On October 12, 2017, President Trump signed a “Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States” (the “Executive Order”) to “facilitate the purchase of insurance across state lines and the development and operation of a healthcare system that provides high-quality care at affordable prices for the American people.” One of the stated goals in the Executive Order is to expand access to and allow more employers to form Association Health Plans (“AHPs”). In furtherance of this goal, the Executive Order directed the Department of Labor to consider proposing new rules to expand the definition of “employer” under Section 3(5) of the Employee Retirement Income Security Act of 1974 (“ERISA”). The Department of Labor issued its proposed rule on January 5, 2018 and its final rule on June 19, 2018.

In Part 1 of this “Deep Dive” series, we examined the history of AHPs and the effects of the changes proposed by the Trump Administration by providing a high-level, summary overview of the three types of arrangements that fall under the umbrella of health arrangements sponsored by associations, which include Affinity Arrangements, Group Insurance Arrangements and AHPs. In Part 2 of this “Deep Dive” series, we compared plan features of the three types of arrangements under current law. In Part 3 of this “Deep Dive” series, we examined the qualification requirements for AHPs under current law. In Part 4 of this Deep Dive Series, we examined the qualification requirements for AHPs under the proposed rule, then explained why the new requirements, if enacted in their proposed form, would result in the polar opposite outcome from the intended result enunciated in the Executive Order.  In this installment of the “Deep Dive” series, we will explain how the final rule differs from the proposed rule.

Pre-2018 Qualification Requirements for AHPs

ERISA provides that an employee benefit plan may be maintained by an association of employers that effectively operates as a single employer. Under guidance issued before 2018, to constitute a bona fide association of employers, the members of the association must:

• have a commonality of interest unrelated to the provision of benefits;
• exercise control over the benefit plan; and
• consist of employers with at least one employee.

In addition, the association itself must

• be a pre-existing organization; and
• exist for a purpose other than providing health coverage to its members.

Proposed Rule-Qualification Requirements for AHPs

The proposed rule retained some of the current AHP requirements and modified or eliminated other existing requirements, as follows:

• The commonality of interest requirement was significantly expanded to allow employers who are either in the same line of business or industry or in the same geographic area to join together for the purpose of providing health insurance to their employees. As a result, more organizations would be permitted to sponsor association health plans than is the case under existing law.
• The requirement that the AHP consist solely of employers with at least one employee was eliminated. As a result, sole proprietors and other self-employed individuals would be allowed to participate in AHPs for their own benefit.
• The requirement that the association be a pre-existing organization was eliminated.
• The requirement that the association exist for a purpose other than providing health coverage to its members was eliminated.
• The proposed rule retained the requirement that the employer-members control the AHP and would also require that the AHP have a formal organizational structure with a governing body and bylaws (or similar indication of formality).

The New Nondiscrimination Requirement in the Proposed Rule.

In a significant departure from current law, the proposed rule prohibited AHPs from varying premiums across groups of employers except in very narrow circumstances. As explained in our fourth Deep Dive installment, commercial insurance carriers are not so limited except to the extent of state and federal community rating requirements applicable to small groups. Under the proposed rule, AHPs would have been forced to quote basically the same rates for all member employers, while commercial carriers are allowed to quote unhealthy large employer groups at higher rates than healthy groups, ultimately resulting in adverse selection in the AHP market. Large employer groups with higher-than-average claims would have a financial incentive to join AHPs, and healthier-than-average-groups with lower costs would inevitably choose to purchase health insurance from commercial carriers. This dynamic would result in AHPs enrolling, on average, more costly groups than carriers in the non-AHP market. As a result, AHPs would then be required to increase premiums across the board, diminishing the ability to attract even moderately healthy groups, resulting in further market segmentation and destabilizing the AHP marketplace.

The Final Rule-Good News for AHPs

The final rule for the most part follows the proposed rule, with a few changes and clarifications. One notable change is that the sponsoring association must now have at least one sustainable purpose in addition to providing health insurance to members. In addition, the final rule now explicitly states that an association is treated as being in the same trade or business as the employer members of the group or association and, as a result, may participate in an AHP covering the association’s members.

And now the good news. In response to concerns expressed by commenters, the Department of Labor has conceded that plans which meet the pre-final rule AHP qualification requirements described above need not meet the final rule AHP requirements. In other words, the requirements in the final rule constitute an alternative method of meeting the requirements to constitute an AHP. This means existing and new AHPs need not satisfy the final rule’s nondiscrimination requirements as long as they meet the AHP requirements as in effect before the final rule.

Any association which wants to form an AHP will almost certainly attempt to qualify under the pre-final rule requirements in order to avoid complying with the unworkable nondiscrimination provisions. Those organizations which may only qualify under the final rule requirements will face significant headwinds. As will be explained in a future Deep Dive, forming a startup AHP requires considerable time, effort and resources, as well as a strong insurance company partner. Without the ability to rate member firms based on health experience, the headwinds will reach gale force. As a practical matter, therefore, we expect the final rule will have little real-world application.

Next “Deep Dive”: Forming an AHP: Legal and Governance Structures