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Association Health Plan Update

Association Health Plan Update

by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.

What Did the Final Association Health Plan Regulations Say – 3 Categories of AHPs

  • The final regulations create what I call 3 Categories of AHPs. These 3 separate Categories are important because ALL of the requirements set forth in the final regulations do NOT apply to ALL of the Categories of AHPs. These 3 Categories are distinguished by how a “group” of employers is considered a “bona fide group or association of employers” for purposes of ERISA (and whether or not the “group” is indeed “bona fide”).
    • Analysis: Here’s what I mean:
      • Category #1 AHP: If a “group” of employers satisfies the DOL’s existing rules for being considered “bona fide,” this “group” may establish a fully-insured “large group” or self-insured AHP. The DOL’s existing rules for being considered “bona fide” require the employers: (1) To be in the same industry, trade, or profession (i.e., they must be “related”) AND (2) To be located in the same geographic location (typically a State or a Tri-State area). Under the DOL’s existing rules, if a “group” includes self-employed individuals with no employees, the “group” will NOT be “bona fide.”
      • Category #2 AHP: If a “group” of employers satisfies the DOL’s new rules for what it means to be “bona fide” (set forth in the final regulations), this “group” may establish a fully-insured “large group” or self-insured AHP. To be “bona fide” under the final rules, a “group” of employers can simply be “related” (i.e., in the same industry, trade, or profession).  Industry-specific groups are NOT confined by the geographic constraint under the DOL’s existing rules (described above). A “group” of employers can also be “bona fide” if they are “unrelated” (i.e., NOT in the same industry, trade, or profession), BUT the employers must be located in the same State or Metropolitan Area (that can span 3 States).  Importantly, the final regulations allow self-employed individuals with no employees (referred to as “working owners”) to create their own “bona fide” group or participate in a “bona fide” group of employers.
      • Category #3 AHP: A “group” of employers that does not satisfy the DOL’s existing guidance – or new final regulations – may sponsor an AHP as a “non-bona-fide” group.

Again, why are these Categories important?

      • Because Category #1 AHPs are NOT subject to any of the requirements set forth in the final regulations. This means – as we will describe more fully below – that Category #1 AHPs can continue to develop different premium rates for different employer members based on the “health claims experience” of the members’ employees (i.e., Category #1 AHPs can continue to “experience-rate” their employer members). However, the “groups” of employers in this Category #1 can only be “related” (which means local Chambers of Commerce will NOT qualify) AND the employers must be located in the same geographic area (which means that national trade associations wanting to offer health benefits in multiple States will NOT qualify). In addition, “groups” that want to include “working owners” – or “working owners” that want to create their own “bona fide” group – CANNOT be a Category #1 AHP.
      • Category #2 AHPs MUST comply with the new requirements set forth in the final regulations. This means that (1) national trade associations CAN offer health benefits in multiple States, (2) local Chambers of Commerce CAN offer health benefits to their “unrelated” employer members located in the same State or Metropolitan area, and (3) “working owners” CAN participate in an AHP established only for “working owners,” or “working owners” can participate in an AHP established by an employer “group.” However – as discussed more fully below – the “groups” of employers and/or “working owners” in this Category #2 CANNOT “experience-rate” different employer members and/or working owners. They also MUST have a “substantial business purpose” unrelated to providing health benefits (which we will also discuss below).
      • Category #3 AHPs that are fully-insured CANNOT be considered “large group” plans. Instead, HHS’s current “look-through” rule will apply, which requires the insurance carrier under-writing the AHP to “look-through” the “group” to the underlying size of the employer and impose the ACA’s “small group” market insurance reforms on those employers with 50 or fewer employees (and the individual market reforms would be imposed on “working owners,” should they be a part of this “non-bona fide” group). In the case of a self-insured AHP, State “benefit mandates” will typically apply, even in the absence of a State MEWA law.

It is important to understand that small employers – and self-employed individuals with no employees – want to sponsor the same type of fully-insured and self-insured health plans that large employers currently sponsor, and they want to benefit – just like large employers do – from a more functional market (relative to the “small group” and “individual” markets).  More specifically, these small employers – and self-employed individuals with no employees – want to enjoy lower administrative costs (which are historically lower in the fully-insured “large group” and self-insured markets relative to the “small group” and “individual” markets), they want flexibility in developing innovative plan designs (like offering multiple and different plan types, including value-based insurance designs), and they want greater negotiating power with insurance carriers and providers. These are the primary reasons why you hear national trade associations, local Chambers of Commerce, franchisees, and organizations/companies with a high concentration of independent contractors being so supportive of AHPs. And it is for these reasons why the DOL pursued the changes the Department made in the final AHP regulations.

