The 2016 election ushered in a new federal approach to insurance regulation. While multiple Congressional efforts to repeal and replace the Affordable Care Act (ACA) did not succeed, the Trump administration has used its administrative authority to relax ACA rules and propose new rules that encourage the expansion of alternative coverage options. These alternatives would not have to comply with the full range of ACA protections, such as the essential health benefit package and adjusted community rating standards. Among these options are association health plans (AHPs).
The administration argues that AHPs will provide less expensive, albeit less comprehensive, coverage for small employers and individuals.1 Critics argue that AHPs are likely to be attractive to a healthier and younger population, leaving an older and sicker population in the ACA-compliant individual and small-group markets. This in turn could result in higher premiums and fewer plan choices.2 State-level regulation could mitigate adverse selection effects, but the proposed rule raises questions about the full scope of state authority.
This article provides an overview of the federal and state regulatory framework for AHPs and attempts to quantify the effects of an expansion of the AHP market on enrollment and morbidity in the ACA-compliant individual markets.
The Regulatory Framework for AHPs
AHPs have long been a health plan option for small employers, the self-employed, and in some cases, individual purchasers. Prior to the enactment of the ACA, millions of individuals and small employers bought health insurance through associations.3 Business and trade associations often offer coverage as part of their broader mission to serve the professional needs of their members. Some associations cater primarily to individuals, including the self-employed, while others cater to employer groups. Some associations cater to a population within a specific state, such as those operated by a state medical association or a local chamber of commerce. Others are domiciled in one state but market AHP coverage in multiple states. Prior to the ACA taking effect, some national associations were established by insurers with the sale of health insurance as the main, or in some cases only, purpose of membership.4
Pre-ACA Regulation of AHPs
The regulation of AHPs has been a combined federal and state endeavor. In general, states are the primary regulators of health insurance and health insurance issuers. Although state laws that relate to employee benefit plans are generally preempted under the federal Employee Retirement Income Security Act (ERISA), a 1983 law explicitly exempted AHPs from that preemption.5 This means that states may apply and enforce state insurance laws with respect to these arrangements.
Specifically, states have authority to engage in financial regulation of AHP issuers to ensure that they are solvent. States further have authority to regulate the coverage to ensure compliance with state standards and the issuers’ marketing and underwriting practices.
Prior to the ACA, many states exempted AHPs from rules and standards that applied to commercial insurers, such as filing requirements, underwriting restrictions, benefit mandates and solvency standards. Additionally, AHPs would sometimes set up headquarters in one state with limited regulatory oversight and then market policies to businesses and consumers in other states with more robust regulation of rating and plan benefits.6
The federal government, through the U.S. Department of Labor (DOL), is responsible for the enforcement of federal law with respect to employee benefit plans subject to ERISA. Thus, to the extent an AHP constitutes an employee welfare benefit plan, states and DOL have concurrent oversight responsibility. However, to date DOL has not considered an AHP offered by an association to member employers to be an employer benefit plan subject to ERISA (called a “bona fide” group or association) except under rare conditions, discussed in more detail below.
To the extent DOL deems an association a “bona fide” group that includes more than 50 employee members, it is considered a large employer health plan and small-group market rules, which in most states are more stringent than in the large-group market, do not apply. Until now, DOL has not considered associations with self-employed members to be eligible for bona fide group status.7
Post-ACA Regulation of AHPs
The ACA included reforms designed to curb past abuses and solvency concerns raised by AHPs. These included greater enforcement authority for DOL, criminal penalties for false statements to state or federal officials, federal registration and additional reporting requirements.8
More broadly, the ACA ushered in a suite of reforms and consumer protections that apply to commercial insurance, including insurance offered through AHPs, as shown in Figure 1.
|Figure 1: Application of ACA Insurance Protections by Market Segment (Fully Insured)|
|ACA Market Reform||Individual Market||Small-group Market*||Large-group Market*|
|Pre-existing condition exclusions prohibited||Yes||Yes||Yes|
|Annual and lifetime limits prohibited||Yes||Yes||Yes|
|Preventive services covered without cost-sharing||Yes||Yes||Yes|
|Essential health benefits||Yes||Yes||No|
|Single risk pool||Yes||Yes||No|
|Risk adjustment program||Yes||Yes||No|
|Medical loss ratio||80%||80%||85%|
*Applies to fully insured products. The small-group market is defined in most states to be groups of up to 50 employees, with large group defined as groups with 51 or more employees.
