Federal And State Policy Toward Association Health Plans .
Federal and State Policy TowardAssociation Health Plans in OregonOctober 2014Kevin Lucia, Sandy Ahn and Sabrina CorletteCenter on Health Insurance ReformsGeorgetown University Health Policy Institute
With support from the Robert Wood Johnson Foundation (RWJF), the Urban Institute isundertaking a comprehensive monitoring and tracking project to examine the implementationand effects of the Patient Protection and Affordable Care Act of 2010 (ACA). The project beganin May 2011 and will take place over several years. The Urban Institute will document changesto the implementation of national health reform to help states, researchers and policymakerslearn from the process as it unfolds. This report is one of a series of papers focusing onparticular implementation issues in case study states. Reports that have been prepared as partof this ongoing project can be found at www.rwjf.org and www.healthpolicycenter.org.The quantitative component of the project is producing analyses of the effects of the ACA oncoverage, health expenditures, affordability, access and premiums in the states and nationally.For more information about the Robert Wood Johnson Foundation’s work on coverage, visitwww.rwjf.org/coverage.SummaryBefore the Affordable Care Act (ACA), some stateregulatory approaches created powerful incentives forhealth insurers to sell through associations to individualsand small employers, largely because they were exemptfrom key state consumer protections and requirementsthat would otherwise apply to health insurance sold inthe individual and small-group markets. Some expertssuggested these regulatory differences allowed forinsurers to segment the market by separating healthierindividuals and small groups from the less healthy,and provided an opportunity for insurers to offer lowerpremiums to those in better health status. In some states,many individual and small employers purchased healthinsurance coverage under associations referred to asAssociation Health Plans (AHPs). With the passage ofthe ACA, health insurance sold through an associationto individuals and small employers must meet the sameinsurance standards of coverage sold in the individualand small-group market. There are, however, rareinstances in which an association selling healthinsurance meets criteria under the Employee RetirementIncome Security Act (ERISA) and is referred to as an“ERISA bona fide group or association of employers.”1In this limited circumstance, the health insurance istreated as a single large-group health plan under ERISAand is not required to meet the ACA protections forsmall-group markets. Though many believed that thenewly level playing field created by the ACA wouldeffectively eliminate the incentive to market and sellhealth insurance through associations, this paper findsthat associations in Oregon offering health insuranceare claiming single large-group health plan status underERISA, thus sidestepping the requirements under theACA for the small-group market. Through interviewswith state regulatory officials, health benefit consultants,association representatives and insurers, this paperexamines the experience of the AHP market in Oregon,a state that had a sizeable AHP market before the ACA.We find that the AHP market continues to exist for smallemployers in Oregon and may be positioned for growth.IntroductionBefore the ACA, millions of individuals and smallemployers bought health insurance through associations,called Association Health Plans (AHPs). Associations,such as professional or trade associations, were oftencreated to further common economic or policyinterests and incidentally offered AHPs as a benefitto their members. Other associations, however, werecreated solely as a way to market and to sell healthinsurance.2ACA Implementation—Monitoring and Tracking: Cross-Cutting Issues2
Some states recognized AHPs as a separate insurancemarket or part of the state’s large-group market andregulated AHPs under regulatory standards distinctfrom health insurance in the individual and small-groupmarket.3 Sometimes the standards that applied to AHPswere different than standards in the individual and smallgroup markets, such as in the areas of underwritingrequirements, rate restrictions, portability protections,benefit mandates and rate review and form reviewrequirements.4 Often these regulatory differences servedas powerful incentives for insurers to sell AHP coverage,and they led to a sizable AHP market in some states.5For example, Oregon enacted legislation in 2007that exempted AHPs from its small employer marketrules, including restrictions on rating under certaincircumstances.6 In 2011, there were 23 small employerAHPs covering 10 percent (approximately 35,000 smallemployer members) of the total small-group market.7Other states with similar regulatory exceptions reportedlarge percentages of the individual or small-groupmarket being sold through AHPs.8 For example, in 2011more people in Washington received coverage throughassociations (over 485,000) than in the individual