 

What Did the Final Association Health Plan Regulations Say – The “Nondiscrimination Protections” and “Substantial Business Purpose” Rule

  • The final regulations not only created the 3 Categories of AHPs (as discussed above), the regs included new rules intended to provide additional protections to employees and “working owners” who may be “high-medical utilizers” (on account of a health condition) and to mitigate the formation of AHPs by inexperienced consultants.
    • Analysis: In an effort to provide additional protections for “high-medical utilizers,” the DOL created 3 distinct “nondiscrimination protections” which I describe this way:
      • Nondiscrimination Protection #1 – An employer and/or “working owners” CANNOT be denied membership in a “group” on account of any “health factor” of any employees or an individual. A “health factor” is defined as:  health status, medical condition, health claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. Here is an example that illustrates this:
        • The Widget-Makers of America sponsor an AHP, and the “group” accepts employers and “working owners” in the widget-making industry. Employer A – a widget-maker – employs 25 employees, 10 of whom have cancer.  Working Owner X is a widget-maker who has diabetes. Employer A CANNOT be denied membership in The Widget-Makers of America because 10 of its 25 employees have cancer, and therefore, produce high “health claims” for Employer A. Similarly, Working Owner X CANNOT be denied membership because she has high “health claims” to treat her diabetes.

What is most important to understand here is this: Once Employer A and Working Owner X are in The Widget-Makers of America, Employer A’s employees CANNOT be denied coverage under the AHP because they have cancer (that’s because AHPs CANNOT deny someone coverage based on a pre-existing condition). Same goes for Working Owner X: This working owner CANNOT be denied coverage because they have diabetes. So in essence, this “nondiscrimination protection” is most relevant for participation in the AHP, not so much membership in The Widget-Makers of America. Because once you are in the “group,” you CANNOT be denied access to health coverage (unless for some reason you are not an “eligible” participant in the AHP based on non-health-factors).

      • Nondiscrimination Protection #2 – The premiums for – or eligibility for benefits under – the “large group” fully-insured or self-insured AHP CANNOT vary based on a particular participant’s “health factor.” Remember, a “health factor” is defined as: health status, medical condition, health claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. This is a current law rule that already applies to a “group health plan.” So in essence, because an AHP is by definition a “group health plan” – and already subject to this requirement – the codification of this rule in the final regulations is redundant.  But, it is a good reminder for people setting up AHPs.
      • Nondiscrimination Protection #3 – A fully-insured “large group” and self-insured AHP CANNOT develop different premiums for different employer members and/or “working owners” based on the “health claims experience” of an employer member’s employees or a “working owner.” As stated above, this nondiscrimination protection ONLY applies to Category #2 AHPs which means, existing “groups” that want to take advantage of the new flexibility under the final regulations CANNOT “experience-rate” their employer and/or “working owner” members. This also means that new “groups” that become “bona fide” under the final rules CANNOT “experience-rate” their employer and/or “working owner” members. In a prior update, I explained why I believe this “nondiscrimination protection” will be problematic for Category #2 AHPs (see my attached update, “Association Health Plan Update”). In short, I argued that the fact that the employer and/or “working owners” have adequate “control” over the AHP – and the fact that ERISA imposes a fiduciary duty on the Board members controlling the AHP to “act in the best interest of plan participants” – I felt that there were adequate enough “controls” to distinguish an AHP from a commercial insurance carrier, and also, legal safeguards that would NOT result in discrimination or pricing “high-medical utilizers” out of the AHP. In my opinion, developing different premiums for healthy members will attract healthy risks that will offset the “high-medical utilizers” that an AHP is required to cover on account of Nondiscrimination Protection #1 (described above). But alas, the DOL disagreed and feared that without this Nondiscrimination Protection #3, AHPs would be no better than commercial insurance carriers.

