Association Health Plans – The Final Rule Is Issued

Earlier this month, the Department of Labor (DOL) released its Final Rule seeking to expand the scope of participation in Association Health Plans. The Final Rule, titled “Definition of ‘Employer’ under Section 3(5) of ERISA – Association Health Plans”, with a few revisions, codified the Proposed Rule. At its heart is a change to the criteria under ERISA under which employers may join together and be treated as the “employer” sponsor of a single multiple-employer benefit or group health plan under ERISA. This blog post provides an overview of the specifics of that change, and the potential opportunities that may result from the Final Rule.

What Is It About

The heart of the Final Rule is a modification of the definition of “employer” under ERISA to expand the pool of employers who may come together and sponsor group health coverage. The change would allow small employers who would not otherwise be able to qualify to join together and collectively have a vehicle, the Association Health Plan (AHP), to offer that coverage to their employees. These employers must simply meet the new “commonality of interest” test, a test which is now quite flexible. The benefit of doing so, among other elements, is that such employers (and sole proprietors) will no longer have to meet the insurance requirements of the ACA for small group insurance offerings.

The Changes Made By The Final Rule

Under ERISA (Section 3(5)), an “association of employers” is allowed to manage employee benefit plans offering health insurance to the member employers. To protect those who are covered, the requirement has been that such associations consist of a “bona fide” group of employers, with a “commonality of interest”, and the employer members were required to control—in form and substance—the activities and operations of the AHP. This is to help insure that the association is a true representative of its employer members, and provide the “protective nexus” that differentiates ERISA plans from insurance arrangements. Thus, there has been an established rule that there must be “some cohesive relationship” between the provider of benefits and the recipients. And, in an important wrinkle, under the existing law, self-employed working owners, i.e. sole proprietors, with no other employees, would not be able to join a qualifying AHP as they could not be covered by ERISA (because they have no employees).

The Final Rule makes a number of critical changes that broaden the scope of employers and sole proprietors that can now participate in AHP’s. Importantly, in adopting the Final Rule, DOL  also confirms the ability to existing AHPs to continue to act in reliance on the existing framework and guidance.

A. The Commonality of Interest Test

The Final Rule  establishes “alternative criteria” for determining whether employers have the required commonality of interest that are substantially different from the previous rules and guidance and which, while facially retaining the over-arching commonality and control requirements, redefine the requirements to meet those requirements in such a way as to minimize their impact. Under the Final Rule, it will be sufficient if there the association of employers has “one substantial purpose unrelated to the provision of benefits”, even if the group or organization’s principal purpose is the provision of insurance benefits.

Notably, the Final Rule provides no definition of just what a “substantial business purpose” might be. Instead, the Preamble notes it might be sufficient if the bona fide group or association, in addition to its insuring activity, convened conferences or offered classes or education materials on “business issues of interest” to AHP members, or served as a standard setting organization, or engaged in public relations activities, such as advertising, education or publishing on business issues of interest to association members. The only proviso is that the activity be “substantial enough that the association would be a viable entity even in the absence of acting as a sponsor of an AHP.”

Put differently, an association could be formed for the principal purpose (or already exist for some unrelated purpose) of sponsoring an AHP, and as long as it engaged in some other activity that was “substantial”, that would be sufficient to permit the association to sponsor an AHP.

As for the commonality requirement for the group members themselves, the employers must either be in the same “trade, industry, line of business or profession” or have a principal place of business (of the employers that are participating) in the same region that does not exceed the boundaries of a single State or metropolitan area – even if the metropolitan area includes more than one State (e.g. Greater NYC Area/Tri-State Region, including portions of NY, New Jersey and Connecticut). The DOL notes that in promulgating this new standard, the terms used are to be construed broadly to expand coverage, and it will consider the use of any “generally-accepted” classification system. Subsets may also meet this standard. Thus, the DOL notes that “information technology” firms would be a sufficient nexus, as would a subset consisting of cloud storage companies. Or, restaurant owners who were in the military, as a subset of all restaurant owners, could similarly pass muster as having the required commonality.

B. Employer Control

The Final Rule retained the concept of employer control as a necessary condition to meet the ERISA statutory requirements for an AHP. The DOL viewed it as important to prevent the creation of commercial enterprises that were AHP’s, but were “in reality” designed to operate as health insurers, but with far less oversight and regulation. Thus to a large extent, the existing requirements applicable to AHPs prior to the Final Rule were maintained. That said, the Final Rule does not require that employer-members engage in day-to-day management of the association or AHP, and a “facts and circumstances” test will be applied. The DOL, however, does indicate that if there factors are present, that would be sufficient: (1) whether employer members nominate and elect directors; (2) whether employer members can remove a director with or without cause; and (3) whether participating employer members have the authority and opportunity to approve or veto decisions which relate to formation, design, amendment and termination of the plan, focusing on changes to coverages, benefits and premiums.