The Obama administration in 2011 required that health insurance policies sold through an association to individuals must comply with the ACA’s individual market reforms, while association coverage marketed to small employers must be regulated as small-group coverage.9 This is sometimes referred to as the “look through” policy because the size of each individual employer determines whether the AHP is subject to individual, small-group, or large-group market rules under federal law.
Market studies suggest that in the wake of these rules, many AHPs dissolved.10 However, AHPs in some states have asserted that they are bona fide employer groups under ERISA, and thus should be regulated as large-group coverage even when their membership includes small employers whose group plans are separately underwritten.11 There is currently limited data available to determine how many of these types of AHPs exist and the size of their enrollment.
Proposed Federal Regulations: Changing the Federal-state Framework for AHPs
In January 2018, DOL proposed regulations designed to expand the availability of AHPs for small businesses and self-employed individuals.12 The rule, if finalized, would allow more groups to form AHPs so that they can offer coverage that is regulated under federal law as large-group coverage. Certain ACA requirements would apply to AHPs as large-group plans, including the prohibition of pre-existing condition exclusions, annual out-of-pocket maximums, the prohibition on annual and lifetime benefit limits, and coverage of preventive services without cost sharing. But AHPs would be exempt from other ACA requirements, such as the essential health benefit standard, limits on rating practices, the single risk pool, and the risk adjustment program (refer to Figure 1).
Gaining Large-group Status Under Federal Law
Prior to its 2018 rulemaking, when DOL assessed whether a group of employers can be considered a bona fide single employer group under ERISA, they considered three issues:
- Whether the association is a bona fide organization with a purpose and function other than the provision of benefits;
- Whether the employers share some commonality unrelated to the provision of benefits; and
- Whether the employers that participate in the benefit program exercise control over the program.
If AHPs cannot meet the above tests, the federal “look through” policy adopted in 2011 means that AHP coverage sold to small employer and individual members must comply with the ACA rules that apply to the small-group and individual markets, respectively.
Under the proposed rule, AHPs could form an association solely to provide insurance benefits and gain the regulatory advantages of being treated as a large group. Additionally, DOL has proposed to expand what it means for employers to “share some commonality.” To be considered a single-employer AHP, employer-members could be either:
- In the same trade, industry, line of business or profession; or
- Have their principal place of business in the same geographic region, either within a state or metropolitan area that includes more than one state, such as Washington D.C. or Kansas City.
If the former, the AHP could sell coverage nationwide, so long as its members are in the same trade, industry, line of business or profession.
Extending AHP Coverage to Individuals
Under current federal rules, employers who want to purchase small-group market coverage must have at least one employee who is not a spouse. The proposed rule would allow self-employed individuals to be treated as “employers” to join the association and at the same time treated as “employees” to be covered under the benefit plan. The proposed rule would require these “worker-owners” to earn a minimum income or work a minimum number of hours. However, the proposed income standard is vague and the rule would allow AHPs to rely solely on a written attestation from the individual that he or she meets these requirements. The proposed rule would further broaden AHPs’ ability to cover individuals by allowing them to enroll former employees and family members, potentially including extended family.
Proposed Nondiscrimination Protections
Under current federal and many state rules, an AHP that achieves bona fide large-group status under ERISA is permitted to separately rate each employer-member of the AHP based on its claims experience or other rating factors. DOL is proposing new rules that would prohibit such health status discrimination among employer-members. Specifically, DOL has proposed that AHP membership, eligibility for benefits, benefit designs and premiums cannot be based on any health factor.13 However, AHPs could adjust rates for members based on bona fide employment-based factors such as geographic location, date of hire, occupation and industry, and other factors such as age, marital status and gender.14
Furthermore, AHPs would not be required to cover the ACA’s essential health benefits and could apply different plan designs to different groups within the AHP. For example, the rules appear to allow an AHP to offer a plan that covers maternity services to employers of a specific size (e.g., small employers) but not to self-employed members. The DOL requested public comment on the proposed nondiscrimination provision, and has signaled it could be removed or modified in the final rule.