With respect to the “substantial business purpose” rule, the DOL initially proposed that “groups” forming AHPs could be established for the “sole purpose” of providing health benefits. The DOL modified its proposal to say the following:

      • A “group” MUST have a “substantial business purpose” in addition to the purpose of providing health benefits. A “substantial business purpose” is NOT specifically defined, but a “substantial business purpose” will exist if the “group” would be considered a viable entity even in the absence of sponsoring the AHP. The preamble explained that a “substantial business purpose” could include convening conferences or offering classes or education materials on business issues of interest to the “group’s” members. The “group” may also act as a standard-setting organization for the industry, or the “group” may engage in public relations activities such as advertising, education, and publishing on business issues of interest to “group” member.

 

What Did the Final Association Health Plan Regulations Say – Regulation 

  • The final AHP regulations do NOTHING to inhibit – or usurp – a State’s ability to regulate a fully-insured “large group” and self-insured AHP, and therefore – at least in my opinion – critics of AHPs have little to be concerned about when it comes to State regulation. I talked about State regulation in detail in a prior update that I actually turned into a news article that I am currently asking media outlets to run (see the attached Word Document). I believe it tells you what’s what when it comes to the DOL’s final regulations and State regulation.
    • Analysis: But, I will re-emphasize this:  First, States – if they so choose – can enact State laws that regulate a fully-insured AHP’s “insurance contract.” This would include laws that impose additional benefit mandates, and in my opinion, specific premium rating rules (like a 3-to-1 age band or community rating for every AHP participant). What States will likely enact these State laws? Answer: Blue States. What States are less likely to enact these State laws? Answer: Red States.  Unfortunately, I foresee a Blue State vs. Red State break-down when it comes to fully-insured AHPs. In the case of self-insured AHPs, the final regulations did NOT include a “class exemption” for self-insured AHPs (where self-insured AHPs could be exempt from the “non-solvency” requirements of State MEWA laws, provided certain Federal requirements).  However, in the preamble of the final regulations, the DOL did speak favorably about developing a “class exemption” when the Department explained: A “class exemption” would provide “a potential future mechanism for preempting State insurance laws that go too far in regulating [self]-insured AHPs in ways that interfere with the important policy goals advanced by th[e] final rule.” I agree with the Department that there is a need for a “class exemption” in cases where States outright prohibit self-insured AHPs, and also in cases where States impose “coverage” and “rating” requirements that are inconsistent with the fully-insured “large group” market.  I am of the opinion that the DOL will indeed pursue the development of a “class exemption,” most likely some time next year.  I am also of the opinion that the DOL – and stakeholders like me and others – want to work hand-in-hand with the NAIC and State Insurance Commissioners to develop a “class exemption” that includes strong protections to prevent insolvencies and fraudulent activity, while also maintaining flexibile coverage requirements so self-insured AHPs can offer lower costing coverage, while also providing a comprehensive level of coverage that ACA supporters want to see offered.  I am hopeful that the NAIC and State Insurance Commissioners will enter into a conversation about a “class exemption” with an open-mind, and with the goal of being constructive. To date, they have only been saying, “Stay Off My Turf.”

 

What Did the Final Association Health Plan Regulations Say – Other Premium Rating Rules, Including “Age” Rating

