Alert / Employee Benefits
Association Health Plan proposed rules create opportunities

Association health plan proposed rules create provocative planning opportunities

Yesterday the US Department of Labor released its much-anticipated proposed rules for association health plans. The rules could reshape how we think about association-based health insurance and open the door to association-based health coverage that crosses trade or industry lines.

The new rules, if finalized, won’t be a panacea for all associations or industries. But associations for some professions, particularly those boasting better-than-average risk profiles or located in low-cost areas in a state, stand to gain. This is particularly true for their members that currently, are left to scrounge for health insurance in the individual or small-group health insurance markets, if the members offer coverage at all.

The newly proposed rules are intended to encourage groups of employers – particularly smaller employers – to band together for purposes of buying health insurance for their employees, taking advantage of economies of scale and the ability to avoid certain costly mandates to obtain more affordable coverage.

Significantly, the proposed rules would allow groups of employers to form associations for the purpose of providing health insurance. Associations could even encompass employers in different trades and industries, subject only to certain geographical limits.

The rules have only been proposed and should be finalized later this year, perhaps as early as this summer. Final rules will likely be effective for 2019 and beyond.

Background

Under current federal and state rules it’s difficult for an association to offer a health plan to its members and have that health plan considered a single, large-group health plan for insurance purposes. That means the plans are unable to ignore some cost-driving mandates that apply to the individual and small-group markets.

Lockton comment: For example, federal rules require individual and small-group plans cover all Affordable Care Act (ACA) and state-designated “essential health benefits,” while large-group plans are not so required (at least by federal rules). In addition, individual and small-group contracts must be community rated – the insureds dumped into the larger community pool for risk-rating purposes – while large-group contracts are rated solely on the risk profile of the single pool of individuals covered under that contract.

Under current rules, for an association health plan to be viewed as a single, large-group plan for insurance purposes, the association must meet several requirements. There must be a close “economic or representational nexus” between the association and its employer members; that is, the association must be a bona fide association, its members must share common economic or other shared-interest goals, and the association members must exercise adequate control over the association and its health plan. The association can’t exist solely for the benefit of providing health insurance.

Many associations can’t satisfy these requirements. Where such an association nevertheless offers its members health insurance, the result is that each employer member of the association that enrolls in the plan is said, for purposes of insurance market rules, to be sponsoring its own plan equal to its smaller share of the larger association plan pie.

Lockton comment: The consequence of this is important. If that employer member is merely a sole proprietor, its coverage is subject to individual market rules. If that employer is considered a small employer under state insurance rules (generally, under 50 employees), its coverage is subject to small-group rules. If it is considered a large-group employer under state insurance rules, its coverage under the association plan is subject to large-group rules.

This makes it next to impossible for an insurer to provide coverage to the association’s members through the association. The association’s risk pool of employers often includes employer members subject to individual market rules, small-group rules and large-group rules. A single insurance contract can’t accommodate this.

The proposed regulations

These proposed rules would soften the restrictions considerably. For example:

  • An association health plan would be considered a single, large group for insurance-rating purposes, as long as:
    • The association members are in the same trade, industry, line of business or profession, OR (the “or” here is key)
    • The members are in the same state (or same geographic area within a state or in the same metro area even if not the same state, like the New York, Washington, D.C. and Kansas City metro areas).
  • The association can exist solely for the purpose of providing health insurance. In fact, it can be newly formed just for that purpose.

The rules don’t allow a free-for-all. They require the association observe some formalities. The association must have a formal organizational structure, bylaws and similar indications of formality. Also, the association plan can only offer coverage to employees (and dependents) and former employees (and dependents) of the employer members.

Lockton comment: A working owner – such as a proprietor or partner – of a business, whether or not incorporated, qualifies as an “employee” for this purpose as long as the owner is earning wages from the business for services supplied to the business (the owner must work in the business at least 30 hours a week or 120 hours a month), is not eligible to participate in subsidized employer-provided health coverage elsewhere (like through a spouse’s employer), and the owner’s earned income from the business is at least as large as the premium he or she pays for the association health plan coverage.

Importantly, the association isn’t required to verify the owner meets these criteria. It can accept the owner’s attestation that the criteria are met.

There are restrictions on how the association plan can operate, which are designed to prevent the association health plan from cherry picking its risks.

While the association can parse eligible employers along trade, geographic and other similar lines, and impose different waiting periods for different classes of employees (such as salaried versus hourly, full time versus part time, bargaining unit and non-bargaining unit, etc.), it can’t do so based on the health risk posed by employees of an otherwise eligible employer.

Thus, for example, an association plan offering coverage to healthcare professionals in the Chicago metro area could not exclude an otherwise eligible employer’s employees simply because those employees pose a worse health risk than employees of other association members.

Lockton comment: Nor could the association plan charge a higher premium to the employer or its employees, simply based on the employees’ health status. However, age rating of participants in the association health plan might be permissible, within limits.

Self-insuring association plans remains a challenge…at least for now

The proposed rules do not, as some had hoped, open the door for more associations to self-insure health coverage offered to members. Self-insuring would allow association plans to avoid state-imposed benefit mandates and premium taxes, and other costs baked into fully-insured premiums.

Most states won’t allow self-insurance for groups of employers not under common ownership. But the Department of Labor is clearly considering the possibility of easing the path for self-insured association plans. The proposed regulations include a request for comments on the notion of allowing association plans to self-insure.

Winners, losers and the great unknowns

Some associations might benefit substantially from the new rules. This is particularly true if their employer-members’ risk profile in the aggregate is more favorable than the profile of the community risk pool in which they are currently lumped. Certain professions (or even unrelated groups of professions in the same state or metro area) that boast better-than-average health risk profiles, for example, might see significant reductions in health insurance costs by purchasing coverage through an association.

Lockton comment: That benefit could grow as a result of the recent federal tax reform law’s elimination of the ACA’s individual mandate penalties, beginning in 2019. The absence of penalties will likely coax many young, healthy individuals from the community risk pools in which they’re currently insured. That exodus would drive a deterioration of the pools’ risk profiles and raise the cost of coverage for people remaining in the individual and small group markets. Higher costs in those markets could make coverage through certain association health plans more attractive.

Other associations’ members, however, might reflect risk profiles that are worse than the community-rated risk pools in which they might now be buying or shopping for coverage. Pulling those members into their own risk pool would make little sense in that case. Also, association health plans are not for the faint of heart. The plans require administrative, marketing, governance and other platforms and processes. They require an insurer ready, willing and able to adequately gauge and underwrite the risk, and to provide adequate healthcare provider networks and other accoutrements of contemporary health insurance.

Still, the specter of literally forming new associations, even across industry lines, solely for the purpose of providing health insurance is provocative and exciting, and creates plenty of opportunities for consideration and innovation.

The Labor Department will accept comments on the proposed rules for several weeks, and then move to finalize them.

Not Legal Advice: Nothing in this Alert should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton's Compliance Services group are not privileged under the attorney client privilege.

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