In the summer of 2017 the Republican leadership of Congress failed to achieve its goal of repealing and replacing the Patient Protection and Affordable Care Act (PPACA). In response to this situation, in Executive Order (EO) 13813, issued on October 12, 2017 President Trump directed the Secretary of Labor to modify the Employee Retirement Income Security Act’s multiple employer welfare association (MEWA) regulations to allow more sole proprietors and small businesses to band together in Association Health Plans (AHPs) as part of PPACA’s large group market. The large group market historically has been composed of employers who are subject to PPACA’s employer shared responsibility mandate. Smaller employers (less than 50 full time employees) are included in the small group market and individuals are included in the individual market. For purposes of this article, an AHP is a MEWA that offers health benefits coverage.
The Employee Retirement Income Security Act of 1974 (ERISA),1 which governs private sector employee benefit plans, contemplates three types of employer sponsored health plans:
- A single employer plan is sponsored by a single employer, which generally would include subsidiaries.
- A multiemployer plan is sponsored by a board of trustees composed of an equal number of employer and labor union representatives pursuant to a collective bargaining agreement.2
- A MEWA is “an employee welfare benefit plan, or any other arrangement…which is established or maintained for the purpose of offering or providing any [ERISA welfare] benefit * * * to the employees of two or more employers (including one or more self employed individuals), or to their beneficiaries.”3
EO 13813 explains that:
Large employers often are able to obtain better terms on health insurance for their employees than small employers because of their larger pools of insurable individuals across which they can spread risk and administrative costs. Expanding access to AHPs can help small businesses overcome this competitive disadvantage by allowing them to group together to self-insure or purchase large group health insurance. Expanding access to AHPs will also allow more small businesses to avoid many of the PPACA’s costly requirements. Expanding access to AHPs will also provide more affordable health insurance options to many Americans, including hourly wage earners, farmers, and the employees of small businesses and entrepreneurs that fuel economic growth.4
Overview of the AHP Rule
In furtherance of this aspect of EO 13813, the Secretary of Labor promulgated a proposed rule on January 5, 2018,5 and a final rule on June 21, 2018.6 The final rule makes the following key changes to the MEWA landscape by adding a regulatory definition of AHPs under the employer heading:7
- The final rule eliminates the Obama Administration’s sub-regulatory “look through” doctrine, which bases the large group, small group, or individual coverage determination for PPACA purposes on the employment size of the participating employer.8 Under the final rule, that determination will be made based on the AHP’s total enrollment.9 In other words, if the AHP’s enrollment is 50 or more members, then PPACA’s large group rules will apply to the entire plan.
- The final rule loosens the rules under which the Labor Department determines whether a group or association of employers is a bona fide group or association capable of sponsoring an ERISA plan on behalf of its employer members. Before the final rule, this analysis focused on three broad sets of issues:
- Whether a group or association is a bona fide organization with business/organizational purposes and functions unrelated to the provision of benefits;
- whether the employers share some commonality and genuine organizational relationship unrelated to the provision of benefits; and
- whether the employers that participate in a benefit program, either directly or indirectly, exercise control over the program, both in form and substance.10
The final rule permits an AHP to be formed by groups or associations of either related employers based on commonality of interest or unrelated employers based on geography, e.g., the same state or metropolitan area, which may include up to three states.11 The final rule permits the group or association’s principal purpose to be offering a health benefit program as long as the group or association has “at least one additional substantial business purpose unrelated to offering health benefits or other employee benefits.”12 The final rule also permits the group or association to extend health benefits coverage to sole proprietors / working owners who otherwise would have to opt for individual coverage under PPACA.13 The final rule prohibits health insurance issuers from creating AHPs, although health insurance issuers may underwrite AHP coverage.14
The Labor Department emphasizes in the preamble to the final rule that:
AHPs may continue to rely upon the Department’s previous guidance. This final rule provides an additional mechanism for groups or associations to meet the definition of an “employer” and sponsor a single ERISA-covered group health plan; it is not the sole mechanism.15
Federal and State Regulation over AHPs
The Labor Department pursuant to ERISA and state insurance regulators has regulated MEWAs for many years.16 The preamble to the final rule explains that:
The Department agrees that the final rule does not modify or otherwise limit existing State authority as established under section 514 of ERISA. If an AHP is fully insured, ERISA section 514(b)(6)(A)(i) provides that State laws that regulate the maintenance of specified contribution and reserve levels (and that enforce those standards) may apply, and State insurance laws are generally saved from preemption when applied to health insurance issuers that sell policies to AHPs and when applied to insurance policies that AHPs purchase to provide benefits. In addition, in the case of fully-insured AHPs, it is the view of the Department that ERISA section 514(b)(6) clearly enables States to subject AHPs to licensing, registration, certification, financial reporting, examination, audit and any other requirement of State insurance law necessary to ensure compliance with the State insurance reserves, contributions and funding obligations. Furthermore, under this framework, if an AHP established pursuant to this final rule is not fully insured, then, under section 514(b)(6)(A)(ii) of ERISA, any State law that regulates insurance may apply to the AHP to the extent that such State law is “not inconsistent” with ERISA.17
