On January 3, 2018, the Department of Labor issued proposed regulations that will make it easier for small employers to band together to form “association health plans” (“AHPs”), thereby providing access to more liberal underwriting and other rules governing large groups. This post provides context for, and summarizes the changes made by, these proposed regulations.
Association health plans are programs providing health coverage, typically within an industry organization, to businesses that share an affinity or common interest. For example, a local or regional Chamber of Commerce may offer an association-type plan to its members. Under current law, small groups generally retain their status as such even where coverage is purchased through an association. Since AHPs are principally marketed to and purchased by small employers, AHPs are usually subject to more restrictive state small group insurance rating and other rules. (See our previous posts on AHPs available here and here.) At the heart of the debate over AHPs is the extent to which small employer groups can band together to form large groups to take advantage of more favorable underwriting and other rules.
The proposed AHP regulation was prompted by an Executive Order issued by the Trump administration on October 12 of last year, which, among other things, included the following instruction to the Labor Secretary:
Within 60 days of the date of this order, the Secretary of Labor shall consider proposing regulations or revising guidance, consistent with law, to expand access to health coverage by allowing more employers to form AHPs. To the extent permitted by law and supported by sound policy, the Secretary should consider expanding the conditions that satisfy the commonality‑of-interest requirements under current Department of Labor advisory opinions interpreting the definition of an “employer” under section 3(5) of the Employee Retirement Income Security Act of 1974. The Secretary of Labor should also consider ways to promote AHP formation on the basis of common geography or industry.
In response, the proposed regulation modifies the definition of the term “employer” in section 3(5) of the Employee Retirement Income Security Act (“ERISA”). Under ERISA, group health plans that cover employees of two or more unrelated employers are referred to as “multiple employer welfare arrangements,” or “MEWAs.” AHPs are, by their very nature, MEWAs.
MEWAs are subject to regulation under both state and Federal law (i.e., ERISA). Under a 1983 amendment to ERISA, states are generally free to regulate self-funded MEWAs, but they are limited to laws that require the maintenance of specified levels of reserves and specified levels of contributions in the case of fully-insured MEWAs that are subject to ERISA. States are also free to comprehensively regulate a fully-insured MEWA that does not qualify as a MEWA under ERISA. For a MEWA to be subject to ERISA requires that the arrangement be an ERISA-covered welfare plan, which means among other things that the MEWA be sponsored by a group of employers. Thus, how ERISA defines “employer” is of vital importance. The proposed regulations are aimed at fully-insured arrangements, although the Department of Labor has invited comments on how the rules might be applied to self-funded plans.
ERISA defines the term “employer” to mean:
[A]ny person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity.
The Department of Labor has consistently taken the position—in advisory opinions and amicus briefs—that for a group or association to constitute an “employer” its group must satisfy two criteria:
- There must be a “bona fide” group or association of employers acting in the interest of its employer-members to provide benefits for its employees (e., there must be “commonality of interest”); and
- The association members must themselves exercise “control,” both in form and substance, over the activities and operations of the plan.
In a series of advisory opinions, the Department of Labor set out a list of factors to be considered to establish commonality of interest that include: how members are solicited; who is entitled to participate and who actually participates in the group; the process by which the group was formed, the purposes for which it was formed, and what, if any, were the preexisting relationships of its members; the powers, rights, and privileges of employer members that exist by reason of their status as employers; and, who actually controls and directs the activities and operations of the benefit program.
Under current law, an AHP established and operated by a commercial promoter would not be an ERISA-covered MEWA, nor (because of the commonality of interest requirement) would a group of employers that banded together for the sole purpose of offering group health coverage. The proposed regulation would not change this result in the case of a commercial operator, but it would permit a group of small employers to band together to make group health plan coverage available to employees. The proposed regulation would, among other things, modify the commonality of interest test, while at the same time continuing to “distinguish employment-based plans, the focal point of Title I of ERISA, from mere commercial insurance programs and administrative service arrangements marketed to employers.”
Also under current law, working owners of an incorporated or unincorporated trade or business with no other common law employees (other than a spouse) are not “employers” and are precluded from participating in an ERISA-covered MEWA as a result. The proposal would change this result.
Regulation of Small vs. Large Groups
Health insurance coverage provided through an AHP (e.g., trade association, chamber of commerce, or similar organization) to individuals and small employers is generally regulated under the same Federal standards that apply to insurance coverage sold by health insurance issuers directly to these individuals and small employers unless the coverage sponsored by the association constitutes a single ERISA-covered plan. Thus, unless the association plan is treated as a single ERISA-covered plan, the size of each individual employer participating in the association determines whether that employer’s coverage is subject to the small group or large group market rules (or the individual market rules, in the case of a working owner with no common law employees).
Small employers are attracted AHPs because they will be regulated as large groups. The Affordable Care Act (“ACA”) imposed a series of protections under the heading of insurance market reforms, which apply with equal force to the individual market and the small and group markets. These include protections for individuals with preexisting conditions. But the ACA also imposes certain requirements that apply only to individual and small group insurance products. These include:
- Essential health benefits
The ACA generally requires health insurance offered for sale in the individual and small group markets to cover “essential health benefits,” which include 10 categories of coverage (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, and pediatric services, including oral and vision care).
- Risk adjustment program
The ACA’s “risk adjustment program” transfers funds from plans with lower-risk enrollees to plans with higher-risk enrollees.
- Guaranteed issue/renewability
Insurers must accept every individual and employer that applies for coverage, and cannot refuse to renew coverage based on claims or health status. (The proposed regulation would impose a similar requirement on AHPs.)
