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 and its final rule on June 19, 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 Part 4 of this Deep Dive Series, we examined the qualification requirements for AHPs under the proposed rule, then explained why the new requirements, if enacted in their proposed form, would result in the polar opposite outcome from the intended result enunciated in the Executive Order. In Part 5 of this Deep Dive Series, we explained how the final rule differed from the proposed rule. In this installment of the “Deep Dive” series, we will explore a typical legal and governance structure associated with the formation of an AHP.
Forming an AHP
While a variety of AHP structures are possible, this “Deep Dive” will describe a structure which has worked particularly well in practice.
The formation of an AHP starts with the sponsoring association, which will typically serve the role of “plan sponsor” within the meaning of ERISA Section 16(B).
A common first step is for the sponsoring association to form a trust. The association will serve as grantor of the trust, with individuals who are employed by members of the association serving as trustees. Ideally, three or more recognized “servant leaders” of their trade, business, or profession will be recruited for the trustee role. These trustees will ultimately be elected by the member firms of the AHP once the AHP is up and running.
The success of the AHP will largely hinge on the dedication, effort, and persistence of the trustees, who, because of ERISA’s strictures, must serve without compensation. The individual trustees should therefore be selected from among those who take pride and satisfaction from building something truly special without monetary remuneration for the benefit of member employers and their employees. While it might seem as if there are fewer and fewer such altruistic individuals in our country today, they do still exist. Care must be taken to find them.
The next step-and most challenging-is to contract with skilled and experienced service providers who will be crucial to the smooth day-to-day operation of the AHP. A partial list of required AHP services includes billing and collection of premiums, marketing and sales, legally-required participant communications and governmental fillings, call centers, internet resources, claims processing, underwriting, robust provider networks, pharmacy benefit management, and insurance against claims costs which exceed premiums, to name just a few. The ideal partner is a strong insurance carrier, and forming a successful AHP is probably not feasible without one. As will be explained in the next “Deep Dive”, however, insurance companies simply are not that interested in contracting with startup AHPs, so engaging an insurance company partner will range from difficult to nearly impossible. Having said this, it can be done. An understanding of the motivations of the carriers is crucial to the success of this effort.
Assuming that the AHP is successful in engaging an insurance carrier, the carrier will issue a group insurance policy to the AHP. While self-insured AHPs are possible, they are not recommended because of state regulatory hurdles. If the AHP wishes to take on risk, it can do so through a minimum premium contract with a financially-sound carrier, in which event the carrier will bear the ultimate risk for all claims costs which exceed premiums and reserves. The AHP will also enter into (i) a services agreement with the carrier and, if the AHP is taking on risk through a minimum premium contract, (ii) an experience-rating agreement.
Each participating member firm will enter into a participation agreement with the trust under which the member firm will agree to the terms and conditions of membership in the trust. The carrier will then issue a certificate of coverage to the member firm.
Accomplishing these legal steps is only half the story. Building a successful AHP requires patience, persistence, and significant resources to overcome the strong headwinds which face startup AHPs. These headwinds, and solutions to lessen their force, will be described in future “Deep Dives”.