The U.S. Department of Labor (DOL) has just released a final regulation allowing more employers to band together to form Association Health Plans (AHPs). The goal of the rule is to allow small employers to use the pricing power and more flexible regulations that apply to a “large employer” plan to provide more affordable health care. This advisory focuses on the changes made by the new rule and its effect on the group market, especially in Washington State, where AHPs are already popular. Part 2 will discuss the ability of independent contractors to use AHPs as an alternative to the individual market.
The New AHP Regulation
Under prior DOL guidance, it was relatively difficult to form an AHP. The plan had to be sponsored by a bona fide industry-based employer group or association that existed primarily for a business purpose other than providing insurance. The employer-members of the association had to exercise control of it through a formal organizational structure. If it met these rules the AHP could purchase health insurance like a large employer, rather than a collection of small employers. The new regulation retains the same basic rules as the prior guidance for industry-based groups, with the important change that the group can now be formed with the primary purpose of providing health insurance, although it must also have some other “substantial business purpose.” The new rule identifies advertising, education, or advancing the well-being of the industry as legitimate substantial business purposes. Also under the new regulation, for the first time an AHP can be established on a geographical basis, covering employers with their principal place of business in a single state or a single metropolitan area located in multiple states. Under this provision of the new regulation, a state or local Chamber of Commerce could sponsor an AHP for its members, even though they belong to many different industries.
Under the new AHP rules, employers get the benefit of obtaining “large employer” health insurance, including the fact that large employer plans do not have to provide the full range of required benefits that individual and small employer plans must provide under the ACA. But this benefit comes with a nondiscrimination flip side: new AHP plans cannot charge different employers different premiums based on the claims history or other health factors of their employees. In other words they cannot engage in “experience-rated” pricing. At the same time, the regulation provides examples of situations where different premiums can be charged based on non-health distinctions, such as between employers in a major city versus employers in rural areas within a state, or employers in different industry sectors.
Effect on the Washington Market
This nondiscrimination rule is a key difference from how AHPs have operated in the state of Washington. The preamble to the regulation notes that the Washington market is uniquely dominated by AHPs already. Up to half of small employers and one-third of all Washington employers get their health insurance through AHPs. AHPs in Washington rate in many different ways. AHPs have been allowed to experience-rate between employers and charge different premiums based on their claims history or other underwriting factors. The new regulation makes clear that AHPs formed under prior guidance do not have to comply with the same rules as AHPs formed under the new regulations—in particular the nondiscrimination rule.
In Washington, it will be business as usual for AHPs formed under prior DOL guidance, which are fully insured. The new regulation becomes effective September 1, 2018 for new fully insured AHPs. As AHPs formed under the new guidance come to market, small employers may have the choice of joining an existing industry-based AHP that charges premiums based on the health of their employees, or joining one of the new AHPs, which will charge more uniform premiums. The choices that will actually be available will greatly depend on how the Washington Insurance Commissioner regulates the AHP market with the new DOL rule in mind.