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The US Department of Labor’s final rules for association health plans are well intended but fall short on delivery, says Phillip Giles of QBE North America.
In late June, nine months since originally proposed by Executive Order 13813, the US Department of Labor (DOL) issued its final rules for association health plans (AHPs) which will go into effect on August 20, 2018.
The intent of both the proposed and the final AHP rules is to deliver expanded options for more affordable healthcare plans to smaller employers, including self-employed individuals. The new rules allow a grouping of small employers to band together to replicate the size and risk profile of a much larger single entity. This allows the collective grouping to attain greater underwriting credibility and lead to enhanced pricing leverage and reduced administrative costs.
The proposed AHP rule would have amended the definition of an “employer” within the Employee Retirement Income Security Act (ERISA).
ERISA regulates the voluntary delivery of employee benefits from an employer to its employees. Since its enactment, ERISA has become the pre-eminent legislation governing employee benefit plans. The prevailing thought among legislatures at the time of its ratification in 1978, was that if employers considered benefit delivery to be too onerous or expensive, many employers might cut back or even discontinue their benefit offerings to employees.
The twofold intent of this legislation was to provide definitive rights and (non-discriminatory) protections to benefit plan participants while simultaneously streamlining plan administration, compliance and delivery for employers.
The latter point has been particularly significant for multi-jurisdictional employers, as ERISA provides one uniform set of regulations prescribed at the federal level to reduce an employer’s burden of having to comply with differing insurance regulations and benefit mandates in every state of their operation. In 1983, ERISA was amended to delegate regulation of Multiple Employer Welfare Arrangements (MEWAs) to individual states.
The AHP rules, as originally proposed earlier this year, represented some promise for expanding the structural options available for smaller employers by expanding the definition of an “employer” to include a grouping of related employers. This would, essentially, allow the association to be viewed as if it were a single employer under ERISA. Unfortunately, what was delivered in the end was just a slightly more defined version of the status quo.
The final rules help define what entities are eligible to form and participate in an AHP, but they also allow each state to continue regulating AHPs under their existing MEWA legislation. Instead of having a uniform set of regulations nationally, we are left with the same inconsistent, fragmented patchwork from one state to the next.
There is also no mandate requiring any state to permit an AHP and currently, only about half of the states permit MEWAs—even fewer allow self-funded MEWAs. The lack of sufficient continuity will create regulatory conflicts and inhibit the formation of multijurisdictional AHPs.
This impedes the ability of most national associations, that would otherwise meet the “bona fide entity” requirements (outlined below) from offering an AHP to members.
Consequently, we are left with regulations that allow individual self-funded employers with the ability to pre-empt state insurance mandates but do not empower self-funded MEWAs with the same capability.
Limited latitude for self-funded plans
The publicity surrounding the originally proposed rules has increased market awareness of, and maybe curiosity about, MEWAs which may have generated some level of exploratory activity in new formations. However, the final rules appear to provide more structural and regulatory latitude to fully-insured plans and materially discourage self-funding of AHPs which will constrain growth within a market segment that would have contributed to greater stability in the cost of benefit delivery for many smaller employers.
In terms of captive market implications, it’s important to understand that the typical AHP will comprise a grouping of very small entities (and possibly even individuals) that are much too small to self-insure on their own. Unless an AHP can attain a sufficient collective size and achieve the consistent track record of underwriting credibility and claims profitability required for self-funding, conversion to a captive structure would not be a viable consideration.
Assuming an AHP can achieve a sustainable self-funded structure, it would still take about three to five years of experience credibility before conversion to a captive would be prudent.
Other significant challenges for a prospective AHP will be to first achieve bona fide status as defined by the Department of Labor’s final rules. To qualify, the group of employers must have a “commonality of interest” such as being engaged in the same trade, industry, line of business or profession. The association must also demonstrate at least one substantial business purpose unrelated to the provision of health insurance coverage. According to the final rule, a commonality of interest standard is met if the association would be a viable entity in the absence of sponsoring an employee benefit plan.
There are a few options for self-funded AHP formation. New and existing employer groups that meet the qualifying bona fide group standard can establish an AHP under the Department of Labor’s existing rules if they are in the same industry (ie, homogeneous) and within the same geographic location. Under the new rules, newly formed homogeneous industry groups can be formed and are not subject to geographic restriction. “Unrelated” (ie, heterogeneous) AHPs can be considered for approval if membership is confined to within the same state or metropolitan area. Both types of groups must meet the bona fide group standard.
In short, it will be easier for homogeneous groups, having a legitimate trade connectivity, to demonstrate the requisite “commonality of interest” than for heterogeneous groups. The guidelines for demonstrating the “substantial business purpose” needed to achieve the commonality of interest standard by the association seem ambiguous but could potentially be reached through the offering of association member services such as advertising, educational sessions, business conferences, and the like.
As mentioned above, the lack of regulatory uniformity from one state to another will be a challenge to multijurisdictional AHP formation. The AHP rules, via ERISA, preserve state regulation of MEWAs from regulatory pre-emption which extend to self-insured AHPs. Therefore, AHPs having employer members in multiple states, such as those sponsored by national trade associations, could be subject to competing sets of state-level MEWA compliance regulations. The most likely option would be to form AHPs on a state-by-state basis within states permitting MEWA formation.
It’s also worth noting that the originally proposed rules would have allowed AHP formation solely for health plan sponsorship. I fully support the decision not to include that in the final rules as it helps prevent AHP formation by non-affiliated third-party programme managers not appropriately vested in long-term performance. Non-vested third-party sponsorship (and profiteering) was fairly prevalent in the early MEWA days of the late 1980s and early 1990s and resulted in widespread insolvencies and tightened regulation.
Faded optimism for expanded opportunity
I was optimistic, albeit cautiously, that the originally proposed rule would lead to increased opportunities for groupings of smaller employers to participate in structural options typically reserved only for larger entities. However, the final version of the rule is quite diluted and only seem to preserve the existing, fragmented, state-based MEWA structure that has been in place for many years, maybe with a bit more definition in terms of qualifying parameters.
I have been working with several well-established self-funded MEWAs that have expressed an interest in converting to a single parent captive, and I expect that more existing MEWAs will explore the same option, at least through the formal feasibility process.
If nothing else, the new rule process has increased market awareness of AHPs and MEWAs, which may lead to some new formations, but I believe that this will deliver only moderate—much less than originally anticipated—impact within the self-funded market and will have even less impact in the captive world.
Phillip C. Giles is vice president–sales and marketing, accident & health, at QBE North America. He can be contacted at: firstname.lastname@example.org
Phil Giles, QBE North America, AHPs, Health, Captive insurance, North America