Myths Vs. Facts Regarding AHPS

Wednesday, August 4, 2010 - 8:00pm

Myth: Small business health plans (SBHPs), also known as association health plans (AHPs) will allow organizations to "cherry pick" only the healthiest individuals, leaving the states' small group markets to care for the sickest individuals.

FACT: SBHPs are prohibited from being able to "cherry pick."

  • The language clearly states that the bona fide association must provide all interested employers (regardless of age, health status, etc.) with information regarding all coverage options available under the plan.
  • Under the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), an individual or employer cannot deny coverage based on health status or claims experience. SBHPs would be subject to all the preexisting condition, portability, nondiscrimination, special enrollment and renewability provisions under HIPAA. Thus, it will not be possible for SBHPs to "cherry pick" because sick or high risk groups or individuals cannot be denied coverage.
  • The language clearly prohibits discrimination based on health status by stipulating that any member of an association who is eligible for membership benefits be furnished with information regarding all coverage options available under the plan and may not be excluded from enrolling in the plan because of health status.
  • The bill requires that the contribution rates for any particular employer must be nondiscriminatory. This means that contribution rates for employers cannot vary on the basis of any health status-related factor with respect to employees of particular employers or on the type of business or industry in which the employer is engaged. This holds true unless the state where that small employer is located would specifically allow such a variation, and then, only to the extent that the state would allow.
  • State insurance rating laws DO apply to fully insured health products offered by SBHPs. The legislation does not preempt state laws that govern the rating of insurance products offered by associations. The legislation does not supercede or impair the law of any state with respect to issuers or health insurance coverage – insurance carriers of fully insured SBHPs would continue to be required to maintain the state requirements and laws such as prompt pay laws, solvency requirements, and external review laws.

Myth: According to the studies by Congressional Budget Office (CBO) and Mercer, SBHPs would result in as many as 100,000 workers losing their coverage, increase insurance premiums for 80% of small business workers, and cause as many as one million people to lose their coverage as a result of higher premiums.

FACT: These studies make a number of flawed assumptions and opponents of SBHPs take these numbers out of context. The Mercer consultant study was prepared at the request of an organization opposed to the legislation.

  • The CBO study (on which the Mercer study is based) makes a series of flawed assumptions:
      It assumes SBHPs will be able to "cherry-pick" the market despite strong protections in the legislation to prevent this.
      It assumes SBHPs cannot provide administrative cost savings compared to the cost of a small firm buying coverage from an insurance company despite real experience showing that SBHPs do achieve administrative savings.
      It assumes small firms will offer only "bare bones" benefit packages, when the reality is that small businesses must compete against large businesses for employees and therefore must offer competitive benefit packages.
      The studies do not account for the merits of increased health plan competition because of the entry of SBHPs into the market, as well as the benefit of bringing young, healthy individuals who are now uninsured into the health plan marketplace.
  • Despite using questionable assumptions in its methodology, according to the non-partisan CBO, SBHPs can enhance the purchasing power of small businesses through "more negotiating power with health insurers (and) lower administrative costs."
  • In addition, CBO estimates that once the effects of the legislation have been fully integrated into the marketplace, about 600,000 formerly uninsured people (including employees and their dependents) would have health coverage. About 7.5 million people would obtain health insurance through association health plans.
  • The 100,000 figure of sickest workers who would lose coverage cited by opponents is from a set of CBO assumptions that ALSO results in 2.1 million formerly uninsured people obtaining health coverage through an SBHP, for a net gain of 2 million newly insured people. In addition, according to CBO, fewer people would be covered by Medicaid, and Medicaid spending would decline.
  • The statement that SBHPs will increase insurance premiums for 80% of workers is based on a CBO estimates that about 20 percent of small firms (affecting 4.3 million people) would switch to an SBHP, and save an estimated 13 percent on their premium costs. Those remaining in the traditional market could experience increases of 2 percent.
  • The Mercer study does not link SBHPs to an increase of one million newly uninsured people, but rather notes that small businesses are losing coverage and experiencing difficulty accessing the small group market. The fact is, small businesses continue to lose coverage – even without SBHPs – as costs rise. With SBHPs, millions of people who work for a small business (or their dependents) will retain health coverage they otherwise could not afford, and more will gain coverage at no cost to the federal government.
  • Another study, by CONSAD Research Corporation, estimated the number of uninsured workers who would gain coverage from this legislation at between 2.1 and 8.5 million. In addition, the CONSAD study indicated that small businesses encounter obstacles to purchasing health insurance beyond the question of price. These include lack of trust of insurance brokers, incomplete access to information about the health plans and benefits, and lack of resources to understand and manage the terms of available health plans. SBHPs are expected to resolve these problems by providing small businesses with a reliable, familiar source for their insurance information and management of their plans.

Myth: SBHPs lack adequate solvency protections.

FACT: The legislation contains extensive requirements for solvency.

