The Past and Future of Association Health Plans
The Trump administration has made the formation of association health plans (AHPs) — those offered by business or professional associations to their members — a central focus of its health policy agenda by significantly expanding their reach, but a federal court decision made in March has found the new rules violate federal tax law.
AHPs have existed for decades. Many are legitimate arrangements made by associations to offer health benefits to members, but some have defrauded enrollees or ended up insolvent, unable to pay members’ claims. They are typically subject to the federal Employee Retirement Income Security Act (ERISA) because they are multiple employer welfare arrangements (MEWAs), but are also subject to state regulation. Illegitimate AHPs have exploited the gaps resulting from AHPs falling in an ambiguous place between state and federal regulation.
The Affordable Care Act (ACA) enhanced regulatory oversight of AHPs, clarifying that AHPs that enrolled individuals or small groups were generally subject to ACA’s individual and small-group market rules. For instance, an AHP that covered individuals or small groups would be required to offer essential health benefits.
There was, however, a very limited exception. An AHP covering small employers could be considered a single large-group health plan under ERISA for regulatory purposes if the employers were bound together by a common interest beyond health coverage and effectively operated as one employer controlling the association. Employers had to share a common trade, business, or profession; shared geographic location (e.g., a chamber of commerce) was not enough. “Plan MEWAs” that qualified would be regulated by the less stringent large-group rules even though they covered only small groups. The exception did not apply to individual sole proprietors. Associations of individuals could never be considered a single employer nor be regulated as a large group. AHPs formed under this exception are now called “pathway 1” AHPs.
Trump Administration’s AHP Rule
In June 2018, the Department of Labor (DOL) greatly expanded the circumstances under which an aggregation of small groups could be considered a large group, creating what are now called “pathway 2” AHPs. Under DOL’s new regulations, an AHP could pass muster as a single employer plan if:
- it served at least one substantial business purpose other than providing health coverage, even though its primary purpose was offering health coverage
- its member employers were either in the same trade or business or in the same geographic area, which could span several states, and
- the employer members in some sense controlled the AHP and health plan.
Under the new regulations, AHPs could also cover individual “working owners,” even though the working owners had no employees other than themselves. The rule prohibited AHPs from discriminating against enrollees on the basis of health status but allowed AHPs to exclude or charge higher premiums to employers on the basis of age, gender, occupation, or other factors.
Although AHPs continue to exist under the pathway 1 rules, a number of entities — in particular, chambers of commerce — have moved quickly to take advantage of the new rule. The Congressional Budget Office projects that more than 3 million people will be covered by an AHP under the new rule. Some states have taken legislative or regulatory actions to encourage or to discourage AHP formation under the new rules.
AHP Rules Invalidated by Federal Court
In July 2018, 11 states and D.C., led by New York, sued in federal court to block the DOL rule. On March 28, federal Judge John D. Bates invalidated much of it. Although he characterized the rule as “an end run around the ACA,” his ruling was based primarily on ERISA rather than the ACA.
He held that the Trump administration’s rule violated ERISA by allowing single-employer AHPs to be formed primarily for the purpose of providing health coverage rather than providing health coverage incidental to some other purpose. He further held that AHPs based on geographic proximity did not ensure sufficient “commonality of interest” to justify treating them as a single-employer plan. He determined that the provisions of the rule permitting “working owners” to participate in single-employer AHPs could not be squared with ERISA’s definitions of “employer” and “employee,” since it allowed employees to be considered employers who are employing themselves. Finally, he concluded that the AHP rule violated the large-group, small-group, and individual regulatory market structure enshrined in the ACA based on ERISA definitions. Judge Bates invalidated much of the rule as irrational and in violation of the Administrative Procedures Act.
AHP Regulation After Federal Court Decision
The DOL has appealed Judge Bates’s ruling. It has not, however, asked that the effectiveness of his ruling be stayed. Instead, it has issued two guidances describing its enforcement policy under the court’s decision. Pending resolution of the appeal, the DOL will not take enforcement action against a pathway 2 AHP for acting in good faith on the rule prior to the court’s decision. AHPs are responsible for meeting their obligations under their existing contracts for the remainder of the contract or plan year. After that, new coverage must comply with the appropriate market rules — for example, coverage sold to individuals must conform to individual market rules.
The enforcement guidelines preclude further sales of coverage by plans based on geographic proximity (i.e., chamber-of-commerce plans). They also would prohibit further sales to “working owners” of plans that do not conform to individual market rules. In a letter to the DOL, New York argues that the DOL should go further and require AHPs to cover all essential health benefits immediately.
The guidance explicitly states that the court’s decision does not affect pathway 1 AHPs. If Judge Bates’s decision is reversed on appeal, pathway 2 AHPs are also likely to proliferate. Pathway 2 AHPs can charge lower premiums than ACA-compliant plans because they can omit ACA-required benefits (although most have so far covered essential benefits) and can underwrite to exclude high risks, as long as exclusion is not based explicitly on health status. Pathway 1 AHPs can even set rates for their small-group members based on the health status of the small group (unless prohibited from doing so by state law). This cherry-picking of good risks will make coverage less expensive for people with lower health care costs, but it is likely to raise premiums for those with preexisting conditions who remain in the ACA-compliant market. The AHP rule is based on a different vision of health insurance markets than the philosophy of the ACA — a vision that values lower cost for some over coverage for all. It remains to be seen which vision prevails.