Will State Regulation be Preempted?
DOL is also considering whether it should exempt certain AHPs from state insurance regulation. However, federal law requires that states’ authority over AHPs’ financial solvency be preserved, so states could continue to set solvency standards, require financial reports and conduct financial exams.
Analyzing Proposed Changes to AHP Regulation
Proponents of the AHP rule argue that it will extend the advantages of being a large employer group, such as a greater array of plan options and administrative efficiencies, to small businesses and the self-employed. While DOL acknowledges that it is unable to quantitatively predict the impact of AHPs on the individual market, the agency asserts that “under the right conditions,” the expanded availability of AHPs will result in lower premiums than those available in the ACA-compliant market. AHP proponents further contend AHP growth could come from younger healthy consumers who are currently uninsured.
AHP critics note that the lower premiums associated with AHPs derive from their ability to attract healthier enrollees and deter those with higher health care costs.15 While the proposed rule includes a provision limiting AHPs from rating based on health status, individuals and groups could be charged less or more based on factors such as job classification, age, gender and industry. Additionally, AHPs could exclude benefits that appeal to employers and individuals with higher health risks, such as maternity care and prescription drugs. As a result, critics contend that AHPs could siphon a healthy population away from ACA-compliant plans, leaving a smaller and sicker risk pool for the traditional insurance market and fewer plan options and higher prices for the small businesses and individuals that remain.
Assessment of the Enrollment and Morbidity Impacts of AHP Proposal
This analysis focuses on quantifying the impact of the proposed rules on enrollment in ACA-compliant plans and the effect of that enrollment change on the morbidity of the individual market risk pool. Our projections assume that the emergence of a mature AHP market in response to the final rule will require at least one year to develop.
Due to uncertainty regarding how the final rules for AHPs will be written and how the market for AHPs will develop, this analysis includes a low estimate and a high estimate of the impact of the proposed changes. For example, the impact of the AHP regulations will depend upon policy and implementation factors such as:
- Whether the proposed rule’s nondiscrimination provision is included in the final rule. If not, AHP insurers would be allowed to rate each group within the plan based on claims experience, meaning that health status related factors could be used to set rates and benefits for self-employed individuals (groups of one);
- The extent to which DOL tightens or loosens the criteria by which an AHP can gain bona fide single employer status;
- The extent to which DOL tightens or loosens the standards for being “self-employed” and tightens or loosens the process for verifying an individual’s self-employed status;
- The extent to which the final rule preempts state authority to regulate AHPs; and
- How associations and insurers respond to the new rules, and the extent of AHP formation and marketing to self-employed individuals.
The “low” estimate in our analysis represents a scenario in which the final rule allows for the enrollment of the self-employed, establishes tightly defined nondiscrimination standards, and refrains from preempting state regulatory authority. It also assumes that DOL will require verification and documentation of an individual’s self-employed status, and that relatively few AHPs are ultimately formed that market to self-employed individuals.
The “high” estimate represents a scenario in which the rule is finalized largely as proposed but does not include the proposed nondiscrimination provision, preempts some state regulatory authority, has limited or no verification processes of self-employed status, and receives a robust marketing response from AHPs.
Under the ACA, individuals had new incentives to buy ACA-compliant coverage because of the individual mandate penalty, premium and cost-sharing reduction (CSR) subsidies for individuals making less than 400 percent of the federal poverty level (FPL) who enroll through the ACA’s insurance exchanges, and the requirement that insurers accept all applicants regardless of health status. The proposed rules for AHPs create incentives for more people to enroll in AHPs by offering lower-cost alternatives for self-employed individuals who are relatively young and healthy. Therefore, this analysis focuses on self-employed individuals enrolled in ACA-compliant plans who may have new incentives to shift to AHPs once the proposed rule is finalized.