andsmall-group markets combined (over 472,000).9Under federal law, association coverage does not existas a distinct category of health insurance, and thegeneral rule is that health insurance policies sold throughan association to individual and small employers areregulated under the same federal standards that apply tothe individual or small-group market.10 These standardsinclude guaranteed access to coverage; restrictions onthe use of health status, gender and other factors whensetting premium rates; coverage of a minimum set ofessential health benefits; policies that meet four actuarialvalue tiers; and a review of rate increases. In addition,insurers are required to maintain one risk pool for eachmarket when setting premiums in the individual andsmall-group market as well as participate in the ACA’srisk and market stabilization programs.11 These standardsand programs were put in place to increase the sharingof health care risk across the individual and small-groupmarkets, thus increasing access and affordability forindividuals and small employers with higher-than-averagecosts.One important but limited exception applies whenan association meets a federal standard for being a“bona fide group or association of employers” underthe Employee Retirement Income Security Act (ERISA)(referred hereafter as “ERISA bona fide”) and its healthcoverage is treated as a single group health plan underERISA.12 Federal guidance states that this occurs in the“rare instance” where the association of employers isdeemed the “employer,” and is treated as sponsoringa single group health plan.13 Under federal law, healthcoverage under such a situation would be regulatedunder the standards applicable to the large-group marketif there are 51 or more employees of the employersparticipating in the association claiming “ERISA bonafide” status.14 In this case, most of the federal marketreforms that apply to the small-group market, suchas guaranteed issue, would not apply.15 See Table 1.Associations with individual members generally cannotmeet “ERISA bona fide” status because individualmembers are not employers.16The United States Department of Labor, which hasoversight responsibilities over ERISA group plans, maydetermine upon request whether an association meetscriteria to qualify its health plan as a single large-grouphealth plan under ERISA. In general, for an AHP tobe treated as a single large-group health plan underERISA, an association must be a group of employersbound together by a commonality of interest (outsideof providing a health plan) with vested control of theassociation to such an extent that they effectively operateas one employer.17 This is considered a “difficult standardfor most associations to meet”18 and federal guidancestates associations can meet this standard in “rareinstances.”19Because of the ACA, this exception had little significancebecause of the lack of federal requirements in thesmall-group market. Given that the ACA now imposescertain rating and benefit standards and rate reviewrequirements (among others) for the small-groupmarket that are not imposed on the large-group market,an association consisting of small employers has asignificant incentive to claim its health coverage as asingle large-group health plan under ERISA and beregulated as such under federal law.Some experts have raised concerns about this incentiveand the potential for adverse selection and increasedpremiums when different regulatory frameworks existfor the same type of health plan purchaser.20 Becausehealth insurers are generally allowed to adjust premiumsbased on health status and other permissible factors thatapply to the large-group market, small employers withyounger, healthier employees may find more competitiveACA Implementation—Monitoring and Tracking: Cross-Cutting Issues3
Table 1. Selective Affordable Care Act Insurance ReformsEffective January 1, 2014Market ReformaApplicability to a SmallEmployer PurchaserDescriptionSmall-groupmarket“ERISA bona fidegroup or associationof employers”(sponsoring a singlelarge-group healthplan under ERISA)Guaranteed IssueRequired to accept any small employer who applies forcoverage.YesNoaBan on PreexistingExclusion PeriodsProhibits insurers from imposing preexistingcondition exclusions.YesYesEssential HealthBenefitsRequires coverage of specified benefits defined in the law.21YesNoActuarial ValueRequires insurers to cover at least 60 percent of total costsunder each plan; requires plans to meet one of four actuarialvalue tiers (bronze, silver, gold, or platinum) as a measure ofhow the share of costs for covered benefits reimbursed by theplan, on average.YesNoRating RulesRequires insurers to vary rates based solely on four factors:family composition, geographic area, age and tobacco use;prohibits insurers from charging an older adult more than threetimes the rate of a younger person; prohibits insurers fromcharging tobacco users more than one and a half times the rateof a non–tobacco user.YesNoSingle Risk PoolIn setting premiums, requires each insurer to treat all smallgroup market coverage sold as