The Affordable Care Act comprehensively reforms health insurance in the United States.  Its central reform provisions apply to “a group health plan and health insurance issuer offering group or individual health insurance coverage,” that is, to individual, small group, large group, and even self-insured coverage.

In fact, however, the ACA does not cover all forms of health insurance.  The ACA insurance reforms are effectuated through amendments to Title XXVII of the Public Health Services Act, which contains a number of exceptions.  The ACA reforms, for example, do not apply to specific disease or fixed dollar indemnity plans, or to short-term, limited duration coverage.  There is already some evidence that insurers are considering moving away from mini-med policies to fixed dollar indemnity policies to avoid the ACA reforms.

More importantly, some of the most significant ACA reforms, such as the essential benefit coverage requirement, the risk adjustment program, the exchanges (until 2017), and — as HHS has interpreted it — the potentially unreasonable premium increase approval requirement, only apply to small group and individual plans and not to large groups.  There is, therefore, a considerable incentive for insurers to seek to characterize their business as large group rather than small group or individual coverage to avoid ACA requirements that do not apply to large groups. One of the most obvious ways to do this is through association health plans (AHPs). 

AHPs (some of which are at times known as group trusts or multiple employer welfare associations (MEWAs)), are arrangements in which an insurance policy is held by an association to cover its members, or through which an association self-insures for the benefit of its members.  The association in turn issues certificates of coverage to its members, who are thus insured through the association.  An association may be a legitimate professional or trade association which incidentally offers health insurance to its members as a benefit.  It may also be a captive of an insurance company, established specifically to market the insurer’s products. Alternatively, an association may be established by an independent entity, like a professional employer organization, that exists to market a range of products including health insurance.

Variation And Uncertainty In The Regulation Of AHPs

Many states regulate AHPs differently than they regulate other plans that market to individuals or small groups.  About half the states also regulate out-of-state associations less stringently than in-state associations, or do not regulate them at all.  AHPs that market to individuals are treated like group plans under the laws of some states and are thereby able to escape state regulations imposed on the individual market. AHPs that market to small groups are also regulated by some states as large group plans.  To the extent that state laws require community rating or in some other way limit health status underwriting in the individual or small group market, but not in the large group market, AHPs can facilitate risk selection by insurers and adverse selection by healthy enrollees. AHPs have effectively undermined attempts by several states to reform health insurance markets

AHPs were traditionally regulated under HIPAA according to the market in which they sold their products: associations that sold coverage to individuals were regulated as individual plans and those that marketed to small groups were regulated as small group plans.  Last year’s medical loss ratio regulations seemed to carry on this interpretation of the law.

The status of associations was called into question this spring, however, when HHS issued its premium review regulations.  The ACA requires health insurance carriers to justify “unreasonable increases in premiums.”  When HHS issued its final regulation on premium review on May 23, 2011, however, it excepted large group insurers from the requirements of the statute. This posed immediately the question of whether associations that had enough members to qualify as a large group, if they were a single group, should have their premiums reviewed if they marketed to small groups and individuals.  HHS did not resolve this question in the May 23 final regulation but rather requested comments.

HHS received 30 comments in response to its request, including comments from the NAIC, consumer organizations, state regulators, providers, insurers, associations, and trade groups representing associations.  Most comments were supportive of reviewing the premiums of associations that marketed to small groups as small group rates and of those that marketed to individuals as individual rates.

HHS’ Definitive Answer On The Regulatory Status Of AHPs

This is the position that HHS adopted.  The revised final rule released on September 1, 2011 could not be clearer.  Rates of plans that would be reviewed as individual or small group coverage if the coverage were not sold by associations must be reviewed as individual or small group rates.

The regulation goes much further than that, however.  In the preamble, HHS clarifies that it is merely applying to the rate review provisions of the ACA the rule that otherwise applied under the Public Health Services Act and that will apply to the application of other ACA provisions.  The AHP loophole is closed.  AHPs will continue to exist; indeed they will thrive if they can actually offer their members operating efficiencies and lower premiums or better coverage than the market otherwise offers.  But they will have to comply with ACA consumer protections and will not be able to cherry pick, which would undermine the exchanges and the stability of the market generally. The fact that three of the seven associations that commented on the proposal reportedly supported the rule indicates that it will be quite possible for associations to comply with it.

The preamble to the regulation also clarifies several other issues.  First, the preamble clarifies that the rule applies whether or not an AHP could be classified as “bona fide” under HIPAA.  “Bona fide” association plans were free under HIPAA from certain requirements, but the ACA applies to AHPs regardless.  Second, the rule clarifies that in states where state law does not authorize review of the rates of insurance sold in the state by out-of-state associations, HHS will itself review the rates.  This seems to be the case in about half of the states.  Finally, the preamble clarifies that states that lack the authority to review out-of-state association rates will not otherwise be considered to lack an effective rate review program or automatically be ineligible for rate review program grants.

Areas Of Potential Concern

One aspect of the rule is somewhat troubling. The preamble notes that under some circumstances, plans sponsored by an association of employers can be recognized as a single ERISA plan.  This is because the definition of “employer” under ERISA (which is incorporated into the ACA through the Public Health Services Act), includes an association of employers that meet certain requirements.  If the plan covers employers with more than 100 employees it could be considered a large group plan, free from rate review.

Not just any association can meet this requirement, however.  The Department of Labor has laid down a strict fact and circumstances test that ultimately considers whether “the person or group that maintains the plan is tied to the employers and employees that participate in the plan by some common economic or representation interest or genuine organizational relationship unrelated to the provision of benefits.”  Under this test, DOL advisory opinions cited in the rule preamble have concluded that a chamber of commerce association plan that covered a number of groups was not a single ERISA plan, but that association plans controlled by employers in a single industry that had a preexisting relationship might be.  Of course, the association would be regarded as a single ERISA plan, and would have to comply with ERISA requirements that apply to plans.  But this exception may cover a number of associations and will need to be carefully monitored to avoid evasion of the rule.

One other major loophole in the ACA may be more difficult to close.  A number of ACA requirements that apply to the individual and small group market (including again, for example, the essential benefits package and risk adjustment) do not apply to self-insured plans. There is some evidence that insurers are marketing stop-loss coverage to small employers that allow small employers to “self-insure” with virtually no risk.  This could allow small employers to opt out of the consumer and market protections of the ACA as long as their employees remain healthy, but opt back in when their stop-loss coverage rates go up.

DOL and Treasury should consider defining “self-insured,” a term that is used in the ACA but never defined, to ensure that employers that self-insure actually bear significant risk and avoid sham self-insurance.  Alternatively, the states should regulate stop-loss coverage more closely to ensure that insurers are actually offering stop-loss coverage and not unregulated high-deductible comprehensive insurance.

There are still loopholes to close, but today was a victory for American health care consumers and for the Affordable Care Act.