AHPs also will be subject to ERISA’s reporting and disclosure requirements, including the obligation imposed on MEWAs to submit Form M-1 annually.18
AHPs and the Health Insurance Portability and Accountability Act (HIPAA) Health Non-Discrimination Rules
The final rule also includes an adaptation of the HIPAA health nondiscrimination rules for AHPs along with 10 examples.19 A key nondiscrimination consideration is that “the group or association may not treat the employees of different employer members of the group or association as distinct groups of similarly-situation individuals based on a health factor of one or more individuals as defined in 29 CFR § 2590.702(a).” Notably, “an AHP may, however, treat employees of subsets of employer members as distinct groups of similarly situation individuals based on bona fide employment-based classification based on other, non-health factors, such as its industry or location, or its employees’ ages or genders, or occupations.” 20 The preamble adds that:
AHPs’ ability to discriminate based on non-health factors is subject to State regulation. As discussed in more detail in section B.7., below (entitled “ERISA Preemption and State Regulation of AHPs”), under ERISA section 514, States maintain significant authority to impose additional rating rules on insured AHPs through regulation of the underlying insurance policies obtained by AHPs to fund the benefits they provide, and may also impose similar requirements for self-insured AHPs.21
For example (drawn from the final rule):
Example 7. (i) Facts. Association P is an agriculture industry association. It sponsors a group health plan that charges employers different premiums based on their primary agriculture subsector, defined under the terms of the plan as: Crop farming, livestock, fishing and aquaculture, and forestry. The distinction is not directed at individual participants or beneficiaries based on a health factor.
(ii) Conclusion. In this Example 7, the premium distinction between members is permitted under paragraphs (d)(3) and (d)(4) because it is not based on a health factor and is not directed at individual participants and beneficiaries based on a health factor.22
Effective Dates, AHP Development, and Potential Enrollment
While the effective date for the final rule was August 20, 2018, the new regulation applies to fully insured AHPs effective September 1, 2018, to pre-existing groups or associations (as of June 20, 2018) that are not fully insured effective January 1, 2019, and to new groups and associations effective April 1, 2019.23 According to press reports, two Nevada chambers of commerce and a Wisconsin trade association for manufacturers are launching fully insured AHPs.24 The Congressional Budget Office predicts that 400,000 people who would have been uninsured will enroll in AHPs and 3.6 million people will enroll in AHPs who would have had other coverage, resulting in 4 million additional people enrolling in new AHPs.25
Pluses and Minuses of AHPs
AHPs will allow small employers to obtain coverage in PPACA’s large group markets, which is subject to fewer PPACA mandates, e.g., PPACA’s essential benefits rules apply to the small group market but not the large group market.26 Businesses generally expect that the fewer mandates will reduce premiums. Also, the large group market allows participants to take full advantage of age 26 child coverage because large group market plans can set one premium for the entire family group. In the small and individual market, the employee must pay an age rated premium for each individual covered under a family enrollment.
Critics, who describe PPACA’s mandates as consumer protections, contend that weakening the mandates harms employees and their covered family members as well as plans in PPACA’s small business or SHOP program. Critics also are concerned by the fact that self-insured MEWAs have a history marred by insolvencies and fraud.27
Legal Challenges to the Final AHP Rule
Not surprisingly, given the controversy over the final rule, on July 26, 2018 the attorneys general for 11 states and the District of Columbia, led by the State of New York filed a lawsuit against the Labor Secretary in the U.S. District Court for the District of Columbia. The lawsuit alleges that the final rule violates PPACA and related laws and therefore is invalid under the Administrative Procedure Act.28 On August 23, 2018, the plaintiff jurisdictions filed a motion for summary judgment which explains in pertinent part:
The Final Rule violates the PPACA by seeking to overturn Congress’s reforms of the individual and small group markets—reforms that were intended to ensure that individuals and employees of small employers could purchase or maintain comprehensive health insurance coverage. The Final Rule also violates ERISA and unlawfully upends nearly forty years of ERISA precedent. For the first time in ERISA’s history, the Final Rule deems sole proprietors with no employees (called “working owners”) to be eligible to form associations under ERISA. And in a dramatic departure from well-settled precedent and DOL’s own longstanding practice, the Final Rule allows entirely unrelated and separate employers in a state or metropolitan area to form associations, including associations created for the primary purpose of selling insurance for profit.29
In addition, insurance regulators from the plaintiff states and a few non-plaintiff states are expressing their concern about the final rule’s impact by placing limits on AHPs.30
The initial launch date for the fully insured AHPs was September 1, 2018, and the legal challenge in the District of Columbia federal court is proceeding apace. It will take some time for the AHP market to develop, assuming the courts permit the initiative to continue to move forward.
