On October 12, 2017, President Donald Trump issued an executive order concerning health care coverage. The White House also posted two summaries of the order. If carried into action, the provisions of the executive order would likely siphon healthy people from of the Affordable Care Act-compliant market, continuing a pattern of regulatory actions under the Trump administration that have undermined the ACA.

The executive order has several main components. First, it calls generally for expanding competition and choice in health care markets and for improving the information available to consumers while reducing reporting burdens (that would presumably be needed to make that information available). Second, it directs the Department of Health and Human Services, in cooperation with the Secretaries of Treasury and Labor and the Federal Trade Commission, to report to the President within 180 days and every 2 years thereafter on steps that could be taken to accomplish these goals.

The primary operative parts of the executive order, however, are provisions that direct the Departments of Treasury, Labor, and Health and Human Services to consider making changes in current regulations and guidance governing health care coverage in three specific areas. First, the executive order directs the Department of Labor to consider within 60 days new rules and guidance “to expand access to health coverage by allowing more employers to form AHPs [association health plans].”

Second, the order directs the three departments to consider within 60 days regulations to expand the maximum length of short-term, limited-duration coverage and to make it renewable by the consumer.  Third, it directs the Departments of Treasury, Labor, and Health and Human Services to within 120 days consider revising rule and guidance “to increase the usability of HRAs, to expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup coverage.”

The Order’s Case For Change

The executive order begins by reciting perceived failures of the Affordable Care Act (ACA):  rising premiums for ACA coverage, reduced insurer participation in exchanges, and reduced exchange enrollment. There is some truth in these assertions. However, many of the problems the individual market is experiencing are certainly due to actions the Trump administration has taken to undermine ACA coverage, and there is good evidence that the ACA market could have stabilized absent those actions. This post, however, specifically addresses the Trump administration executive order, the legality of the measures it proposes, and their likely effects, not the claims it makes.

The Steps Between The Executive Order And Regulatory Action

It must be emphasized that this is only an executive order. It is not a change in the law or even in regulations. It is a direction to draft rules. Under the Administrative Procedure Act these agencies will first have to publish proposed rules and then receive and respond to public comments before publishing the rules in final form. The fact sheet accompanying the order acknowledges that regulations will proceed through notice and comment rulemaking. This will likely take months.

Indeed, rulemaking will likely be proceeded by studies by the affected departments, and any proposed and final rules will likely have to be reviewed by the Office of Management and Budget. Therefore, changes are unlikely to affect plans beginning on January 1 of 2018, although some changes may take effect mid-year.

Association Health Plans

The executive order first instructs the Department of Labor to expand the availability of association health plans under the Employee Retirement Income Security Act of 1974 (ERISA).

Legal Background

ERISA was adopted in response to the failure of several private sector retirement plans in the 1960s and was primarily intended to ensure the security of retiree benefits. It also, however, applies to “employee welfare benefit plans,” defined in ERISA to mean

any plan, fund, or program . . . established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits. . .

Participants must be employees, former employees, or members of employee organizations and beneficiaries are their dependents.

Group health plans offered by employers or employee organizations are, therefore, governed by ERISA. ERISA group health plans are subject to various reporting, disclosure, and fiduciary requirements under ERISA itself. They are also subject to requirements imposed by the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which prohibits, for example, denying employees coverage or charging them premiums based on their health status. Group health plans are explicitly subject to the Affordable Care Act’s health care coverage reforms

Group health plans as such, however, are not subject to state insurance regulation. ERISA contains a provision that preempts state law. This provision is subject, however, to certain exceptions, such as criminal law. The preemption provision, contains one particularly important exception—it does not preempt state laws regulating insurance. This leads to one of the most important distinctions in ERISA law: insurers that insure group health plans are subject to state laws and regulations—for example, mandates prescribing the services they must cover or regulations governing claims or marketing practices. But states cannot regulate the underlying employer-health plan that is insured. And they cannot—subject to an important exception described below—regulate self-insured plans, that is plans in which the plan sponsor rather than insurer bears the risk.

Over 60 percent of employees are in self-funded plans, including over 90 percent of workers in companies with 5,000 or more employees (although some self-funded plans are government or church plans not subject to ERISA). Because ERISA plans are not subject to state regulation, they can be and are in fact offered across state lines.

If associations, such as chambers of commerce, professional or trade associations, or just enterprising entrepreneurs who start up associations to attract healthy enrollees (formerly called “air breather” associations) could offer health plans as ERISA group health plans, they could conceivably be free from some state regulations and could market across state lines. They might also enjoy a second regulatory advantage: If an association covered more than 50 enrollees (and almost all would), it could conceivably be considered a large group plan under the ACA.

