The United States Department of Labor (DOL) published a final rule on June 19 that relaxes the regulation of, and expands access to, association health plans (AHPs). President Donald J. Trump’s October 12, 2017 Executive Order instructed the DOL to consider expanding access to association health plans and the Department released a proposed rule on January 5, 2018. A Health Law Pulse summary of the proposed rule is available here.
The final rule largely finalizes the policies in the proposed rule and will make it easier for employers to join together and be treated as a single large group. Large group coverage is not subject to certain Affordable Care Act (ACA) requirements that apply to the individual and small group markets, such as: guaranteed availability and renewability, prohibitions on medical underwriting and denying coverage based on pre-existing conditions, and the requirement to provide essential health benefits (EHB(s)). The final rule refers to AHPs as “an innovative option for expanding access to employer-sponsored coverage.” AHPs are not a new type of product and have faced criticism for having a history of fraud that has negatively impacted providers, employers, and individuals. The DOL believes AHPs will reduce the cost of coverage because employers will have:
increased bargaining power vis-à-vis hospitals, doctors, and pharmacy benefit providers, and creating new economies of scale, administrative efficiencies, and a more efficient allocation of plan responsibilities (as the day-to-day administration of the benefit program is transferred from participating employers, who may have little expertise in these matters, to the AHP sponsor).
The final rule loosens the long-standing interpretation by enlarging the definition of “employer” under ERISA and more broadly defines “group or association of employers”.
Commonality of Interest
Historically, the DOL narrowly interpreted the circumstances under which employers may join together as a single ERISA-covered multi-employer plan to offer or enroll in a group health plan. The commonality of interest standard is meant to differentiate bona fide groups from arrangements resembling private insurance. The DOL and courts have applied a facts-and-circumstances approach that examined whether the employer group or association: (1) had business and organization purposes and functions unrelated to the provision of benefits; (2) had a commonality and organizational relationship unrelated to the provision of benefits; and (3) participating employers directly or indirectly exercised control over the program. The final rule implements a more flexible examination that only requires the members to be:
(1) in the same trade, industry, line of business, or profession; or
(2) have a principal place of business within a region that does not exceed the boundaries of the same state or metropolitan region.
The final rule states that DOL will interpret these terms broadly, with the intention of distinguishing a bona fide association from a commercial health insurer. An association may not nefariously create a geographic or industry distinction as a “subterfuge” to discriminate based on a health factor
Substantial Business Purpose
The final rule requires a bona fide group or association of employers to have at least one substantial business purpose unrelated to the provision of benefits. The finalized policy is more restrictive than the proposed rule, which would have permitted the formation of associations for the sole purpose of purchasing health coverage. The final rule preamble is clear that while a substantial business purpose needs to exist, it does not need to be the primary purpose of the association. The final rule does not define “substantial business purpose”. However, it does create a safe harbor: A substantial business purpose will be considered to exist if the association would be a viable entity even if it wasn’t sponsoring a benefit plan. The final rule offers examples of services that would meet the safe harbor:
- convening conferences or offering classes or educational materials on business issues of interest to the association members;
- a standard-setting organization that establishes business standards or practices;
- public relations activities such as advertising, education, and publishing on business issues of interest to association members unrelated to sponsorship of an AHP;
- to advance the well-being of the industry in which its members operate, although in that case the group or association would need to advance that well-being through substantial other activity in addition to providing health coverage.
Organization Structure and Employer Control
The final rule requires the association to have a formal organizational structure that includes a governing body and by-laws. Member employers must control the functions and activities of the association. While noting the factors are not exclusive, the DOL provides three factors that would assist in demonstrating sufficient control: (1) employer members nominate and elect directors, officers, trustees, or other members of the governing body; (2) authority of the employer members to remove the members of the governing body; and (3) whether employer members participating in the plan can approve or veto decisions related to plan formation and design, including changes in coverage benefits, and premiums.
Critics of the proposed rule expressed concern about the potential for AHPs to cherry pick consumers to ensure a healthier population of enrollees. The final rule contains nondiscrimination requirements that expand the HIPAA nondiscrimination requirements. An AHP may not discriminate against a member employer based on the health status of their employees. For example, an employer may not be excluded from participating in the AHP based on the health status of their employees. An individual’s health factor may not be the basis for differences in eligibility, benefits, or premiums within a group of similarly situated individuals. A group or association may not treat the employees of different employer members as separate groups based on a health factor. For example, an association may not differentiate premiums to member employers based on the health status of the member employers’ employees.
However, different benefit packages, pricing, and premiums are permissible across various classifications of similarly situated individuals. An AHP may use bona fide classifications to differentiate eligibility, benefits, or premiums such as:
- full-time versus part-time employment;
- different geographic location;
- date of hire;
- length of service;
- current versus former employees; and
- different occupations.
