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Achieving Universal Coverage



Experiences Under the ACA Suggest Association Health Plans Could Harm the Small-Group Insurance Market

small office who can purchase insurance through association health plans

The Affordable Care Act’s (ACA) market reforms require both individual and small-group insurers to cover preexisting conditions and certain essential health benefits, and to set premiums without taking into account enrollees’ medical conditions. The federal government, however, announced a final rule last summer that would enable many more small firms1 and self-employed individuals to purchase insurance through “association health plans” that are not subject to these core market regulations. Experts worry that these plans could lead to higher premiums in the regulated small-group market.

Under the new rule, groups can form associations specifically to sell insurance under terms that are more favorable to healthier people. Increasing access to these non-ACA-compliant health plans is likely to draw healthier people out of the regulated market. This has led to concern about the likely effects of splitting the small-group market into two segments: one that is subject to the ACA’s market rules and the other that is not. Some analysts project that this could increase prices by more than 10 percent for those who need the ACA’s more comprehensive coverage or who cannot qualify for less-regulated options. Others, however, believe that negative effects will be more muted.

Rather than looking at projections, we conducted a data analysis to see how market segmentation has actually functioned in the small-group market to date, under the ACA’s original rules, and whether that could shed light on the new rule’s potential effects. Even before the new rule expanding association health plans, small firms could avoid ACA regulations through two routes, depending on particular state rules: 1) self-insuring rather than purchasing insurance, and 2) holding on to plans that predate the ACA (known as “transitional” plans).

Self-Insured Small Groups

The ACA’s small-group regulations do not apply to employers that self-insure. Self-insurance is attractive mainly for small firms whose employees are healthier than marketwide averages. But, usually, small firms cannot afford the financial risk of self-insuring. Some states, however, allow them to “reinsure” most of their risk. Some have argued that self-insured plans should not be exempted from ACA regulation unless the employer retains a substantial level of financial risk. Indeed, 18 states substantially limit this option by requiring employers to remain on the hook for at least $20,000 worth of medical claims per person, or they prohibit small-firm reinsurance altogether. Other states are more lenient, allowing small firms to claim self-insured status even if they retain only $5,000 to 10,000 of risk or, in some states, no risk at all, which makes self-insurance much more viable for small firms.

Transitional Plans

Another way small firms have avoided ACA market regulations is by keeping “transitional” plans that were purchased after the ACA was enacted but before it took full effect (2010–2013). In 21 states, regulators or insurers have decided not to allow these transitional plans, preferring instead to apply the ACA’s rules marketwide (other than to pre-2010 plans that the ACA itself grandfathered in). But in other states regulators and insurers have embraced transitional plans. Firms cannot opt into these preexisting plans, but they can choose to hold on to them to avoid ACA regulations.

Impact of Existing Market Segmentation

To estimate the effects of noncompliant health plans on the regulated market, we developed “risk scores” that measure the overall health status of a state’s small-group market. These risk scores are actuarial measures of how expected costs for the pool of people in a given market compare with an average population. A higher risk score indicates a less healthy, more costly pool of enrollees.

We found in each of the past three years that each regulation permitting non-ACA-compliant plans — self-insurance and transitional plans — was associated with a risk profile for the ACA-compliant market that was 10 percent to 14 percent higher than in states without such policies. Also, states that adopted both policies had risk profiles that were 15 percent to 20 percent higher than states with neither regulation.

Increase in Risk Profiles in States with Varying Small-Group Regulatory Policy

Allow transitional

Don’t restrict self-funding

Allow both













Because we did not control for other factors that might be causing these differences, we cannot be certain that regulatory policies are the primary drivers of higher risk scores and, certainly, other factors are undoubtedly involved. However, other researchers have indicated these regulations have had at least some discernable effects on the ACA’s small-group risk pool.

On the whole, small-group risk scores have differed noticeably between states with and without policies that allow market segmentation. Moreover, the segmentation effects of the new association health plan rule could be substantially greater. The effects of allowing transitional plans are muted by the fact that new subscribers cannot purchase them, and also by the fact that these plans are subject to some ACA regulations (e.g., covering preventive services and eliminating annual dollar limits). Accordingly, in a previous analysis, we noted that, in 2015, claims in ACA plans were only 9 percent higher than in transitional plans. For self-funding, potential market effects are limited by the inherent costs and risks of self-insurance and reinsurance. Association health plans are not constrained by these factors.

Relevance for Association Health Plans

Recent analysis has shown that small-group markets have generally fared reasonably well under the ACA’s market reforms. Association health plans, however, could have a much more pervasive effect on market segmentation. Unlike transitional plans, they can enroll new subscribers, and, unlike self-funding, they are feasible for groups of any size, or self-employed individuals. Fortunately, the new federal rule allows states to retain or impose stricter standards for regulating association health plans, which some states have already done and others are considering doing, to avoid harm to the existing market. Only time will tell, but for states that remain more permissive, the new rule, in combination with the existing ones, may result in substantial price increases and enrollment declines in the core part of the small-group market that offers the greatest projections.


This study developed “risk scores” that measure the overall health status of a state’s small-group market in terms of how expected costs compare with an average population. Using federal data, we created an enrollment-weighted measure of the marketwide risk score in each of 46 states’ small-group markets,2 adjusted for the average actuarial value of health plans in each state.

We then grouped states according to their regulatory approaches to self-insuring and transitional plans. We classified states as not restricting self-insurance if they allow small employers to retain less than $20,000 of risk per person (the level recommended by the National Association of Insurance Commissioners). And we classified states as allowing transitional plans if small-group insurers reported that less than 10 percent of enrollment was in transitional plans in 2016. We then calculated a summed risk score for each group of states, for each of three years, to observe the differences in marketwide risk scores based on regulatory approaches.



1 Those with up to 50 full-time workers (or up to 100 workers in California, Colorado, New York, and Vermont).

2 We excluded the District of Columbia, Massachusetts, and Vermont because they have merged the individual and small-group markets, and New Jersey and New York because they adopted community rating and other ACA elements prior to the ACA.

Publication Details



Mark A. Hall, Fred D. & Elizabeth L. Turnage Professor of Law, Wake Forest University School of Law

[email protected]


Mark A. Hall and Michael J. McCue, "Experiences Under the ACA Suggest Association Health Plans Could Harm the Small-Group Insurance Market," To the Point (blog), Commonwealth Fund, Dec. 4, 2018.