Many of the most important protections of the Affordable Care Act apply to individual and small group plans. These include the essential health benefit and metal-level requirements and several provisions intended to deter health plans from excluding or charging more to people with preexisting conditions—such as rules that limit the factors plans can consider in setting premiums, a requirement that all plans be considered part of a single risk pool, and a risk adjustment program to move funds from insurers that avoid high-cost enrollees to plans that cover them. Large group plans can avoid covering essential services like mental health care and substance use disorder treatment and, although they technically are not supposed to exclude preexisting conditions or charge higher rates to people with them, they are in fact less constrained in doing so.

Large group plans remain subject to some ACA rules: they must cover preventive services and adult children up to age 26, and cannot exclude preexisting conditions or impose annual or lifetime limits. But even here, protection may be limited. Annual and lifetime limits only apply to essential health benefits, and a restrictive interpretation of EHBs could seriously limit this protection.

If association health plans could market health coverage claiming to be self-insured large group plans, therefore, they could be free from state regulation and could market plans with skimpy benefits and find it easier to cherry pick healthy enrollees and avoid unhealthy one. This is obviously the goal of the Trump Executive Order.

But the matter requires closer inquiry. The Affordable Care Act defines “group health plan” by reference to the definition of the term in the Public Health Services Act. The PHSA, in turn, defines “group health plan” by reference to the ERISA definition of “employee welfare benefit plan,” but specifies that a “group health plan” provides coverage to employees and their dependents. Moreover, the ACA defines “group market” coverage as coverage through “a group health plan maintained by an employer.”

These definitions seem to leave little room for association health plans, which are by definition are not plans offered by an employer to employees. But here the law gets (even more) confusing. ERISA states that “employer” means “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity.” It also defines “employee organization” to include not only labor unions and similar organizations but also “employees’ beneficiary association organized for the purpose in whole or in part, of establishing” and employee benefit plan. Finally, ERISA defines “multiple employer welfare arrangement” (MEWA) to mean “an employee welfare benefit plan, or any other arrangement (other than an employee welfare benefit plan), which is established or maintained for the purpose of offering or providing” benefits such as health care” to the employees of two or more employers (including one or more self-employed individuals), or to their beneficiaries . . .”

A Checkered History For AHPs

From the earliest days of ERISA, associations cropped up selling health coverage and claiming ERISA protection from state insurance regulation, identifying themselves as employer or employee associations. A number of these associations were scams, which defrauded their members and left millions of dollars of claims unpaid when they became insolvent. In 1982, Congress amended ERISA to give states regulatory authority over self-insured MEWAs and some regulatory authority to ensure solvency over insured MEWAs, including requiring them to be licensed and to submit financial reports (states, of course, retain regulatory authority over insurers that insure associations). States have much greater capacity and a far better track record of dealing with fraudulent association plans than the federal government.  Fraud by association plans continued, however, despite state regulatory efforts.

The Affordable Care Act did not outlaw association health plans. It took several steps to limit their abuses, however. First, it imposed reporting requirements on MEWAs, imposed criminal penalties on MEWA fraud, and authorized the Department of Labor to take immediate action to deal with fraudulent MEWAs. It also dropped from the “guaranteed availability” provision of the PHSA an exception that had existed for bona fide association plans. An insurer that offers coverage through an association must offer the same plan to non-members who want it, if they can find out about it. Associations themselves are not subject to guaranteed availability requirements and will likely be able to find ways to winnow healthy from unhealthy applicants.

But most importantly, the ACA nowhere recognizes associations as having special status. Distinctions under prior law for “bona fide” associations, more or less disappear. The ACA simply defines large group, small group, and individual plans, without reference to how they are offered. Association plans continue under the ACA, but under regulations and guidance, associations that offer coverage to individuals are subject to the individual market rules and associations that offer coverage to small groups are subject to the small group coverage rules. These include the essential health benefit requirements and rules intended to prohibit cherry picking.

There is, however, a possible exception to this regulatory approach. ERISA recognizes association health plans covering small groups under certain circumstances as single-employer large group plans. A group of small group plans could, that is, be treated as a single large group. To date the Department of Labor has interpreted this exception quite narrowly to apply only when a “bona fide” group of employers is bound together by a commonality of interest (other than simply providing a health plan) with vested control of the association so that they effectively operate as a single employer. Association plans offered by general business groups or that include individual members do not qualify, a position that the Department of Labor has reaffirmed as recently as this year. In a few states, pre-existing association plans reorganized as single trade or occupation plans to qualify for this exception and continued to operate.

