In last week’s post we explained the changes made by a newly proposed Department of Labor regulation, the purpose of which is make it easier for small employers to band together to form “association health plans” (“AHPs”). In that post, we promised to examine the impact of the proposed regulation on the small group and individual health insurance markets, which we will do in this post.
The Department’s Purpose and Rationale for the Proposal
The Department of Labor’s proposed AHP regulation was issued in response to an Executive Order issued by the Trump administration in the fall of last year. The changes that the Department proposed will, if adopted as a final rule, up-end decades of Department of Labor advisory opinions, case law, and state regulatory precedent that all seek to constrain the extent to which small employers can combine for the purposes of purchasing health care. In so doing, current law generally defers to, or at least aligns with the wishes of, state insurance regulators and the National Association of Insurance Commissioners (NAIC). These regulators and the NAIC, as well as other similarly situated groups, generally view AHPs with suspicion. (The principle objections to the expanded availability of AHPs are set out in a February 2017 issue brief published by the American Academy of Actuaries (AAA) and an undated paper issued by the NAIC.)
In contrast, the Department of Labor believes that current rules governing AHPs limit choice and effectively force carriers to raise premiums for healthier small groups and individuals. In turn, these groups and individuals are likely to seek more affordable coverage elsewhere if available, or drop insurance altogether if it is not. Rather than constrain AHPs, the proposed regulations seek to broaden the conditions under which associations can sponsor AHPs, thereby increasing the number of small businesses potentially eligible to participate in AHPs.
Handicapping the Objections to AHPs
We summarize the principal objections to AHPs as follows:
- Fraudulent MEWAs
As the preamble to the proposed regulation frankly acknowledges, “some MEWAs have historically been unable to pay claims due to fraud, insufficient funding, or inadequate reserves.” This might be something of an understatement. A more damming picture emerges from an issue brief from The Commonwealth Fund entitled, MEWAs: The Threat of Plan Insolvency and Other Challenges, by Mila Kofman, Eliza Bangit, and Kevin Lucia. According to the paper:
“MEWAs, however, have a long history marred by financial instability and even fraud. Due to licensing requirements that are often less stringent than those imposed on traditional insurers, they are at far greater risk of becoming insolvent when claims suddenly or unexpectedly exceed their ability to pay them. As thousands of Americans have found out, insolvency means that medical bills go unpaid, spelling financial ruin for many who are stuck with huge expenses. Meanwhile, doctors and hospitals are forced to contend with ways to finance uncompensated care; some pass these costs along to insured patients in the form of higher fees, which in turn can drive up already high insurance premiums.”
While certainly worrisome, the proposed regulation applies only to fully-insured AHPs, which are already subject to state laws governing solvency. In contrast, it is self-funded MEWAs that are more prone to fraud. This was particularly true in the early days of ERISA—i.e., before the enactment of a 1983 amendment clarifying the ability of states to regulate MEWAs. The preamble to the proposed regulation claims that “ERISA section 514(b)(6) gives the Department and State insurance regulators joint authority over MEWAs (including AHPs described in this proposed rule), to ensure appropriate consumer protections for employers and employees relying on an AHP for healthcare coverage.” (Footnotes omitted). This is a broad claim, and one that will not be taken at face value by the rule’s opponents. What the proposal acknowledges, however, is that the Department would need to commit additional resources to combat AHP mismanagement and abuse if the proposal is adopted as a final rule.
- Impact on the risk pool
The impact of the proposal on state risk pools goes to the heart of the debate over AHPs. The ACA and state small group rules tightly regulate how individual and small group issuers pool risk, e.g., by limiting the degree to which premiums can be adjusted based on age. Recognizing that these rules affect market stability, the ACA requires mandatory transfers of ‘‘risk adjustment payments’’ from carriers that have taken on more risk to those that have taken on less. AHPs would not be subject to risk adjustment payments, but instead would be subject to nondiscrimination rules that bar all group health plans from conditioning eligibility, benefits, or premiums on health status. The Department believes that “these [nondiscrimination] rules should help AHPs to assemble large, stable risk pools, while at the same time limiting the risk that AHPs might tend to enroll healthier small businesses and thereby adversely affect individual and small group markets.” It is also possible that AHPs will be more likely to form in industries with younger, healthier employees, as employers and their employees will gain access to more affordable coverage than is available in the individual and small group markets. While the nondiscrimination rules are laudable, they operate within, and not across, AHPs.
- Sale of insurance “across state lines”
If, as the proposal envisions, an AHP is established in a state with fewer coverage requirements and less restrictive issue and rating rules relative to other states, the AHP would be allowed to use that state’s requirements in all states, even those with greater regulatory requirements. In contrast, non-AHP insurance plans would continue to be subject to each state’s requirements. The result is a fragmentation of the small group market in which higher-cost individuals and small groups would find it more difficult to obtain coverage. Despite the proposed regulation’s non-discrimination rules, it seems that concerns over AHPs operating across state lines remain valid.
- Lack of robust coverage
Because they would not be subject to individual and small group market rules—which limit the policies that issuers can offer to small businesses and include a requirement to offer all 10 categories of essential health benefits—AHPs have the flexibility to offer less comprehensive coverage. AHPs could therefore offer less comprehensive and more affordable coverage, which the Department touts as an advantage of AHPs. But less comprehensive benefits could attract healthier individuals, leaving less healthy individuals in the individual and small group markets and thus driving up the premiums. The Department is of the view that this “risk may be small, however, relative to the benefits realized by small businesses and their employees that gain access to more affordable insurance that more closely matches their preferences.” The Department goes on the make the following claim:
“In addition, to the extent that AHPs deliver administrative savings or market power they may offer less expensive but equally comprehensive benefit options as compared to plans available in the individual or small group markets. This feature of AHPs would appeal to their less healthy members, prompting less healthy individuals to leave the individual and small group markets and potentially balancing out any exodus of healthy individuals from these markets.”
But less expensive and less robust coverage would be attractive to less healthy individuals only if it covers the conditions that make them less healthy. To take an extreme case, coverage under an MEC (or “preventive-services-only plan”) that costs $45 per month would be of little use to a cancer patient.
- The application of administrative savings
The Department assumes that widespread access to, and adoption of, AHPs by small employers will result in a net savings of administrative expenses, which may well be true. These is no guarantee, however, that these savings will be passed along to members. The savings may instead be applied to the costs of forming and operating the AHP and/or recruiting and enrolling association members. While conceding this possibility, the Department claims—correctly, as best we can tell—that AHPs sponsored by pre-existing associations that exist for reasons other than offering health insurance might have more potential to deliver administrative savings than those set up to offer health insurance.
The debate over AHPs deals with health policy at its highest levels. Each of the above-elaborated concerns make certain assumptions about the role of the individual and small group health insurance markets and their place in the balkanized U.S. health care financing system. The Department’s critique of the small group and individual markets may well be accurate, but no one anticipates that AHPs will take up the entire small group or individual markets. Some groups and individuals will be left behind. This may be fine, if the policy makers find some other way to take up the slack.
The current small group or individual markets have evolved to fill a need. They strike a balance that the newly proposed AHP regulations disrupt, perhaps significantly. This is not a small proposal. We expect a contentious comment process as stakeholders and policy makers alike press their views of the proper role of AHPs in the financing of health care.