Ten percent of all U.S. workers were self-employed in 2015.16 However, the percentage of the individual market ACA enrollment that is self-employed is much higher because these individuals do not have access to employer-provided health insurance. Based on data from the Urban Institute,17 and estimates of the size of the individual market ACA enrollment,18 an estimated 24 percent of enrollees in ACA-compliant individual market policies are self-employed. The members who have incomes less than 250 percent of the FPL are not expected to move to an AHP, because the premium and cost-sharing subsidies for these members more than offset the higher morbidity that is expected in the individual ACA market. As income increases, the premium and cost-sharing subsidies are reduced, so moderate- to high-income individuals are projected to be more likely to move to AHPs as shown in Figure 2.
|Figure 2: Self-employed Population in the Individual Market|
|Income||Percentage of Individual Enrollment Who are
|Percentage of Self-employed Projected to Move to AHPs**|
*Urban Institute, Health Insurance Policy Simulation Model 2018, simulation in 2016.
**The “low” and “high” projections reflect estimates about how many self-employed individuals will leave the ACA-compliant market for AHPs.
AHPs are expected to be attractive to younger and healthier individuals because under the proposed rule they are not required to offer the same comprehensive set of benefits required of ACA-compliant plans, and they are allowed to use enhanced rating factors based on age, gender, industry and other non-health-related factors. For example, an ACA-compliant plan in the individual market is limited to charging an older person no more than three times the premium charged to a younger person. This results in younger members subsidizing older members who, on average, spend much more than three times as much as younger members on health care services.19 AHPs will likely be allowed to set premiums for policies that more accurately reflect the potential costs of older versus younger members, which should result in significant savings for younger individuals who move to AHPs.
To estimate the impact of the proposed AHP rule on health insurance enrollment among self-employed individuals in the ACA-compliant individual market, we used the Unified Rate Review Template (URRT) for Single Risk Pool Plans data for plan year 2018 provided by the U.S. Centers for Medicare & Medicaid Services (CMS).20 These files include 2016 experience for ACA-compliant individual market policies nationwide, both on- and off-exchange. This experience does not reflect carriers who left markets in 2017 and 2018, but still includes a significant amount of data regarding enrollment and morbidity by metal tier for on and off-exchange plans.
We modeled members leaving the ACA-compliant plans by metal tier (catastrophic, bronze, silver, gold and platinum) and estimated their relative morbidity compared to members remaining in ACA-compliant plans within those metal tiers.
Figure 3 shows the percentage of individuals expected to leave on-exchange plans for AHPs and their relative morbidity to individuals within a given metal tier. For example, the “low” scenario includes a projected 20 percent of members in catastrophic plans on-exchange moving to AHPs and these members would have a relative morbidity factor of 0.6, or be 40 percent healthier than the average member in a catastrophic plan on-exchange.21 Figure 4 illustrates that these same estimates were used for the catastrophic plans off-exchange, because members in these plans are not eligible for the ACA’s premium or cost-sharing subsidies. Conversely, for silver-level plans, movement into AHPs is a relatively modest three percent under the “high” scenario, because the ACA’s premium and cost-sharing subsidies insulate a majority of these enrollees from the full price of their plans.22 However, the individuals who do shift to AHPs from silver-level exchange plans are likely to be significantly healthier, with a relative morbidity of just 0.3, or 70 percent healthier than average on-exchange silver plan enrollees.
|Figure 3: On-exchange Projections|
|Metal Tier||2016 Morbidity*||Percentage Moving to AHPs||Relative Morbidity of Movers|
*The 2016 morbidity was estimated based on the relative 2016 loss ratios in the experience from the 2018 URRT data.
|Figure 4: Off-exchange Projections|
|Metal Tier||2016 Morbidity||Percentage Moving to AHPs||Relative Morbidity of Movers|
Figure 4 shows the percentage of off-exchange individuals opting for AHPs instead of ACA-compliant plans off-exchange, and their morbidity relative to individuals within a given metal tier. Because individuals buying off-exchange are not eligible for the ACA’s premium subsidies and thus pay the full premium, these individuals are more likely to migrate to lower-cost alternatives. For example, in the “high” scenario, we project that 35 percent of enrollees in ACA-compliant bronze plans will shift to AHPs, and that their relative morbidity will be 0.6, or 40 percent healthier than average off-exchange bronze plan enrollees.
In the “low” scenario, we project that, overall, three percent of the individual market (on and off-exchange) will leave and purchase an AHP. These members will be 62 percent healthier than the average health of the members remaining in the individual ACA market. As a result, the individual ACA market would see a 1.4 percent increase in average claims.