C. Sole Proprietors

The Final Rule specifically addresses what it calls the “dual treatment” of working owners as employers and employees. It provides that such individuals, who operate without common law employees, can qualify as both an employer and an employee, and thus can join an AHP as an employer and receive health coverage as an employee. The working owner in this instance means anyone with an ownership right “of any nature” in a trade or business, including a partner or other self-employed individual, who works on average at least 20 hours per week or 80 hours per month providing services to the working owner’s trade or business, or has wages or self-employment income from that trade or business that is at least the amount of the cost of coverage for that working owner and any covered beneficiaries. Thus, where previously access to group health coverage would not be available to sole proprietors, a sole proprietor now would be counted as an employee of a single group or association employer. Finally, verification of acceptable status is left to the plan fiduciaries, who may rely on written documentation or a sworn statement submitted by the working owner, without independent verification.

D. Nondiscrimination Requirements

The goal of nondiscrimination requirements is to prohibit discrimination with respect to benefits and premiums for similarly situated individuals. This can be a complex area, focused on specific facts and circumstances (e.g. full time vs. part time, bargaining unit member, et al.) and a full discussion is beyond the scope of this blog entry. However, the basic rules that were applicable to AHP’s before adoption of the Final Rule around prevention of discrimination in conditioning membership on any “health factor” remain in force, including the permitted exceptions.

The Opportunity

If the Final Rule survives legal challenge, there are a myriad of opportunities (and risks) for entities previously not able to obtain insurance as a part of a larger group under the existing rules may be able to participate in an AHP. Three examples may illustrate the scope of possibility.

First, virtually any type of existing trade association should be able to meet the necessary associational and control requirements. Such an association would then be able to make a health plan product available to its members as a potentially profit making offering that may also help bind the members more tightly to the association.

Second, hospitals and hospital based systems should be able to create an AHP to offer health benefits to their aligned medical staffs. There certainly could be the necessary commonality of interest, and the captive insurers of such systems may be able to play a significant role in facilitating the necessary insurance relationships, as well as desirable stop loss coverage. And, properly structured, the reach of the fraud and abuse laws should be capable of being avoided.

Third, a franchisor should be able to offer an AHP to its franchisees to enable those franchisees to offer health benefits to their employees.  Such an arrangement could provide substantial benefits to franchisees, and make the offering franchisor a more attractive business proposition in the competitive franchise business marketplace.

The Role of the States Remains Pivotal

Notwithstanding the desire of the administration to create a more flexible environment to allow small employers to take advantage of the new definitions to negotiate lower premium insurance, the role of the States remains pivotal. As the DOL notes, the ERISA preemption rules are not changing. This means that there remains the potential for broad State insurance regulation, either through the health insurance issuers through which coverage is purchased, or directly in the case of self-insured AHPs. Thus:

  1. A self-funded AHP is subject to state regulation, just like non-fully insured MEWAs are.  Some states regulate them as insurance companies; other states take a somewhat less intrusive regulatory role;
  2. The group itself may be unacceptable under State law; and
  3. The type(s) of insurance that can be sold to the AHP can, and will, be regulated by the States.

What this means is that, to a great extent, while the DOL has sanctioned a very broad expansion under ERISA, it will, in the main, look to the States for effective oversight.  For example, the AHP’s ability to discriminate based on non-health factors is specifically called out as being subject to State regulation. Similarly, the States will be able to exercise authority to impose additional rating rules on fully-insured AHPs.

The Effective Dates

The applicability date for fully-insured AHPs is set for September 1, 2018. For any employee benefit welfare plan that is not insured, the applicability date is January 1, 2019.

The Future

How the AHP “alternative criteria” effort will unfold is an open question. In March, as the Proposed Rule was being considered, the Attorneys General of 17 States submitted a strong comment letter opposing key elements of the proposal. Shortly after the Final Rule was adopted, two of the signatories to that letter, New York and Massachusetts, immediately indicated their intent to file litigation to enjoin the Final Rule as inconsistent with the applicable statutory basis. Whether the other States who signed on to the joint comment letter will join, remains to be seen.

Even if that lawsuit fails, state insurance regulators in many states will likely take actions to limit the scope of AHPs on the same or similar bases as those regulators have historically regulated or prohibited MEWAs.

Finally, and perhaps most importantly, while cheaper coverage is clearly a desirable goal, the ultimate impact on the insurance markets and the quality of insurance being offered remain open questions. For example, because AHPs will not be subject to the essential health benefits requirements, there may be an adverse selection impact across insurance markets that will create material problems for higher risk populations.  This could leave small groups as a whole with reduced access to affordable health insurance.