  • While Category #2 AHPs (discussed above) CANNOT “experience-rate” their employer and/or “working owner” members, these AHPs are permitted to vary premiums for certain employer and/or “working owner” members if there is a “bona fide employment-based classification” like:  full-time vs. part-time employees, union vs. non-union, employees located in different geographic locations, different occupations, date of hire, and length of service. These AHPs are also permitted to vary premiums by age and gender within these classifications (i.e., different populations within the “group”).
    • Analysis: The new flavor of the week for AHP critics is the fact that AHPs can vary premiums based on age and gender.  Their most recent claims: AHPs can discriminate against old people and women and charge them more money. Here’s why this will NOT happen when it comes to age: The Age Discrimination In Employment Act (ADEA) applies in cases where an employer offers their employees a range of employee benefits (e.g., retirement, disability insurance, and also health benefits). And, the ADEA prohibits an employer from treating older workers worse than younger workers. This means that an employer CANNOT charge a higher premium for John Q. Worker who is age 55 and a lower premium for John Doe Worker who is 28.  It is important to remember that AHPs are made up of employers (including “working owners” acting in the capacity of an employer). As a result, the ADEA will prohibit these employers and “working owners” that are a part of the AHP from varying individual worker’s premiums based on age. So, NO discrimination. It is true that – just like large employers – AHPs can vary premium rates based on the age for different populations within the “group.” In this case, I believe critics have a right to raise the issue of “equity.” BUT, there is a justifiable reason for varying premiums based on age for different populations within the “group.” What I mean is this: Actuaries (like the American Academy of Actuaries) and economists (like the Congressional Budget Office (CBO)) will tell you that – based on objective data – an older person spends close to 5 times more on health care than a younger person spends.  As a result, actuaries and the CBO will tell you that when developing an “actuarially fair” premium, the premium rate for an older person should be roughly 5 times higher than the premium for a younger person. In other words, the premium variation for age should be 5-to-1 if you want to develop an “actuarially fair” premium. Now, ACA supporters – and organizations like AARP – are strongly opposed to a 5-to-1 age band. Why? Because an age band that is 3-to-1 does NOT produce an “actuarially fair” premium. Instead, younger people are paying more in premiums to subsidize older people. However, ACA supporters and AARP support this skewed subsidization of health insurance for older people. Soooo, by just looking at this age rating issue through AARP’s lens, I can see why they are turning up the volume on the fact that AHPs can vary premiums based on age. Their position – which they have a right to – is based on the premise that a 3-to-1 age band is the most appropriate ratio to develop premiums.  Unfortunately – in my opinion – they are wrong. I’m not the only one saying that the AARP is wrong on this. I’m just listening the actuaries and CBO who know more than I do. Importantly, large employers who offer health benefits to their employees also think the AARP is wrong. What I mean is this: If a large employer decides to vary their premium rates based on age (which many do not), the greatest differential in premiums that these large employers will adopt is typically a 5-to-1 ratio.  That’s because these large employers listen to their actuaries who tell them than an “actuarially fair” premium is one that is varied by age by a 5-to-1 ratio. Interestingly though, most large, self-insured plans do not develop premium rates based on age at all, instead they “community rate” their premiums and charge every employee the same rate. However, some large employers may vary rates based age for different lines of business, but often times the variation may be as little as 1.5-to-1 or 2-to-1. I expect most if not all fully-insured and self-insured AHPs will do the same thing large employers are doing when it comes to age rating.

 

Some More Commentary on Rating By “Age”

  • Why don’t large employers currently vary their premiums by a 25-to-1 ratio? Answer: Because of age discrimination and the ADEA. What?!? While the ADEA prohibits employers from treating older workers worse than younger workers (as described above), there is a “safe harbor” under the ADEA that allows employers to charge older workers higher premiums than younger workers without violating the law.
    • Analysis: Specifically, the “equal benefit or equal cost” safe harbor allows an employer to charge older employees more for the same benefits offered to younger employees so long as the employer can show that the cost of the same benefits for older workers was higher based on justified cost considerations. With respect to age rating, the “justified cost considerations” are based on the well-accepted data that shows that an older person spends close to 5 times more than younger people. If these “cost considerations” are applied uniformly among the employer’s entire population – instead of singling specific employees out – there is NO ADEA violation. Sorry for the complexity on this age rating issue, but I feel it is important to establish what the law is. And to also establish what “market practices” large employers engage in. Why?  Because – as stated above – I believe AHPs are going to act the same way large employers currently do, and they are going to adopt this same “market practice.” More importantly though, while AHPs are permitted to develop premiums based on the age of certain populations within the “group,” the AHP CANNOT adopt a 25-to-1 age band. Rather, a 5-to-1 age band is really the only differential that can be justified by verifiable data, and thus permissible under the law (note, there could be a situation where for a particular “group,” an 8-to-1 ratio is a “justifiable cost consideration” based on the demographics of that “group,” but these situations will be limited). Last comment: Currently, the ADEA does not apply to employers with fewer than 20 employees, nor does the ADEA apply to self-employed individuals. BUT, here is the solution:  In the final DOL regulations, the Department decided that for purposes of the Mental Health Parity Act (which currently does NOT apply to “small employers), that ALL of the employees – including a “working owner” in the capacity of an employee – who are a part of the “group” MUST be aggregated together to determine the size of the AHP, and thus, the application of the Mental Health Parity Act.  In my opinion, this is the correct result, and a result that the EEOC (which is the agency that has interpretive authority over the ADEA) should specify in sub-regulatory guidance (or Congress should clarify in legislation) that ALL of the employees – including a “working owner” in the capacity of an employee – must be aggregated together for purposes of applying the ADEA to a fully-insured and self-insured AHP (this aggregation should also be done for purposes of Title VII protections for women, which we will discuss in our next update).