The preamble provides examples such as an agricultural AHP that offers a different benefit package to dairy farmers than to corn growers, or a metropolitan AHP that offers different pricing to retailers than to restaurants. Unlike the protections offered by the ACA, an AHP is permitted to vary premiums based on gender and age. The final rule states that the use of non-health factors is subject to state regulation.
The final rule also permits AHPs to vary benefits and contributions based on wellness programs. The adjustment can be up to 30 percent of the total cost of coverage, or 50 percent if the program is meant to prevent or reduce tobacco use.
The final rule permits self-employed individuals to purchase health coverage through an association. Previously, a self-employed individual or sole proprietor was considered an individual and therefore could not purchase insurance in the small or large group market. A “working owner” without common law employees, will be considered an employer and an employee, permitting the self-employed individual to join the association as an employer and purchase insurance as an employee. The definition of “working owner” requires an ownership right in a trade or business, the earning of wages or self-employment income, and working at least 20 hours per week or 80 hours per month. In support of this policy the preamble references the growth in the “gig economy” and permits an individual to aggregate hours worked across individual jobs and contracts in the same trade. The fiduciary of the AHP will be responsible for making a reasonable determination that eligibility criteria have been satisfied. AHPs are not required to include working owners and may set their own membership requirements.
The final rule states that independent contractors do not become employees “merely by participating in an AHP with those independent contractors, who would participate as working owners.”
Some states had requested the final rule not be implemented until 2020 to permit states to make applicable changes to existing state law. The DOL rejected this request but the final rule phases in the implementation of the new regulations. The regulations for fully-insured AHPs will be effective September 1, 2018; the regulations for existing self-insured AHPs will apply January 1, 2019; and the regulations for new self-insured AHPs formed based on the final rule will be effective on April 1, 2019. The final rule makes clear that current associations that meet the requirements of the earlier and more restrictive guidance may continue to operate. A new AHP may choose to follow the new policy or the earlier guidance.
The preamble also reiterates that applicable large employers subject to the shared responsibility provisions of the Internal Revenue Code may be required to make a shared responsibility payment if the AHP fails to provide minimum value coverage. AHPs must provide coverage for certain recommended preventive services without the imposition of cost sharing and remain subject to any state benefit mandates. While AHPs may not be required to cover EHBs (if providing coverage in the large group market), if the AHP covers an EHB than it must count the individual’s out-of-pocket spending for that benefit towards the maximum out-of-pocket amount and cover the benefit without any lifetime or annual dollar limit. The DOL is clear that state oversight and regulatory authority of AHPs and MEWAs are not displaced by the final rule. More specifically, states’ regulation of fully insured products will not be disrupted. States may also continue to apply insurance laws to self-funded AHPs if the state law is not inconsistent with ERISA.
The final regulation text also includes a severability provision. The regulation provides that if any portion of the rule is held to be invalid or unenforceable, the remainder of the rule should be severable and remain in effect.
There is concern that AHPs will attract younger and healthier consumers who would otherwise enroll in individual or small group market insurance. The DOL cites to CBO predictions that 400,000 uninsured individuals and 3.6 million people with existing coverage are likely to enroll in an AHP. The Society of Actuaries predicts that AHPs will reduce Exchange enrollment by 2 – 6% and that the healthier consumers are likely to leave Exchange plans. Insurers have indicated that premium increases for 2019 are the result of the expected expansion of AHPs, the elimination of the shared responsibility payment in the Tax Cut and Jobs Act, and the anticipated final rule that will expand access to short-term limited duration insurance.
An AHP in the large group market will not be required to provide EHBs and therefore could design coverage in certain circumstances without maternity coverage, prescription drugs, or even hospital coverage. AHPs will be permitted to develop premiums specific to age, gender, industry, or occupation. The final rule acknowledges that premiums in the individual market will rise and highlights that subsidized consumers in the Exchanges will continue to be shielded from these premium increases. However, those purchasing individual market coverage with household incomes above 400% FPL will not be protected from higher premiums. The DOL also recognizes that the additional flexibility granted to AHPs will increase opportunities for mismanagement and abuse, which will increase the burden on state and federal regulators.
The Massachusetts and New York Attorney Generals have announced they will file a lawsuit challenging the final rule. They joined the Attorneys General of fifteen other states to submit comments on the proposed rule. The Attorneys General expressed their belief that many of the proposed changes were contrary to ERISA and the ACA. Democratic members of Congress had requested the comment period be reopened on the basis that the administration employed incorrect economic analysis to support the proposed policy. The DOL received over 900 comments to the proposed rule. One survey found that over 95% of healthcare groups comments were critical of the proposed rules.
The Trump Administration is expected to finalize a rule expanding access to short-term limited duration insurance shortly. (HL Pulse summary available here).