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1 29 U.S.C. 1001 et seq.
2 Id. § 1002 (37)(A). Multiemployer plans are authorized by Section 302(c)(5) of the Labor Management Relations Act of 1947, 29 U.S.C. § 186(c)(5).
3 Id. § 1002(40). The benefits may include medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services. Id. § 1002(1). For more information on the background of MEWAs, see NAIC Health and Welfare Plans under ERISA / Guidelines for State and Federal Regulation (2004), available at https://www.naic.org/documents/prod_serv_legal_ers_om.pdf.
4 82 Fed. Reg. 48,385, available at https://www.whitehouse.gov/presidential-actions/presidential-executive-order-promoting-healthcare-choice-competition-across-united-states/.
5 83 Fed. Reg. 614, available at https://www.regulations.gov/document?D=EBSA-2018-0001-0001.
6 83 Fed. Reg. 28,912, available at https://www.regulations.gov/document?D=EBSA-2018-0001-0725.
7 The statutory definition of employer is found in ERISA § 3(5), 29 U.S.C. 1002(5). The final rule adds a supplemental definition of employer at 29 C.F.R. § 2510.3-5.
8 The look through doctrine was created by the Centers for Medicare & Medicaid Services Bulletin concerning Application of Individual and Group Market Requirements under Title XXVII of the Public Health Service Act when Insurance Coverage Is Sold to, or through, Associations (Sept. 1, 2011), available at https://www.cms.gov/CCIIO/Resources/Files/Downloads/association_coverage_9_1_2011.pdf. The proposed rule discusses the look though doctrine at 83 Fed. Reg. at 619-20.
9 See 83 Fed. Reg. at 28,915 and note 8 thereto.
10 Id. at 28,914. For examples of MEWAs approved under the original rules, see Labor Department Advisory Opinions 2017-02A (May 16, 2017) and 2005-25A (Dec. 30, 2005), available at https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/ref/erisa-sec-3-5
11 29 C.F.R. § 2510.3-5(b). The HIPAA health nondiscrimination rules are found in ERISA § 702, 29 U.S.C. § 1182 and 29 C.F.R. § 2590.702. The Labor Department offers a self compliance test tool for these rules at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/compliance-assistance-guide-appendix-a.pdf.
12 Id. § 2510.3-5(b)(1).
13 Id. § 2510.3-5(b)(2).
14 Id. § 2510.3-5(b)(8).
15 83 Fed. Reg. at 28,916 and notes 11-12.
16 Source: https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/mewa-under-erisa-a-guide-to-federal-and-state-regulation.pdf.
17 83 Fed. Reg. at 28,959.
18 Id. at 29,838. See also the Labor Department’s AHP ERISA Compliance Assistance (issued in August 2018), available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/compliance-assistance-publication-ahp.pdf.
19 29 C.F.R. § 2510.3-5(b).
20 83 Fed. Reg. at 28,941.
21 Id. at 28,928.
22 29 C.F.R. § 2510.3-5(d)(5).
23 Id. at § 2510.3-5(f).
24 Source: https://associationsnow.com/2018/08/nevada-chambers-unite-form-association-health-plan/ and https://www.biztimes.com/2018/ideas/government-politics/wmc-creating-statewide-association-health-plan-for-employers/.
25 83 Fed. Reg. at 28,212 and note 2.
26 See Id. at 28,933. The pluses and minuses of the AHP rule are discussed at length in the preamble to the final rule. Should an AHP enroll a company that is an applicable large employer for PPACA purposes, that company would be subject to PPACA’s employer shared responsibility provisions which mandate coverage for full time employees who work 30 or more hours weekly or 120 or more hours monthly. See IRS guidance on those provisions, available at https://www.irs.gov/affordable-care-act/employers/employer-shared-responsibility-provisions. Should an AHP enroll a small employer which is not subject to that mandate, the employer could allow employees who could receive subsidized PPACA marketplace coverage to elect coverage from a marketplace plan.
27 Source: Commonwealth Fund Issue Brief “MEWAs: The Threat of Plan Insolvency and Other Challenges, at 2-3 (2004), available at https://www.commonwealthfund.org/sites/default/files/documents/___media_files_publications_issue_brief_2004_mar_mewas__the_threat_of_plan_insolvency_and_other_challenges_kofman_mewas_pdf.pdf.
28 New York v. U.S. Department of Labor, Civil Action No. 1:18-cv-1747 (D.D.C.) (Bates, J.).
29 Plaintiffs’ Motion for Summary Judgment, at 1, available on PACER.
30 Source: http://www.modernhealthcare.com/article/20180807/NEWS/180809927/states-draw-sharp-limits-on-association-health-plans. Restrictions include requiring the AHPs to protect people with preexisting conditions and to offer state or PPACA mandated essential benefits.