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 3(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”.

Next “Deep Dive”: Business and Operational Issues Associated with Forming an AHP: Engaging an Insurance Carrier

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 this installment of the “Deep Dive” series, we will explain how the final rule differs from the proposed rule.

Pre-2018 Qualification Requirements for AHPs

ERISA provides that an employee benefit plan may be maintained by an association of employers that effectively operates as a single employer. Under guidance issued before 2018, to constitute 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.

Proposed Rule-Qualification Requirements for AHPs

The proposed rule retained some of the current AHP requirements and modified or eliminated other existing requirements, as follows:

  • The commonality of interest requirement was 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, 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 was 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 was eliminated.
  • The requirement that the association exist for a purpose other than providing health coverage to its members was eliminated.
  • The proposed rule retained 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 in the Proposed Rule.

In a significant departure from current law, the proposed rule prohibited AHPs from varying premiums across groups of employers except in very narrow circumstances. As explained in our fourth Deep Dive installment, commercial insurance carriers are not so limited except to the extent of state and federal community rating requirements applicable to small groups. Under the proposed rule, AHPs would have been forced to quote basically the same rates for all member employers, while commercial carriers are allowed to 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 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 Final Rule-Good News for AHPs

The final rule for the most part follows the proposed rule, with a few changes and clarifications. One notable change is that the sponsoring association must now have at least one sustainable purpose in addition to providing health insurance to members. In addition, the final rule now explicitly states that an association is treated as being in the same trade or business as the employer members of the group or association and, as a result, may participate in an AHP covering the association’s members.

And now the good news. In response to concerns expressed by commenters, the Department of Labor has conceded that plans which meet the pre-final rule AHP qualification requirements described above need not meet the final rule AHP requirements. In other words, the requirements in the final rule constitute an alternative method of meeting the requirements to constitute an AHP. This means existing and new AHPs need not satisfy the final rule’s nondiscrimination requirements as long as they meet the AHP requirements as in effect before the final rule.

Any association which wants to form an AHP will almost certainly attempt to qualify under the pre-final rule requirements in order to avoid complying with the unworkable nondiscrimination provisions. Those organizations which may only qualify under the final rule requirements will face significant headwinds. As will be explained in a future Deep Dive, forming a startup AHP requires considerable time, effort and resources, as well as a strong insurance company partner. Without the ability to rate member firms based on health experience, the headwinds will reach gale force. As a practical matter, therefore, we expect the final rule will have little real-world application.