A new proposed regulation represents the latest phase of the Administration’s efforts to reshape the American health care system. The proposed regulation, issued in response to President Trump’s October 12 executive order, opens the way to expand association health plans (AHPs). An AHP is a health plan sponsored by a group of unrelated employers, linked by factors such as a common industry or geography.
The stated goal of the proposed regulation is to make it easier for small employers to buy lower cost health insurance. However, the proposed regulation is a bit like an iceberg: most of the impact is below the surface.
Here’s what’s going on.
The Employee Retirement Income Security Act of 1974 (ERISA) governs “employer-sponsored” benefit plans (including health plans). Plans governed by ERISA are, generally, not governed by state law (because ERISA preempts much state law). If a health plan is not sponsored by an employer (and is not governed by ERISA) it is subject to state law (including state insurance law). As a result, the characterization of a plan as an “employer-sponsored” plan under ERISA has significant legal implications.
ERISA defines employer as “any person acting directly as an employer, or indirectly in the interest of an employer … and includes a group or association of employers acting for an employer in such capacity.” Historically, the Department of Labor and the courts have interpreted the definition of employer narrowly, rejecting claims that groups of unrelated employers linked solely by geography or industry can be an “employer.” As stated by the DOL in Advisory Opinion 2017-02:
“The Department has expressed the view that … in the absence of any genuine organizational relationship between the employers, no employer group or association exists for purposes of ERISA” and “where membership in a group or association is open to anyone engaged in a particular trade or profession regardless of their status as employer, and where control of the group or association is not vested solely in employer members, the group or association is not a bona fide group or association of employers for purposes of ERISA.”
This distinction is especially important in the context of the Affordable Care Act. “Small” group plans (generally, under 50 employees) are subject to different – and more rigorous – standards than “large” group plans. So, for example, under current ERISA/ACA rules five unrelated employers with 40 employees each will be subject to the stricter small plan rules, but one employer with 200 employees would be subject to the different (and, in some ways, less stringent) large plan rules. The proposed regulation will change all of that.
The Proposed Regulation: What It Says
Under the proposed regulation, a group of employers could be considered as an “employer” under ERISA if the employers had a “commonality of interest.” This is defined very loosely in the proposed regulation:
“Commonality of interest of employer members of a group or association will be determined based on relevant facts and circumstances and may be established by: (1) Employers being in the same trade, industry, line of business or profession; or (2) Employers having a principal place of business in a region that does not exceed the boundaries of the same State or the same metropolitan area (even if the metropolitan area includes more than one State).”
There are a few other key features of the proposed regulation:
- An AHP can be established by an entity even if the sole purpose of the entity is to offer health coverage; under prior rulings, an AHP had to be established by an entity with some bona fide reason for existing other than offering health coverage other purposes or functions;
- Each member of the employer group must be acting “as an employer” (presumably, in the more traditional definition of employer);
- The employer group must have “a formal organizational structure with a governing body and has by-laws or other similar indications of formality”;
- The functions of the group must be “controlled by its employer members, either directly or indirectly through the regular nomination and election of directors, officers, or other similar representatives that control the group”;
- The plan sponsored by the employer group cannot discriminate against individual employers with respect to eligibility for benefits or premiums based on health status or preexisting conditions.
The Proposed Regulation: Some Implications
AHPs under the proposed regulation:
- Will not be subject to the requirements, under the ACA, that plans offered in the small group market must cover a specified list of essential health benefits;
- Will be able to exclude entire classes of coverage (such as not covering cancer treatments) as long as the exclusion is uniform across all employers in the group;
- Will be able to discriminate across different “bona fide” classes of employee based on health status – for example, different qualification rules could apply to part-time full-time employees; and
- Could provide self-insured coverage and, generally, be exempt from state regulations regarding solvency and otherwise governing self-insured plans.
You can start to see where this is going. Under the proposed regulation there is a risk that AHPs will be able to create self-insured plans that are under-funded, offer coverage that is designed to attract only healthy populations, and with substantial coverage gaps. And, they will be able to market these plans to unsuspecting smaller employers by offering remarkably “affordable” coverage. This risk is compounded by the fact that these AHPs may draw healthier populations from the small group and individual markets, further undermining those markets and increasing premiums for groups that continue to be covered by the small group rules.
These concerns about AHPs have been raised by groups with key expertise, such as the American Academy of Actuaries (https://www.actuary.org/files/publications/AHPs_HR1101_030817.pdf) and the National Association of Insurance Commissioners (http://www.naic.org/documents/health_archive_naic_opposes_small_business_fairness_act.pdf).
A Leap into the Unknown
In reading the proposed regulation, it is striking to note that the DOL is proposing a significant reinterpretation of the law (and decades of regulatory and judicial interpretation) with no analysis into the possible implications. The DOL identifies several potential benefits of expanding AHPs, including advantages of scale in purchasing health benefits and administration and increased health coverage choices for small employers. However, the proposed regulation cites no studies or analysis indicating that these goals can be furthered by this regulation – and no analysis of the possible negative outcomes from increased use of AHPs. Indeed, the preamble to the proposed regulation acknowledges that the DOL does not know whether the proposed regulation will have any effect on the availability of insurance or whether the proposed regulation will do more harm than good. As acknowledged by the DOL:
While the impacts of this proposed rule, and of AHPs themselves, are intended to be positive on net, the incidence, nature, and magnitude of both positive and negative effects are uncertain.
This uncertainty about the consequences permeates the proposed regulations. Words conveying uncertainty appear with alarming frequency throughout the proposed regulation (“potential”- 55 times, “may” – 113 times, “could” – 47 times and “might” 29 times) while words conveying more assurance in the outcome are rare (“should”- 11 times and “likely” – 14 times).
To help address these issues the preamble to the proposed regulation does request “comments and data that will allow the impacts of the rule to be quantified, and that will enable it to more fully assess the proposed rule’s effects.”
The executive order issued in October specified that the DOL should “consider proposing regulations” as “supported by sound policy.” Under the right circumstances, bona fide groups of employers can come together to create programs that achieve efficiencies beyond the capabilities of the individual employers in the group – the growth of certain multiple employer retirement plans reflects that potential. However, given the risk of abuse and market disruption posed by AHPs, some caution is necessary. It is not clear that this proposed regulation recognizes the risks posed to insurance markets or represents the “sound policy” considerations required under the executive order. Fortunately, the DOL still has an opportunity to get this right as the proposal is considered.