a single risk pool.YesNoRisk AdjustmentProgram that redirects funds from insurers with low-riskparticipants to insurers with higher-risk participants.YesNoRate ReviewRequires review of proposed increases in health insurancepremiums and determine whether such rate increases arereasonable.YesNoOregon prohibits insurers offering group health plans to associations to decline coverage to any eligible member. Oregon Admin. Rule 836-053-0230.premiums under health plans regulated under largegroup rules.22 If this was the case, small employergroups with higher risk profiles may have less incentiveto purchase AHPs because they would be exposed tohigher premiums and larger rate increases and wouldlikely have difficulty finding an AHP providing coveragefor essential health benefits. Over time, if healthy groupsgravitate toward health insurance coverage through anassociation claiming that its coverage is regulated underlarge-group market rules; this could subsequently lead tomarket segmentation and adverse selection in the planssold through the small-group market, including the smallgroup marketplaces.allowing insurers to exclude high-cost groups or chargethem substantially higher premiums. A similar scenariooccurred in Kentucky in the mid-1990s, when thestate passed comprehensive health reform includingrequirements for community rating and standardizedbenefits in the individual market. However, AHPs wereexempted from these requirements, which led to a massexodus of insurers from the non-AHP market; only twoinsurers, of the approximately 23 that had been activein the individual market before reform, continued to sellnew individual policies outside of the AHP market.23 Onescholar noted that “the association exemption provided ahaven for healthy risks in the associations.”24Further, health insurers could have incentives to sellplans only through associations claiming “ERISA bonafide” status because the market is more profitable,To understand the effect of ACA implementation onthe AHP market, we conducted a case study of theAHP market in Oregon, a state in which a sizeableACA Implementation—Monitoring and Tracking: Cross-Cutting Issues4
AHP market existed before the ACA. We conductedin-depth interviews with state regulators and AHPmarket stakeholders such as health benefit consultants,associations and insurers that participate in Oregon’sAHP market. We considered the AHP market before theACA, changes in how Oregon regulates the AHP marketand whether the AHP market merged into the smallgroup market, as some experts assumed it would afterthe ACA was enacted. Lastly, we discuss the future of theAHP market in Oregon now that the ACA market rules arein place.Observations from OregonBefore the ACA, state regulators closely monitoredAHPs exempt from Oregon’s small-group marketrulesOregon eliminated the exemption of AHP coverage fromthe state’s small-group market reforms, including thestate’s rating restrictions, effective in 2014.28Before the ACA and under Oregon law, AHP coveragewas considered group coverage whether it was soldto an individual or a small employer member of anassociation.25 Oregon law exempted AHP coverage fromthe standards that otherwise applied to the small-groupmarket as long as the AHP met certain requirements.Association coverage was exempted from standardssuch as rating rules that significantly limited premiumadjustments based on health status and other factors.26To qualify for an exemption, the association had tohave been in existence for at least one year and not beorganized solely to market health insurance. Insurerswere required to submit the by-laws, constitution, andother documentation related to the association whenfiling for health coverage to be sold to an association.27In addition, the Oregon Insurance Division (OID) issuedguidance explaining that health insurance sold throughan association to an individual or small employermust comply with the applicable standards under theACA that apply to that market except in the “limitedcircumstances” that an association is considered a “truelarge-group as defined in federal law” (i.e., ERISA).29However, in the same guidance, OID stated that itwould not engage in an up-front certification processto determine whether or not an association “qualifiesas a true large-group” under ERISA “given the legalcomplexity and fact-specific nature involved withsuch an analysis and determination.”30 Instead, OIDrecommended that insurers or associations interested in“verifying large-group status under ERISA” contact theU.S. Department of Labor. State regulators indicated thatthe authority to determine whether or not health coveragethrough an association qualified for ERISA large-groupcoverage rests with the U.S. Department of Labor, andbecause it did not have the authority to make such adetermination, doubted that any state decision would“carry any weight” in this area.State regulators closely monitored the status ofassociations that offered health coverage. Beforeenactment of the ACA, the state reported between22 and 26 state-based, small employer associationswhose total