On June 19, 2018, the Trump administration took the first step in a three-part effort to expand affordable health plan options for consumers when the U.S. Department of Labor (DOL) finalized a proposed rule designed to make it easier for a group of employers to form and offer association health plans (AHP). A final rule relaxing rules around short-term, limited duration insurance and a proposed rule addressing health reimbursement arrangements are expected in the upcoming months. In cementing proposed changes to its January 2018 proposed rule, “Definition of ‘Employer’ Under Section 3(5) of ERISA — Association Health Plans,” the administration seeks to broaden health options for individuals who are self-employed or employed by smaller businesses. The final rule will be applicable in three phases starting on September 1, 2018.
Under the rule, it will be substantially easier for a group of employers tied by a “commonality of interest” to form a bona fide association capable of offering a single multi-employer benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA). The rule outlines two primary bases for establishing this “commonality of interest”: (1) having a principal place of business in the same region (e.g., a state or metropolitan area), or (2) operating in the same industry, trade, line of business or profession. An association also may establish additional membership criteria enabling entities with a sufficient “commonality of interest” to participate in the AHP, such as being minority-owned or sharing a common moral or religious conviction, so long as the criteria are not a subterfuge for discrimination based on a health factor. Further, the final rule clarifies how the association must be governed and controlled by its employer-members in order to be considered a bona fide association capable of offering a single-employer health benefit plan.
Meeting the criteria for a bona fide group or association of employers in the final rule allows the AHP to be treated as a single-employer ERISA plan. Thus, assuming the association is comprised of employer-members with more than 50 total full-time employees, it will be considered a large group and exempt from key Affordable Care Act (ACA) market reforms, such as the essential health benefits requirements and modified community rating rules, that would otherwise apply to a health plan offered by any of its individual employer-members with less than 50 full-time employees. This is important because the ACA applies certain requirements only to small group (and individual) health insurance products and not to large group plans.
The ACA nondiscrimination rules define a “health factor” as: health status, medical condition (including both physical and mental illnesses), claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. Small group rating laws not only prohibit experience rating but they also identify a maximum corridor for annual changes in the premium rate. Typically the range is 15%. This provides protection against the claims experience of one individual in any given year.
The final rule also clarifies that an AHP may treat each employer-member as a distinct group of similarly situated individuals, so long as it is not done on the basis of a health factor. Thus, while many existing AHPs use claims experience to underwrite each employer-member separately, AHPs formed under the final rule will not be able to do so; instead, the AHP may only vary premium rates across employer-members for non-health factors, such as age, geography, group size, or industry.
Although the final rule largely resembles the proposed rule, the DOL addressed several important issues raised or left open by the proposed rule. Some of the more important clarifications are below:
Except with respect to existing AHPs that satisfy the pre-rule guidance, the final rule becomes applicable to AHPs in a staggered fashion:
Following the publication of the final rule, state attorneys general for Massachusetts and New York announced their intent to challenge the DOL’s authority to make certain changes in the final rule. Specific parts of the rule that may be challenged include the change to the definitions of a “bona fide association” and “working owner” on the grounds that the new interpretations are inconsistent with ERISA and decades of caselaw. More broadly, states may also take issue with the relatively fast ramp-up period before the rules take effect. While some states like California and New Jersey have already taken action to limit the rule’s effects on their insurance markets, the rapidly approaching effective dates could hamper individual states’ ability to impose more stringent requirements on AHPs in the interests of enhanced consumer protection and/or to mitigate potential adverse selection. The DOL announced no concrete plans to step up federal oversight of AHPs, thus presumably leaving primary enforcement and oversight responsibility with state insurance departments.