How Association Health Plans Could Affect Your Insurance

Expanded AHPs would allow some small employers access to cheaper health coverage
Expanded AHPs would allow some small employers access to cheaper health coverage, but could drive up premiums in the ACA-compliant market. PeopleImages/Getty Images 

Association health plans (AHPs) have been around for decades, stemming from the Employee Retirement Income Security Act (ERISA) of 1974, and largely subject to state regulation under new rules that were enacted in the early 1980s. The Affordable Care Act (ACA) imposed new regulations designed to provide additional protections to AHP members.

But the Trump Administration wants to relax the rules for AHPs, which is why they've been making new headlines recently. In October 2017, President Trump's "Healthcare Choice and Competition" executive order called for, among other things, new regulations aimed at "expanding access" to AHPs for small businesses and self-employed individuals currently subject to the ACA's small group and individual market regulations.

And in early January 2018, the Department of Labor published proposed regulations stemming from the President's October executive order, opening up a 60-day public comment period (you can submit a comment here).

In a Nutshell: How AHPs Could Change Your Health Insurance

If you have coverage from a large employer, Medicaid, or Medicare, the proposed new rules won't affect your coverage. If you have coverage in the individual or small group markets, however, the proposed regulations might affect your coverage, depending on where you live.

The rules have not yet been finalized, and it's unclear how much leeway states will have to limit the new rules if and when they are finalized. But expanded access to AHPs could result in lower health insurance premiums for small groups and self-employed individuals who join associations that offer AHPs. However, with those lower premiums could come corresponding reductions in health insurance benefits. The adage "you get what you pay for" is hard to avoid.

On the other hand, individuals and small businesses that don't join associations and obtain coverage under AHPs may see higher premiums in future years, and/or a less stable insurance market, with fewer insurers offering coverage. This would stem from the fact that AHPs would likely be designed to appeal to businesses with healthier, younger employees, leaving an older, sicker market for the ACA-compliant plans.

Those who don't join AHPs would include small businesses and self-employed individuals that prefer to retain their more robust ACA-compliant coverage, and individuals who aren't self-employed—and therefore not eligible to join an AHP—including early retirees.

If you currently work for a small employer that doesn't offer health coverage and you obtain your coverage in the exchange, your eligibility for premium subsidies (premium tax credits) is based on your household income. But if your employer were to join an association and offer AHP coverage that meets the ACA's definition of affordable, you would no longer be eligible for premium subsidies.

Current Regulations: Rules Vary Depending on the Size of the Group

The title of the proposed regulations, "Definition of 'Employer' Under Section 3(5) of ERISA—Association Health Plans," sums up the crux of the issue: Essentially, who is allowed to join together to form a large group, employer-sponsored plan?

That's important because the ACA regulates large and small groups differently. "Small group" means up to 50 employees in most states, but up to 100 employees in California, Colorado, New York, and Vermont. And small group rules under the ACA (for plans effective January 2014 or later) are generally the same as the rules for individual market coverage: The plans have to be guaranteed-issue, with premiums that vary only based on location, employees' ages (within a maximum ratio of 3:1 for older versus younger employees), whether the employee has dependants on the plan, and tobacco use.

Factors like gender, type of industry, and the overall health of the group cannot be used to determine premiums. And small group plans implemented since 2014 must cover the ACA's essential health benefits, and fit into one of the ACA's metal levels (bronze, silver, gold, or platinum), which are a measure of actuarial value.

Some ACA regulations do apply to large group plans and self-insured plans (which are particularly popular with very large employers), but the regulations aren't as strict. Premiums for large group and self-insured plans aren't subject to the same review process that applies to individual and small group plans, can vary based on a group's medical claims history, and do not have to conform to the 3:1 age band ratio that applies to the small group market (ie, premiums for older employees can be more than three times the premiums charged for younger employees). And large group and self-insured plans do not have to cover the ACA's essential health benefits.