 

What About Legal Challenges to the Final Regulations?

  • The Attorneys General from New York and Massachusetts have publicly announced that they will file a legal challenge, asking a court to strike down the final AHP regulations. Their arguments: (1) The DOL does not have the authority to change the law through the final regulations and (2) The DOL’s final regulations are inconsistent – and conflict – with the ACA, and therefore, they cannot stand.
    • Analysis: The below discussion may get a little wonky, but in short, I believe this legal challenge will fail at some point during the judicial process. Here’s why: ERISA defines “employer” as “any person acting directly as an employer…and includes a group or association of employers acting for an employer in such capacity.” Importantly, the term “a group or association of employers” is not further defined in ERISA’s statute. The Supreme Court tells us that in instances where a statutory term is ambiguous – and in cases where a particular statutory term has no corresponding statutory definition – the Federal Department that has the authority to enforce the statute in question has wide-latitude to interpret and further define the ambiguous statutory term, as long at the Department’s interpretation is reasonable. Remember King v. Burwell. In the case of the term “a group or association of employers,” the DOL has taken steps to define what it means to be “a group or association of employers” through various Advisory Opinions  Importantly, DOL Advisory Opinions serve as interpretive rules. The Supreme Court tells us that a Federal Department has the authority to modify its interpretive rules with a new interpretation that deviates from the Department’s previous interpretation. This all means that the DOL does indeed have the authority to issue a new interpretation of the term “a group or association of employers” that deviates from the Department’s definition of the term previously set forth in various DOL Advisory Opinions. Same analysis for allowing self-employed individuals with no employees to participate in an AHP. In short, the DOL currently has a regulation that does not allow self-employed individuals with no employees to participate in an ERISA-covered plan. This regulation, however, is an interpretive rule because ERISA’s statute does NOT define a “self-employed individual” let alone a “self-employed individuals with no employees.” Because the Supreme Court allows a Federal Department to modify its interpretive rules – even if the interpretation deviates from a previous interpretation – such an action is permissible. Also important is the fact that the DOL made both of these interpretive changes through first issuing proposed regulations, accepting public comments on the proposal, and finalizing the new interpretation in regulations, which are all a part of the notice-and-comment process required by the Administrative Procedures Act (APA).

 

Some More Commentary on the Legal Challenge

  • The Attorneys General will also argue that the final AHP regulations conflict with the ACA and the amendments the ACA made to the Public Health Service Act (PHSA). It is important to understand that ERISA (which is the law the governs AHPs as “group health plans”) is separate and distinct from the PHSA. And as a result, changes to ERISA and its interpretive rules cannot and will not conflict with the PHSA (and the ACA’s amendments to the PHSA).
    • Analysis: In addition – and more importantly – HHS’s guidance that was issued in 2011 is evidence that even the previous Administration – one which was a critic of AHPs – viewed ERISA and the PHSA as 2 distinct laws. As discussed previously, the 2011 guidance requires that “non-bona-fide” groups sponsoring an AHP must comply with the PHSA (and the ACA’s small group and individual market reforms) depending on the size of the “group” member. HOWEVER, the 2011 guidance also says that if a “group” is considered “bona fide” for purposes of ERISA, the ACA’s market reforms (which live under the PHSA) do NOT apply if the employees of the “group” – in the aggregate – are 51 employees and above. In other words, if a fully-insured AHP is sponsored by a “bona fide” group under ERISA, ERISA comes into play in a manner that does NOT conflict with the PHSA. Rather, ERISA works in conjunction with the PHSA for purposes of determining the size of the “group” (i.e., are the number of employees in the “group” 51 and above?), which then determines whether the PHSA’s rules applicable to the “small group” or “large group” market apply (and therefore, whether the ACA’s “small group” market reforms apply or whether the AHP is treated a “large group” plan and regulated as such). There is an outside chance that a “friendly” District Court rules in favor of the Attorneys General by Sept. 1, 2018. In this case, the final regs would be put on hold until a Circuit Court of Appeals or the Supreme Court resolves the issue, which could drag out to June 2019. BUT, I think this legal challenge fails at the District Court level, which means a fully-insured AHP can be established by existing and new “groups” as early as Sept. 1, 2018, an existing AHP can sponsor a self-insured plan on Jan. 1, 2019, and new self-insured AHPs can be set up starting April 1, 2019. Stay tuned…