Association Health Plan Final Rule May Bring New Coverage Options for Small Businesses and Self-Employed

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. 

Overview of AHP Final Rule

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 requires insurers that offer products in the large group market to accept all employers that apply for coverage, regardless of the health factors of their employees. In the AHP final rule, the DOL extended this protection to employers (including working owners) applying for coverage with an AHP; that is, an AHP, like any other group health plan, “cannot discriminate in eligibility, benefits, or premiums against an individual within a group of similarly situated individuals based on a health factor.” 83 FR 28925

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.

Clarifications and Modifications to the Proposed Rule

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:

1. Existing and New AHPs Can Form Based on Pre-Rule Guidance. The DOL clarified that the final rule is one of two separate and distinct pathways to achieving bona fide association status: AHPs that qualify as a bona fide association under prior, more stringent commonality of interest and governance criteria (“pre-rule guidance”) may continue to operate and are exempt from the final rule’s requirements, including the rule’s nondiscrimination requirements. For example, as noted above, many AHPs in existence today adjust rates for each employer-member based on the employer-member’s claims experience, but this practice is prohibited for new AHPs formed under the parameters of the final rule.
2. Substantial Business Purpose Test for Associations Formed Under the New Rules. Whereas the proposed rule would have allowed AHPs to form solely to provide health coverage to employer-members and their employees, the DOL added an additional criterion in the final rule: the association must have a “substantial business purpose” unrelated to the provision of health coverage and other employee benefits. Specific examples of acceptable “substantial business purposes” include acting as a standard setting organization, hosting conferences or other educational opportunities for the employers and promoting a common business or economic interests.
3. Definition of “Working Owner” Is Further Relaxed. Working owners, such as individuals with passive ownership in a trade or business or self-employed individuals, can be treated as both an employer-member and employee for purposes of participating in an AHP. The final rule modifies the proposed definition of “working owner” by allowing the individual to qualify if, among other things, he or she works at least 20 hours per week or 80 hours per month (reduced from 30 hours per week and 120 hours per month), or has wages or self-employment income that equals the cost of coverage in the AHP. The final rule also clarifies that hours and wages in the same trade can be aggregated across jobs or contracts.
4. Compliance With Other Federal Laws Pertaining to Health Coverage. Without providing an exhaustive list of federal rules that may apply to AHPs, DOL addresses how certain federal laws apply to AHPs:
   • Employer mandate and minimum value: DOL clarified that the association itself is not generally required to comply with the employer mandate or minimum value requirement; however, any employer-members that are applicable large employers who participate in an AHP could face penalties if the AHP fails to provide minimum value coverage.
   • Title VII of the Civil Rights Act (as amended by the Pregnancy Discrimination Act of 1978): AHPs covering employers with 15 or more employees must reimburse for pregnancy-related expenses for employees and their spouses in the same manner as those incurred for other medical conditions.
   • Mental Health Parity and Addiction Equity Act (MHPAEA): Whether an AHP must comply with the MHPAEA will be based on the total number of employees employed in the aggregate during the preceding calendar year by the employer members of the bona fide group or association. In other words, most AHPs likely will be subject to MHPAEA as large groups.

Effective Dates

Except with respect to existing AHPs that satisfy the pre-rule guidance, the final rule becomes applicable to AHPs in a staggered fashion:

• For new fully insured AHPs, the rule will apply beginning on September 1, 2018.
• For self-insured AHPs already in existence as of August 20, 2018, the rule will go into effect beginning on January 1, 2019.
• For new self-insured AHPs formed pursuant to the final rule’s requirements, the rules will apply beginning on April 1, 2019.

Looking Ahead

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.