. However, unlike small-group plans, AHPs do not need to cover a minimum set of essential health benefits, and they are permitted to use age, gender, industry, occupation or other demographic factors to set premiums for member employers. AHPs are also exempt from the ACA’s single risk pool requirement and the risk adjustment program.
A more detailed summary of the rule is available here. The DOL projects that 4 million additional people will enroll in AHPs, of whom 3.6 million would be dis-enrolling from other coverage. Because many of these people will be relatively healthy, the ACA-compliant individual and small-group markets in many states are projected to be left with smaller, sicker risk pools.
Implications for State Regulation
States are the primary regulators of health insurance, and have broad authority to regulate both fully insured and self-insured AHPs, on matters including financial solvency, marketing and rating practices, and insurance contracts. The final rule reaffirms that authority. In fact, in many areas of oversight and enforcement, DOL explicitly calls on state regulators to serve as the front line to ensure compliance with applicable federal and state rules and observes that states “retain broad authority . . . to optimize AHPs’ role in their local markets.” Additionally, the DOL refrained from using its authority under ERISA to exempt certain categories of self-funded AHPs from state regulation, although rather ominously, the agency signaled that it might do so in the future if states “go too far in regulating non-fully-insured AHPs in ways that interfere with . . . this final rule.”
With AHPs meeting the new federal standards able to be sold as early as September 1, 2018 (if fully insured) and in early 2019 (if self-funded), states may wish to prepare now by considering the following:
- Premiums. Insurers participating in the ACA-compliant individual and small-group markets may need to re-file or adjust their proposed 2019 premium rates to account for more healthy enrollees leaving for AHPs. States may also clarify or adopt requirements for AHPs to submit premium rates and plan contracts for prior review and approval.
- Consumer confusion. AHPs could be marketed to consumers and small businesses at the same time as the ACA’s annual open enrollment period. States may need to do more to educate consumers about their options and require that AHPs fully disclose how the plans differ from ACA-compliant coverage. States could also experience a greater volume of consumer questions and complaints.
- Adverse selection. DOL recognizes that the new rule will “necessarily” create adverse selection against states’ individual and small-group markets by siphoning young, healthy groups and individuals away from those markets. States that want to limit this effect may require AHPs – including those domiciled outside of the state but doing business within it – to comply with rating rules and benefit standards that otherwise apply to the individual and small group insurers, limit enrollment of the self-employed, prohibit AHPs from establishing discriminatory service areas, and require new AHPs to contribute to state-level reinsurance programs, among other options.
- Risk of increased fraud and insolvencies. In comments on the proposed rule, many state departments of insurance expressed concerns that the new policy would exacerbate AHPs’ long history of insolvencies and even fraud, leaving policyholders and providers with millions of dollars in unpaid claims. In its final rule, DOL acknowledges that the new framework “introduces increased opportunities for mismanagement and abuse” by AHPs and anticipates “close cooperation” with states to limit these dangers. States can act to protect policyholders by:
- Requiring AHPs to meet the same solvency and governance standards as commercial carriers;
- Requiring AHPs to contribute to state guaranty funds, which protect policyholders in the event a company defaults on paying claims;
- Clarifying or enacting state laws allowing insurance departments to place AHPs into receivership if needed;
- Requiring submission and advance approval of marketing materials;
- Requiring AHPs that are domiciled in another state but market to their residents to meet state licensing standards, and by pursuing those that are not licensed under traditional prohibitions on unlicensed insurers.
- Budgetary effects. Oversight of these newly formed AHPs could place a strain on states’ regulatory capacity. Additionally, to the extent that AHPs gain significant membership and shift small businesses and individuals away from the state-regulated group or individual markets, states could experience a decline in revenue from premium taxes. This shortfall could impact state budgeting and planning.
On a very short timeframe (by September of 2018), this rulemaking could expand the number of AHPs that market insurance to small businesses and individuals but do not have to comply with the rules that typically apply to the small-group and individual markets. This will have implications for the business owners and individuals who enroll in these AHPs, as well as for people who remain in the traditionally regulated insurance markets. The DOL has affirmed that states have “broad authority” to regulate AHPs, protect consumers, and mitigate potential adverse selection in their insurance markets. States have a wide range of tools with which to exercise that authority, although some may need to enact new legislation or regulations to do so. States may also face resource constraints due to increased regulatory demands and declining premium tax revenue.
The author wishes to thank Jason Levitis, Kevin Lucia, Justin Giovannelli, Tim Jost, Sara Lueck, and Gary Claxton for their comments and feedback on drafts of this article.