number varied by year. Most respondentsnoted that membership in these associations was, forthe most part, focused on small employer membersof a single industry or trade, such as constructionservices, and not set up by an insurer “just to sell healthinsurance.” However, many respondents noted that someassociations have membership consisting of individualsfrom multiple industries or trades or including individualsthat maintained only a loose affiliation to the association’sprimary industry of focus, such as industry consultants,legal advisors or others.Oregon eliminated the AHP exemption from thestate’s small-group market rules, but associationscan still claim status under ERISA and have a singlelarge-group planOregon does not require that insurers obtain from anassociation a Department of Labor determination that itshealth coverage can be treated as a single large-grouphealth plan under ERISA before issuing large-groupcoverage to an association. Instead, because OID’sauthority extends to the insurer and not the association,OID requires insurers to attest that the association meets“ERISA bona fide” status before the issuer provides alarge-group plan to that association.31 Some respondentsquestioned OID’s reliance on an attestation, but stateregulators pointed out its plan to closely monitorinsurer compliance with the law and subject outliers tofurther scrutiny.32 State regulators noted that an insurerfound to be making a false attestation faces “seriousACA Implementation—Monitoring and Tracking: Cross-Cutting Issues5
administrative penalties.” Respondents indicated thatOregon’s approach contrasts with the approach of otherstates, such as Nevada and Montana, which requirea determination from the Department of Labor that theassociation meets “ERISA bona fide” status before anissuer can provide a large-group policy to an association.Overall, most respondents dismissed the practicality ofgetting an official advisory opinion from the Departmentof Labor that an association meets “ERISA bona fide”status so that its health coverage qualifies for largegroup status under ERISA. One insurer noted “gettingan opinion out of the Department of Labor could take ayear or more, and we didn’t have time for that.” Indeed,state officials recognized this timing issue and noted thatit contributed to OID’s decision to accept from an insureran attestation that an association meets “ERISA bonafide” status instead of requiring an upfront determinationfrom the Department of Labor. One state regulatorpointed out that the alternative option—requiringassociations to go through the Department of Labordetermination process—had the potential of “leavingsignificant numbers of consumers [association members]in a lurch and disrupting markets further.” Consequently,most insurers have simply asked the association toproduce a legal opinion that it meets the criteria for“ERISA bona fide” status, allowing the insurer to providea single large-group health plan.Respondents report many existing associations areclaiming to qualify under ERISA and obtaining largegroup coverage, sidestepping ACA market reformsfor the small-group marketAs noted above, depending on the year, 22 to 26 smallemployer associations offered AHP coverage beforethe ACA in Oregon. Respondents suggested that many(if not most) of these associations are now claiming“ERISA bona fide” status, effectively making their healthcoverage a single large-group plan under ERISA andthus not subject to the ACA requirements for the smallgroup market. Most, if not all, of these associationshad been established before the ACA and had beenoffering health coverage as a benefit to their members.Respondents indicated that these associations areplanning to continue offering AHP coverage to smallemployer members.Under Oregon’s framework, the self-attestation has ledto insurers and associations working together to pursue“ERISA bona fide” status. According to one insurer,“we put [the ERISA status determination] back on [the]association, but we give them guidance on steps theyneed to pursue to become a bona fide association.”Although all insurers we contacted asked the associationto provide a legal opinion supporting its status as“ERISA bona fide,” insurers’ approaches varied. Someinsurers simply required the association to provide anindependent legal opinion; others required more supportfor the association’s “ERISA bona fide” status claim.One insurer stated, “it is supposed to be a hard testbut everyone thinks they’re bona fide [under ERISA].”According to respondents, one particular Chamberof Commerce association had previously requestedan advisory opinion from the Department of Labor.They noted that the Department of Labor found thatthe chamber di
employers bought health insurance through associations, called Association Health Plans (AHPs). Associations, such as professional or trade associations, were often created to further common economic or policy interests and incidentally offered AHPs as a benefit to their members. Other associations, however, were
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