In the “high” scenario, we project that 10 percent of the individual market (on- and off-exchange) will leave and purchase AHPs. These members will be 54 percent healthier than the average health of the members remaining in the individual ACA market and the individual ACA market would see a 4.4 percent increase in average claims.
These estimates are based on nationwide data and the impacts are expected to vary significantly by state due to variation in state regulation, the percentage of members receiving premium and CSR subsidies, and relative morbidity, as well as the percentage of members who are self-employed. Exchange enrollees receiving premium subsidies in each state range from 55 to 94 percent and enrollees eligible for a cost-sharing reduced plan range from 12 to 80 percent.23
Further, these estimates are based on actuarial judgement, derived from 2016 enrollment and morbidity data, and do not reflect intervening policy changes such as repeal of the ACA’s individual mandate penalty, cuts to advertising and enrollment assistance for the ACA’s exchanges, or the proposed relaxation of limits on short-term limited-duration insurance plans. The cumulative effect of these changes is likely to result in a further shift away from ACA-compliant individual market coverage and a higher relative morbidity of the ACA-compliant risk pool than is reflected here.
Proposed federal rules would encourage the expansion of AHPs offering coverage to self-employed individuals that is exempt from ACA individual market rules, including underwriting limits, participation in a single risk pool, and the requirement to cover a minimum set of essential health benefits. Proponents of AHPs believe that they will provide individuals with lower-cost plan options, while critics note that they are likely to drive premiums up for individuals remaining in the ACA-compliant market.
There is considerable uncertainty about how the administration’s proposed rule will be finalized, how many associations or issuers will form and market AHPs, and how other policy decisions, such as repeal of the ACA’s individual mandate penalty and the expansion of short-term limited duration insurance will affect the individual market.
Our analysis suggests that the positions of both AHP critics and proponents have merit. Younger, healthier individuals who are not eligible for the ACA’s premium subsidies, who receive less generous subsidies due to higher income, or who are currently without coverage altogether, are likely to find less expensive plan options through AHPs. As many as 3 percent of enrollees in the individual market under our “low” scenario and 10 percent under our “high” scenario will gravitate to lower-cost AHPs. However, this will result in less enrollment and higher morbidity in the ACA-compliant individual market, leading to a 1.4 percent increase in claims costs under our “low” scenario and a 4.4 percent increase under our “high” scenario.24 These changes will ultimately result in higher premiums for individuals remaining in the ACA-compliant market.
This article would not have been possible without the generous support of the Robert Wood Johnson Foundation and the Altarum Institute. We also thank Linda Blumberg, Ph.D., and Matt Buettgens, Ph.D., from the Urban Institute for sharing data on self-employment in the individual market from the Health Insurance Policy Simulation Model (HIPSM). The authors also are grateful to Kevin Lucia, J.D., M.H.P., of Georgetown University; Bela Gorman, FSA, MAAA, of Gorman Actuarial LLC; Dave Dillon, FSA, MAAA, of Lewis & Ellis; and Paul Hughes-Cromwick, MA, CBE, of the Altarum Institute, for their editorial review.