- Single risk pool
The single risk pool requirement requires health insurance issuers to consider the claims experience of all individuals enrolled in plans offered by the issuer in the individual market to be in a single risk pool, and all its individuals in the small group market to be members of a single risk pool.
- Modified community rating
Health insurance issuers are barred from varying premiums except with respect to location, age (within certain limits), family size, and tobacco-use (within certain limits).
In addition, the ACA’s medical loss ratios provisions, which limit the portion of premium dollars health insurance issuers may spend on administration and marketing, establish different thresholds for the small group market and the large group market, with the latter being treated marginally more favorably.
There is also the matter of the application of state small group requirements. As we explained above, a properly structured AHP—i.e., one that is an ERISA-covered MEWA—is subject only to state laws governing the maintenance of specified levels of reserves and specified levels of contributions. State laws that would otherwise bar a group of small employers from banding together to form a large group will not apply.
NOTE: An AHP that otherwise satisfies the requirements of the proposed regulations will not automatically qualify as an ERISA-covered MEWA. The statute (ERISA section 514(b)(6)(D)) requires a finding by the Secretary of Labor that a MEWA is fully insured (i.e., the terms of the arrangement must “provide for benefits the amount of all of which the Secretary determines are guaranteed under a contract, or policy of insurance, issued by an insurance company, insurance service, or insurance organization, qualified to conduct business in a State”). In the absence of an express finding by the Secretary of Labor (e.g., in the form of an advisory opinion (see, e.g., Ad. Op. 2005-20A)), an AHP could not operate as a large group in a state, such as Massachusetts, that prohibits small groups from combining into large groups (M.G.L. ch. 176J)
Once an AHP is regulated as a large group, the association will have a great a great deal of plan design latitude. Because it will not be required to cover essential health benefits, a plan will be able to exclude coverage for particular essential health benefit components at will. (For plans to qualify as providing “minimum value,” however, they among other things cover inpatient and outpatient hospital and physician services.) States will continue to be able to regulate the underlying insurance products (e.g., benefit mandates, fair marketing practices, etc.), but they will not be able to directly regulate the AHP other than in the limited manner explained above.
The Proposed Regulation
The proposed regulations make the following changes:
Definition of “Employer”
The proposal specifies the persons who may act as an “employer” within the meaning of ERISA section 3(5). An “employer” includes a bona fide group or association of employers that meets the following requirements:
(1) The group or association exists for the purpose, in whole or in part, of sponsoring a group health plan that it offers to its employer members;
(2) Each employer member of the group or association participating in the group health plan is a person acting directly as an employer of at least one employee who is a participant covered under the plan;
(3) The group or association has a formal organizational structure with a governing body and has by-laws or other similar indications of formality;
(4) The functions and activities of the group or association, including the establishment and maintenance of the group health plan, are 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 or association and the establishment and maintenance of the plan;
(5) The employer members have a commonality of interest;
(6) The group or association does not make health coverage through the association available other than to employees and former employees of employer members and family members or other beneficiaries of those employees and former employees;
(7) The group or association and health coverage offered by the group or association complies with the nondiscrimination provisions (explained below); and
(8) The group or association is not a health insurance issuer, or owned or controlled by a health insurance issuer.
Items (1) and (2) allow employers to band together for the express purpose of offering health coverage if they either are in the same trade, industry, line of business, or profession, or have a principal place of business within a state or metropolitan area that can include more than one state. Moreover, under the proposal, the “commonality of interest” requirement in item (5) is satisfied if the employers are in the same trade, industry, line of business or profession; or they have 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). Thus, the association can be established for the sole purpose of providing health insurance.
The proposal would add a health plan nondiscrimination requirement that would prevent the group or association from conditioning membership in the group or association based on any health factor of an employee or employees or a former employee or former employees of the employer member (or any employee’s family members or other beneficiaries). This requirement includes a ban on discrimination in premiums or contributions.
The ACA’s bar on health status discrimination applies within a single employer/group member; the proposed regulation’s non-discrimination expands the ACA nondiscrimination rule to apply across groups that form an association. As a result, associations may not cherry pick groups, or charge groups with worse experience higher premiums. A program established by an association must make coverage available to all association members on the same terms.
Treatment of self-employed individuals
Under current law, an AHP cannot include an association member who is a self-employed individual with no common law employees. Such an individual is not deemed to be an “employer” for ERISA purposes. The proposed regulation would change this result under rules dealing with the “dual treatment of working owners as employers and employees.”
Under the proposal, a “working owner of a trade or business” may qualify as both an employer and as an employee of a trade or business for AHP eligibility purposes. The term “working owner” is defined to mean any individual who has self-employment income; who is not eligible to participate in any other subsidized coverage (e.g., under a spouse’s plan); and works at least 30 hours per week or at least 120 hours per month. Alternatively, a working owner who does not satisfy the hours worked requirement can qualify if he or she “has earned income from such trade or business that at least equals the working owner’s cost of coverage for participation by the working owner and any covered beneficiaries in the group health plan sponsored by the group or association in which the individual is participating.”
It is telling that the Department has chosen to respond to the administration’s Executive Order in a proposed regulation. Arguably, these changes could be accomplished in sub-regulatory guidance. The proposed regulation is replete with requests for comments, which suggests that the Department has chosen to proceed with caution. We think this is a wise approach. While these proposed regulations will, if adopted as a final rule, be welcomed by employers, they will also pose daunting challenges to federal and state regulators as they grapple with enforcement. MEWAs have historically attracted fraudulent schemes and operators. It has been the states, and not the Federal government, that have typically taken the lead in policing MEWAs. The proposal would change this. State regulators will also be worried about the impact of the proposal on their small group markets, which could be fragmented by the expanded adoption of AHPs. We will examine these challenges in a future post.