The Executive Order Would Allow AHPs Broad Latitude To Cherry Pick Healthy Groups

The Trump executive order seems to propose broadening the single-employer exception. Each small group plan member of the single-employer group would still be an ERISA plan and arguably subject to the ACA’s small group requirements.  But the administration seems to want to change this, treating them as large group plans. The order specifically states: “To the extent permitted by law and supported by sound policy, the Secretary should consider expanding the conditions that satisfy the commonality‑of-interest requirements under current Department of Labor advisory opinions interpreting the definition of an “employer” under section 3(5) of the Employee Retirement Income Security Act of 1974. The Secretary of Labor should also consider ways to promote AHP formation on the basis of common geography or industry.”

A regulation that would do this could do further damage to the ACA small group market, as associations would pick off healthy groups. They would limit benefits that are needed by high-cost enrollees, age rate to exclude older groups, and market only to healthy groups. Groups with older, higher-cost enrollees would remain in the ACA-compliant small group market, which would drive up premiums for these groups. The executive order says that the associations could not discriminate against unhealthy employees. But single employer associations do indeed discriminate against unhealthy small groups, and they could easily find ways to become unattractive to unhealthy employees, such as not covering services they need.

The ACA-compliant small group market has already been undermined by small groups purchasing generous stop-loss coverage and claiming to be self-insured, and by healthy groups remaining in transitional, grandmothered plans. The administration also announced earlier this year that the federally facilitated SHOP exchange would no longer sell small group coverage online. Association health plans could finish the ACA-compliant small group market off.

These association plans would still involve multiple employers and thus still be MEWAs. They would thus be subject to state regulation. They could not be sold across state lines free from any state oversight. Only if states decided not to exercise their regulatory authority or if the administration found some way to preempt state MEWA regulation, would sale across state lines exempt from state regulation be possible. ERISA does allow the Secretary of Labor to preempt some state regulatory authority with respect to specific plans or classes of MEWAs involving ERISA plans, something the administration seems to be considering, but even under this authority DOL cannot preempt state solvency requirements, or licensing or reporting authority with respect to solvency issues.

While there might be a path for the Trump administration to allow small group association coverage through ERISA MEWAs, the administration could not legally extend association coverage to individuals under ERISA. ERISA deals with group health plans that cover employees or former employees. Employee plans must have at least one employee. A self-employed person is not an employee, and a self-employed person’s spouse cannot be counted as an employee. Extending ERISA large group coverage, and ERISA state law preemption, to individuals would seem to be clearly contrary to the purpose and requirements of ERISA. The executive order does not seem to reach this far.

There is also a question as to whether, even if the administration could find a way to allow associations to sell coverage free of state regulation, this would really result in sale of insurance across state lines. Health insurance coverage is almost universally provided currently through network plans. Associations would have to form or rent networks wherever they did business, which would be an impediment to sale in multiple states. Even within a single state, however, associations could undermine ACA-compliant coverage.

Association coverage has long been opposed by the National Association of Insurance Commissioners because of its tendency to segment the individual market, undermine consumer protections, and lead to fraud and insolvency. The American Academy of Actuaries has raised the same concerns. Moreover, a primary argument for association health plans before the ACA—that they would aggregate the bargaining power of small groups to deal with insurers—is no longer relevant as the exchanges offer greater bargaining power than any association could.

When legislation expanding association health plans passed the House in 2004, it was opposed by over 1,000 state government, business, labor, consumer, and physician and provider groups, including many small business organizations and chambers of commerce. Twenty consumer and disease organizations signed a letter opposing association health plan legislation this spring. The administration is trying to achieve through executive fiat a result that Congress has consistently rejected.

Short-Term Coverage

The second part of the executive order deals with expanding short-term coverage. Short-term coverage has long existed to provide coverage for individuals in coverage gaps, for example, between jobs or between school and a job. It also, as the executive order notes, may be useful to people who want a broader choice of insurers or provider networks than are available through the exchange or who missed signing up during open enrollment.

HIPAA, the first attempt by the federal government to impose some regulations on the individual market, exempted short-term coverage from its regulatory grasp, presumably because the requirements HIPAA imposed, like requiring guaranteed availability or some form of continuation coverage, were not appropriate for short-term coverage.