- 1. The Federal Register. 2018. Federal Register 83 (4): 614. https://www.gpo.gov/fdsys/pkg/FR-2018-01-05/pdf/2017-28103.pdf ↩
- 2. American Academy of Actuaries. 2017. “Issue Brief: Association Health Plans.” February. https://www.actuary.org/content/association-health-plans-0 ↩
- 3. Kofman, M., K. Lucia, K., Bangit, E., and Pollitz, K. 2005. “Association Health Insurance: Is it Time to Regulate This Product?” Journal of Insurance Regulation, 24 (1): 31-45. ↩
- 4. Ibid. ↩
- 5. 29 U.S.C. §1144(b)(6)(A). ↩
- 6. Supra note 3. ↩
- 7. Federal law prevents associations that market coverage to self-employed individuals from being considered an ERISA-covered plan. ERISA requires that such plans be maintained by an employer or employee organization. Self-employed individuals without common law employees are not “employers” under federal law. 29 U.S.C. § 1002(1), (5). U.S. Department of Labor. 2013. “Multiple Employer Welfare Arrangements Under the Employee Retirement Income Security Act (ERISA): A Guide to Federal and State Regulation.” August. https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/mewa-under-erisa-a-guide-to-federal-and-state-regulation.pdf ↩
- 8. 29 U.S.C. §§ 1021(g); 1131 et seq. ↩
- 9. Cohen, Gary. 2011. “Insurance Standards Bulletin: Application of Individual and Group Market Requirements Under Title XXVII of the Public Health Service Act When Insurance Coverage Is Sold to, or Through, Associations.” Centers for Medicare & Medicaid Services. September 1. https://www.cms.gov/CCIIO/Resources/Files/Downloads/association_coverage_9_1_2011.pdf. ↩
- 10. Corlette, Sabrina, Jack Hoadley, Kevin Lucia, and Dania Palanker. 2017. “Small Business Health Insurance and the ACA: Views From the Market 2017.” The Urban Institute and Robert Wood Johnson Foundation. July. https://www.urban.org/sites/default/files/publication/92291/2001459_small_business_health_insurance_and_the_aca_views_from_the_market_2017_0.pdf. ↩
- 11. Lucia, Kevin, Sandy Ahn, and Sabrina Corlette. 2014. “Federal and State Policy Toward Association Health Plans in Oregon.” The Urban Institute and Robert Wood Johnson Foundation. October. https://georgetown.app.box.com/s/bnae0s3lp15cmdrzipq6dyxsgefkaqq8. ↩
- 12. Supra note 1. ↩
- 13. The proposed rule defines “health factor” as health status, medical condition (including both physical and mental illnesses), claims experience, receipt of health care, medical history, genetic information, evidence of insurability and disability. Department of Labor. 29 CRF Part 2510: 36. ↩
- 14. The preamble to the proposed rule further specifies that, subject to certain anti-abuse provisions for discrimination directed at individuals, a plan may treat beneficiaries as distinct groups based on the bona fide employment-based classification of the participant through whom the beneficiary is receiving coverage, the relationship to the participant, marital status, age or student status and other factors if the factor is not a health factor. ↩
- 15. Supra note 2. ↩
- 16. Hipple, Steven F., and Laurel A. Hammond. 2016. “Self-employment in the United States.” U.S. Bureau of Labor Statistics. March. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/pdf/self-employment-in-the-united-states.pdf. ↩
- 17. Urban Institute. 2018. “Urban Institute Health Insurance Policy Simulation Model.” Simulation in 2016. ↩
- 18. Centers for Medicare & Medicaid Services. 2017. “2017 Effectuated Enrollment Snapshot.” June 12. https://downloads.cms.gov/files/effectuated-enrollment-snapshot-report-06-12-17.pdf. ↩
- 19. Health Care Cost Institute. 2015. “2014 Health Care Cost and Utilization Report.” October. http://www.healthcostinstitute.org/files/2014%20HCCUR%2010.29.15.pdf. ↩
- 20. The Center for Consumer Information & Insurance Oversight, Centers for Medicare & Medicaid Services. 2018. “Rate Review Data.” Accessed April 2018. https://www.cms.gov/CCIIO/Resources/Data-Resources/ratereview.html. ↩
- 21. Even under the “high” scenario, in which we assume a relatively loose verification processes for determining self-employment, not all enrollees will qualify as self-employed for purposes of AHP enrollment. ↩
- 22. In 2018, 83 percent of exchange enrollees are receiving APTCs; 53 percent are receiving CSR subsidies. Centers for Medicare & Medicaid Services. 2018. “Health Insurance Exchanges 2018 Open Enrollment Period Final Report.” ↩
- 23. These ranges exclude the District of Columbia, which, due to small number of CSR-eligible enrollees, is an outlier among the states. D.C. has 4 percent and 3 percent respectively. Kaiser Family Foundation. 2017. “Total Marketplace Enrollment and Financial Assistance.” February. https://www.kff.org/health-reform/state-indicator/total-marketplace-enrollment-and-financial-assistance/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D. ↩
- 24. The resulting impact on premiums would be slightly lower because some administrative expenses are not impacted by an increase in claims. ↩