On October 12, 2017, President Trump signed a “Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States” (the “Executive Order”) to “facilitate the purchase of insurance across state lines and the development and operation of a healthcare system that provides high-quality care at affordable prices for the American people.” One of the stated goals in the Executive Order is to expand access to and allow more employers to form Association Health Plans (“AHPs”). In furtherance of this goal, the Executive Order directed the Department of Labor to consider proposing new rules to expand the definition of “employer” under Section 3(5) of the Employee Retirement Income Security Act of 1974 (“ERISA”). The Department of Labor issued its proposed rule on January 5, 2018.
In Part 1 of this “Deep Dive” series, we examined the history of AHPs and the effects of the changes proposed by the Trump Administration by providing a high-level, summary overview of the three types of arrangements that fall under the umbrella of health arrangements sponsored by associations, which include Affinity Arrangements, Group Insurance Arrangements and AHPs. In Part 2 of this “Deep Dive” series, we compared plan features of the three types of arrangements under current law. In Part 3 of this “Deep Dive” series, we examined the qualification requirements for AHPs under current law. In this installment of the “Deep Dive” series, we will examine the qualification requirements for AHPs under the proposed rule, then explain why the new requirements, if enacted in their current form, would result in the polar opposite outcome from the intended result enunciated in the Executive Order. Rather than facilitate the expansion of AHPs, the proposed rule would result in their decline and ultimate demise.
Proposed Qualification Requirements for AHPs
ERISA provides that an employee benefit plan may be maintained by an association of employers that effectively operates like a single employer. Under the current statutory and regulatory scheme, to be a bona fide association of employers, the members of the association must:
- have a commonality of interest unrelated to the provision of benefits;
- exercise control over the benefit plan; and
- consist of employers with at least one employee.
In addition, the association itself must
- be a pre-existing organization; and
- exist for a purpose other than providing health coverage to its members.
The proposed rule would retain some of the current AHP requirements and modify or eliminate other existing requirements, as follows:
- The commonality of interest requirement would be significantly expanded to allow employers who are either in the same line of business or industry or in the same geographic area to join together for the purpose of providing health insurance to their employees. As a result, many more organizations would be permitted to sponsor association health plans than is the case under existing law.
- The requirement that the AHP consist solely of employers with at least one employee would be eliminated. As a result, sole proprietors and other self-employed individuals would be allowed to participate in AHPs for their own benefit.
- The requirement that the association be a pre-existing organization would be eliminated.
- The requirement that the association exist for a purpose other than providing health coverage to its members would be eliminated.
- The proposed rule would retain the requirement that the employer-members control the AHP and would also require that the AHP have a formal organizational structure with a governing body and bylaws (or similar indication of formality).
The New Nondiscrimination Requirement – A Death Sentence for AHPs
While the provisions of the proposed rule discussed above would relax the existing requirements associated with forming an AHP, a new requirement added by the proposed rule would result in a virtual death knell for most existing AHPs and significantly inhibit the formation of new AHPs.
In a significant and unwarranted departure from current law, the proposed rule prohibits AHPs from varying premiums across groups of employers except in very narrow circumstances. However, commercial insurance carriers would not be so limited except to the extent of state and federal community rating requirements applicable to small groups. If the proposed rule were issued in its current form, AHPs would be forced to quote basically the same rates for all member employers, and commercial carriers would quote unhealthy large employer groups at higher rates than healthy groups, ultimately resulting in adverse selection in the AHP market. Large employer groups with higher-than-average claims would have a financial incentive to join AHPs, and healthier-than-average-groups with lower costs would inevitably choose to purchase health insurance from commercial carriers. This dynamic would result in AHPs enrolling, on average, more costly groups than commercial carriers in the non-AHP market. As a result, AHPs would then be required to increase premiums across the board, diminishing the ability to attract even moderately healthy groups, resulting in further market segmentation and destabilizing the AHP marketplace.
The DOL states in the preamble to the proposed rule that its purpose is to encourage the establishment and growth of AHPs and to expand access of employers and their employees to more affordable health coverage by relaxing the regulatory requirements applicable to AHPs. It is anticipated that the final AHP rule will be issued soon. Given the avowed purposed of the rule, we expect the DOL to significantly modify, if not eliminate, the nondiscrimination requirement so that this purpose may be achieved.