The ACA simply adopted the HIPAA individual market definition, completely excluding short-term coverage from its grasp. Short term coverage is not subject, therefore, to the ACA’s guaranteed issue and guaranteed renewal requirements; age rating and cost-sharing limitations; prohibitions on health status underwriting, annual and lifetime limits, preexisting condition exclusion clauses; essential health benefit requirements; or any other consumer or market protections. Short term coverage is also exempt from many state law insurance mandates and regulations. Few states explicitly define or regulate short term coverage, but many specifically exclude it from state law requirements.

Under the ACA, however, an individual who had only short-term coverage and not some other form of ACA-compliant coverage would be out of compliance with the individual responsibility requirement and would have to pay the penalty for noncompliance.

Short term policies in fact generally offer skimpy coverage. They impose limits on coverage, omit benefits like mental health or maternity coverage, exclude coverage of preexisting conditions, and have higher out-of-pocket limits than ACA-compliant coverage. They also are very profitable to insurers who offer them, having much lower medical loss ratios than ACA-compliant coverage. Finally, they are cheap for people who qualify for them.

Neither HIPAA nor the ACA defined how short “short-term” is, but regulations that antedated the ACA required the term of coverage to be less than 12 months not taking into account any renewals to which the enrollee was entitled. In the fall of 2016, the departments of Labor, Treasury, and HHS promulgated regulations limiting shot term coverage to a period less than three months. This accords with the time period that individuals may remain without coverage without having to pay the ACA’s individual responsibility penalty. The policy contract and all application materials connected with enrollment also had to prominently display a warning stating that the short-term coverage did not satisfy the individual coverage mandate.

The regulation also provided that the less-than-three-month limit applies to any extensions “that may be elected with or without the issuer’s consent.” This provision was intended to keep insurers from indefinitely extending short-term coverage. The Departments, however, rejected the suggestion from commenters that individuals not be allowed to purchase short-term coverage if they had previously been covered under a short-term policy, deeming such a policy to be too difficult to enforce. Insurers are not therefore, actually prohibited from renewing short-term policies as long as they do not guarantee renewability, and some no doubt do.

Although some insurers have supported the three-month definition, others have pushed for restoring the less-than-one-year definition. The NAIC has argued that the issue should be left up to the states, but few states have in fact addressed the issue. In June, a number of Republican senators asked the administration to return to the prior definition.

Likely Consequences Of Allowing Full-Year Short-Term Coverage

Allowing individuals to choose full-year short-term coverage in lieu of ACA-compliant coverage could have several results. First, and most importantly, it could siphon off healthy enrollees from the ACA-compliant marketplace. This could leave the marketplace risk pool—but also the off-marketplace risk pool—with a higher-risk population, driving up premiums. It might also drive some insurers from the ACA-compliant market.

Second, full-year short-term coverage would deprive short-term product enrollees of essential ACA protections, such as coverage of preexisting conditions. And third, it would leave short-term enrollees without immediate access to ACA-compliant coverage if they had an accident or illness and needed more extensive coverage. Loss of short-term coverage would not qualify an individual for a special enrollment period; thus, an individual enrolled in short-term coverage would not be able to move to ACA-compliant coverage until the next open enrollment period.

Fourth, allowing full-year short term coverage could cause consumer confusion, with consumers who enroll in short-term coverage believing they are getting health insurance.

It is not clear whether the administration will try to make short-term coverage minimum essential coverage, thus freeing people who enroll in it from the individual responsibility penalty and allowing them to enroll in ACA-compliant coverage if they lost their short-term coverage. This might well not be possible since the ACA explicitly recognizes short-term coverage as not ACA compliant. Doing this would even further undermine the ACA-compliant market.

Health Reimbursement Arrangements

Finally, the Executive Order directs the agencies to reduce restrictions on the use of Health Reimbursement Arrangements (HRAs). This could allow more generous funding of HRAs. But its primary intent seems to be to allow the use of HRAs to pay for premiums in the individual market.

An HRA allows employers to fund medical care expenses for their employees on a pre-tax basis. HRAs were not prior to 2016 formally recognized in the Tax Code, but were rather created by IRS guidance. They qualify for pre-tax treatment only because they are considered group health plans, and thus not subject to tax under the group health plan exception under the Tax Code.

An HRA must be funded solely by employer contributions and can only be used to reimburse an employee for the medical care expenses (as defined by the IRS) of the employee or dependents up to a maximum dollar amount. Any unused portion of the maximum dollar amount may be carried forward to subsequent years. If certain rules are followed, neither employer contributions to nor employee reimbursements from a HRA are subject to income tax.