In addition, while many of the ACA's requirements do not apply to large group and self-insured plans, self-insured plans are also not subject to state regulations. Instead, they're regulated by the federal government, under ERISA guidelines. So you can think of the regulatory framework as being most strict for individual and small group plans, least strict for self-insured plans, and somewhere in the middle for large groups that purchase coverage from an insurance company rather than self-insuring, since the insurance companies that sell those plans are subject to state regulation, albeit with relaxed rules under the ACA when compared with individual and small group plans (in general, the larger an organization is, the more likely they are to self-insure).

Proposed AHP Guidelines Would Relax the Rules

Under current rules, AHPs are permitted to offer large group or self-insured plans to their members, but the rules are fairly strict: The employers must join together for a purpose other than just creating an AHP (this is referred to as a "commonality of interest," which generally means they have to be in the same industry), they must have control over the AHP, and the member employers must have more than one employee (ie, they cannot be sole proprietors with no employees).

The proposed regulations would relax those rules. If finalized as proposed, the new rules would allow employers to join together to create an AHP based on shared industry OR shared geographic area, which could be a state or a more localized region, such as a county or a metropolitan area (keeping in mind that some metropolitan areas extend across more than one state). So several small auto-repair shops in diverse areas could join together to create an AHP, or several small unrelated businesses all located in the same city or state could join together to create an AHP.

While the group of mechanics would fit the current definition of an association that could join together with a commonality of interest, the new rules would allow employers to form an association even if geographic location is their only commonality of interest.

However, the proposed regulations would still require associations to be "genuine organizations with the organizational structure necessary to act 'in the interest' of participating employers." The association would have to have by-laws and governance and be overseen by the businesses that comprise its membership. So while a group of employers could join together with the general purpose of obtaining large group or self-insured health insurance (and thus avoiding the ACA's individual and small group regulations), they would have to create a bonafide association in order to do so.

Under current rules, self-employed individuals with no employees are unable to join AHPs in order to obtain ERISA-regulated health coverage (as opposed to ACA-compliant individual market coverage). But the proposed regulations would relax that rule, allowing "working owners" to join AHPs as long as they're not eligible for subsidized health insurance from another employer-sponsored plan, work at least 120 hours per month, and earn enough from their self-employment to cover the cost of the coverage offered by the AHP.

What Sort of Coverage Would AHPs Offer?

If the proposed rule is finalized, new AHPs could start to appear fairly soon, and there would likely be a wide range in terms of the quality of the coverage they offer. But by and large, the whole point of expanding AHPs is to lower the cost of health coverage. And since the proposed regulations do nothing to lower the cost of health care (which is what drives the cost of health insurance), the only way for them to have lower premiums is to either cut corners in terms of the benefits offered, or to curate a membership that's healthier than average.

The proposed rules would prevent AHPs from directly discriminating based on health status, so they would not be able to reject a business or employee from membership in the association (and thus AHP coverage) based on medical history. However, AHPs would have significant latitude to design their coverage in a way that's not appealing to people with serious pre-existing conditions. Insurers were already doing this to some extent before the ACA—for example, offering health plans that only covered generic drugs, or that didn't provide mental health coverage at all.

The ACA put a stop to those practices, and all individual and small group health insurance policies effective since January 2014 have had to meet minimum coverage standards. But many of the ACA's rules don't apply to large group and self-insured plans, which is why the idea of expanding access to AHPs is appealing to small businesses with healthy employees.

The American Academy of Actuaries and the National Association of Insurance Commissioners expressed concerns in 2017 (when AHP expansion was being considered by lawmakers) about the effect of expanded AHPs on the individual and small group markets. Both organizations noted that new and expanded AHPs could result in adverse selection in the state-regulated (i.e. non-AHP) individual and small group markets, as AHPs could design their plans to appeal to small businesses (and self-employed individuals) with healthier, younger employees, leaving an older, sicker population in the state-regulated, ACA-compliant individual and small group markets.

The AAA and NAIC also both note that AHPs of bygone decades often faced insolvency, an issue that could arise again. And since these plans are not regulated by state insurance commissioners, members would have little in the way of recourse if their AHP ended up unable to pay their claims.

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