Late last week, in response to a presidential executive order, the Department of Labor released a draft regulation greatly expanding the potential use of association health plans (AHPs) in the provision of health insurance. The regulation proposes an expanded definition of the term “commonality of interest” that enables employers to band together and be considered a single employer for the provision of health insurance. If small employers (generally less than 51 full-time employees) and sole proprietors (who are currently not allowed to purchase coverage in the small group market) can form an AHP and be considered a single large employer, the AHP can avoid benefit mandates, rating rules, and other requirements that would otherwise apply to these employers under the ACA rules. An AHP would be subject to the large group market rules.
Under prior regulation, employers were allowed to use AHPs for the provision of health benefits if, for example, AHP employers shared a commonality of interest and met three criteria: (1) the association had a purpose unrelated to the provision of benefits, (2) the employers shared some commonality unrelated to the provision of benefits, and (3) employers participating in the arrangement had control over the program. But the draft regulation changes this by allowing employers to come together for the sole purpose of providing health benefits if they are either (1) in the same trade, industry, line of business, or profession, or (2) have a principal place of business within a region, provided the region does not exceed the bounds of a state or metropolitan area where the metropolitan area includes more than one state.
Perhaps more importantly, the prior administration, through guidance, took the position that “in most situations involving employment-based association coverage, the group health plan exists at the individual employer level and not at the association-of-employers level.” It was the prior administration’s view that, “In these situations the size of each individual employer participating in the association determines whether that employer’s coverage is subject to the small group market or the large group market rules.” This was sometimes referred to as the “look-through” rule where regulators looked through the association to the employer to determine applicable rules and regulations. But the draft regulation does away with this look-through provision so an association of small employers is considered a large employer if its members collectively employ at least 51 employees.
We expect adoption of this draft regulation will have important implications. Small employers electing to join AHPs would likely be those where AHP rules related to rating and benefits result in lower premiums compared to the ACA market. Large group market rating rules have fewer restrictions relative to factors including age and industry. Large groups can also remove certain benefits. While a geographically based AHP might prefer comprehensive benefits to attract a wide variety of groups, industry-specific AHPs may tailor benefits to only those most valued by the demographic of their industry. If an AHP was to exclude services with a significant cost (such as prescription drugs), it may achieve significantly lower premiums compared to the ACA market. However, excluding coverage of services shifts full cost burden to the employees and their dependents using the services.
AHPs willing to significantly reduce benefits are also likely to attract employers with employees in better than average health. These employers could purchase reduced benefits through the AHP knowing that they could purchase comprehensive, ACA coverage if the health status of the group changed during the year. Pulling healthier groups into AHPs would leave less healthy groups behind in the ACA small group market. Since AHPs would not be required to pool their risk with the ACA market, either directly in setting premiums or through risk adjustment, this would require increased premium rates in the ACA market. The result could be a bifurcated market where healthier groups join AHPs and less healthy groups purchase ACA coverage, assuming there is at least one carrier that remains active in the ACA small group market. Similarly, if young, healthy sole proprietors leave the individual ACA market for AHPs, the health of the remaining members in that market could deteriorate.
Given the troubled history of AHPs, carriers currently participating in the individual or small group ACA market may take a ‘wait and see’ approach before deciding whether to enter this new market. However, carriers will have to be prepared to react quickly if AHPs begin siphoning off the better risks from the ACA markets, as we expect they will. In addition, they must be in a position to adjust their ACA rates accordingly, and perhaps take advantage of the quarterly filing option in the small group ACA market to file new rates outside of their annual filing.
For those carriers that decide to enter the AHP market, developing rates in the early years will be challenging. Carriers will not have data for the employers and sole proprietors that join the AHP from which to develop accurate premiums. The ability to revise rates more quickly than under the ACA provides carriers with some protection if emerging experience differs from what was anticipated. Carriers will also need to consider the structure and governance of the AHP, such as when and how employer groups may enter and exit the AHP.
Finally, AHPs may present a significant, new opportunity for carriers that do not currently offer coverage in the small group market. The administrative costs associated with complying with the many operational and reporting requirements of the ACA small group market would not be present. Carriers would not need to establish processes to medically underwrite each small group individually as they did to compete in the small group market prior to the ACA, since all groups and sole proprietors that join an AHP must be offered rates that do not depend on health status. At the same time, carriers will have to develop the infrastructure to establish appropriate rates for each AHP as a whole.