HRAs are not explicitly mentioned in the ACA. However, the IRS, in collaboration with the Departments of Labor and HHS, concluded that, as a form of group health plan with tax-exempt employer contributions, HRAs must comply with ACA group health plan requirements, including the ACA’s preventive services coverage mandate and prohibition on annual limits. Thus, an employer cannot use a HRA simply to pay premiums for coverage of employees and their dependents in the individual market. HRA contributions can only be sheltered from taxation if they are coupled with an ACA-compliant group health plan. This was the position that the Departments took in a series of guidances beginning in 2013, subject to limited exceptions.

A Small-Employer Exception From HRA Limits In The Cures Act, But A Strictly Limited Exception

In 2016, Congress adopted in Title XVIII of the [21st Century] Cures Act a new type of arrangement, the Qualified Small Employer HRA (QSEHRA), that is effectively an exception to the HRA prohibition, but only for small employers — employers that have fewer than 50 full-time equivalent employees and therefore are not subject to the large employer mandates. These employers may pay or reimburse employees through a QSEHRA for premiums for health insurance that qualify as minimum essential coverage.

The Cures Act exception, however, is tightly circumscribed. A QSEHRA must be solely funded by the employer without employee contributions, the payments cannot exceed $4,950 per year ($10,000 for family coverage), and contributions must be provided on the same terms to all eligible employees (although payments may vary insofar as premiums vary based on age or the number of family members). Employees may be excluded as ineligible if they are under age 25, employed for fewer than 90 days, part-time or seasonal employees, subject to a collective bargaining agreement that covers health benefits, or certain non-resident aliens. QSEHRAs meeting these requirements are defined to not be group health plans but will still benefit from the group health plan tax exemption.

Individuals who receive QSEHRA contributions are not eligible for premium tax credits if the monthly premium for self-only coverage for the benchmark second-lowest cost silver (70 percent actuarial value) plan in their “relevant individual insurance market” falls below a threshold: one half of 9.5 percent of the employee’s household income minus the QSEHRA premium contribution. If coverage is not affordable under this formula—if the benchmark premium exceeds the threshold—the employee may qualify for a premium tax credit, but it will be reduced by the amount of the QSEHRA contribution.

Employers must provide their eligible employees notice at least 90 days before the beginning of a year for which they offer a QSEHRA 1) that it is available and 2) that employees must have minimum essential coverage to receive QSEHRA premium contributions tax free. The employer must state in the notice that employees should inform the marketplace of the availability of the funding if they apply for marketplace coverage. Employers are also required to report the amount of the benefit on their employees’ W-2s. Most of the provisions of the law become effective as of any plan years following the end of 2016.

Expanding the use of HRAs to pay for individual premiums of course, raises concerns for market segmentation. If employers can dump their unhealthy employees into the marketplaces, they will surely degrade the marketplace risk pool. In adopting the CURES Act, Congress essentially accepted the Departments’ interpretation of the how HRAs should be treated under the ACA and created a limited exception. It is difficult to see how the administration can unilaterally expand the limited exception Congress created without legislative authority, particularly without the guardrails Congress thought necessary.

Achieving Through Regulation What Couldn’t Be Done In Congress

President Trump’s executive order appears to be part of a larger strategy of undermining the ACA. Other decisions of the Trump administration—creating uncertainty as to funding of the cost-sharing reduction payments, reducing advertising and navigator funding for marketplace enrollment, cutting the length of the open enrollment period, closing the marketplace for maintenance for hours each week—seem intended to drive down marketplace enrollment and drive up ACA-compliant coverage premiums. This strategy seems to have been quite effective—premiums are up dramatically for 2018 for individuals who do not have the benefit of premium tax credits.

The second step in the strategy is to open doors for young and healthy people to flee that ACA-compliant market and find lower premiums. All three of these measures do this. Their apparent intent is to siphon healthy people out of the ACA-compliant market, causing the risk pool to become every less healthy and more costly, possibly leading to collapse in some states. These measures could also leave a significant number of participants in the small group and individual market without the protections Congress intended to give consumers when it adopted the ACA. If the changes go into effect for 2018, markets could destabilize immediately, with some insurers exiting the individual or small group markets.

All summer some Republicans in Congress attempted unsuccessfully to repeal the ACA. The rules that will follow from the executive order may to a substantial degree achieve the goal Congress refused to accept.