  • Health insurance issuers that offer FULLY INSURED coverage to SBHPs will continue to be subject to state laws regarding solvency. In addition, the U.S. Department of Labor (DOL) would condition its class certification of fully insured SBHPs on the issuer's satisfaction of state solvency and other insurance regulations.
  • With respect to SELF-INSURED SBHPs, the legislation sets forth explicit solvency requirements that are much stronger than current law for employers or unions who self-insure, as ERISA contains no solvency standards for these entities.

Claims Reserves: The SBHP must establish and maintain reserves in amounts recommended by a qualified actuary who is certified by the American Academy of Actuaries.

Stop-loss: The SBHP must secure specific excess stop-loss coverage and aggregate excess stop-loss coverage to protect against unexpectedly large claims. Both of these insurance products will be fully regulated by the state, and the Secretary of Labor is able to modify or increase these requirements by regulation.

Indemnification: The SBHP must secure indemnification insurance to cover any claims left outstanding as the result of a plan termination.

Surplus Requirements: In addition to claims reserves, plans must establish and maintain a surplus in an amount at least equal to $500,000 but not greater than $2,000,000 as may be set forth in regulations. A cap on surplus requirements guards against an SBHP charging excessive premiums for the benefit of the association, rather than the benefit of plan participants.

Consultation with Actuaries and Insurance Commissioners: The legislation authorizes additional reserve requirements and excess stop-loss insurance as may be deemed appropriate by the Secretary, taking into account the recommendations of the Solvency Standards Working Group established by regulation. The Working Group will consist of members from the NAIC, the American Academy of Actuaries, state government officials, and other involved parties.

Myth: SBHPs would be allowed to charge each small employer joining the SBHP a different rate based upon the health status of its employees.

FACT: The bill requires that the contribution rates for any particular employer must be nondiscriminatory.

  • The legislation specifically states (Section 805(a)(2)(A)):

    "The contribution rates for any participating small employer do not vary on the basis of any health status-related factor in relation to employees of such employer or their beneficiaries and do not vary on the basis of type of business or industry in which such employer is engaged."

  • This provision explicitly prohibits an SBHP from charging one firm a higher rate than another based on health status factors –except to the extent already allowed by state law in the state in which the employer is located. This exception is provided to protect an SBHP from having unhealthy risks dumped onto it by health insurance carriers, or having good risks "cherry picked" by the commercial market.

Myth: Fully insured SBHPs would only be subject to the rate bands in their state of domicile and would use those rules in all other states in which they operate.

FACT: SBHPs can only generate a set of rates for all insured groups within the plan based upon the overall claims experience of the entire SBHP.

  • SBHPs would utilize the standard insurance factors currently used by the insurance industry to calculate rates for the plan.
  • SBHPs cannot use one state's rating bands for employers and employees that live in ANOTHER state. The plan can only vary rates for employer groups within the SBHP and located in a given state to the same extent state law allows insurance companies in the state are also permitted to do so.

Myth: SBHPs will destroy consumer protections by pre-empting all state benefit mandates and regulations.

FACT: The preemption of state mandates is an integral aspect of ERISA.

  • All labor unions and large corporations are preempted from state benefit mandates and most regulations, operating across state boundaries in a uniform manner. Rather than use the preemption of state benefit mandates to offer inferior health coverage to workers, union and self-insured large employers offer extremely rich benefit packages to their workers. As cited in a 1996 GAO study, a KPMG study found that self-funded plans are more likely to offer the benefits and services that are most commonly mandated by states than fully insured plans. SBHPs would do the same for small businesses.
  • Uniformity provides for lower administrative costs. Administrative costs make up only 5 to 12 percent of health care costs for large employers, compared to administrative costs for smaller employers of 33 to 37 percent.
  • The solvency standards, plan requirements, oversight, and patient protections included in the SBHP legislation are more stringent than those now required by some states.
  • SBHPs would be subject to federal health insurance requirements that provide consumer protections, such as COBRA continuation coverage; ERISA's claims procedures for benefit denials and appeals; HIPAA's guaranteed portability and renewability of health coverage for those with preexisting conditions; the Mental Health Parity Act; the Women's Health and Cancer Rights Act; and the Newborns' and Mothers' Health Protection Act.
  • It is important to realize that this legislation only preempts state benefit mandates for INSURED health plans. These types of plans must continue to meet other consumer protections, such as third-party external reviews, as well as solvency requirements set forth by the state. Because it operates in the interest of its members, a SBHP will readily cover benefits demonstrated to be cost-effective, such as childhood immunization, prenatal care, and cancer screenings. The bottom line is that, while well-intentioned, excessive coverage mandates for infertility treatment, alternative health services, substance abuse treatment or for services not backed by sound science drive up the cost of health coverage and leave small businesses unable to afford coverage at all.
  • If the SBHP is self-insured, the SBHP will fall under the same rules and requirements as other self-insured plans (currently over 275,000 plans covering 72 million lives). All self-insured plans are exempt from most state rules and regulations, and instead are governed by federal law and regulations with DOL oversight. Already, there is a tremendous amount of litigation regarding ERISA's preemption of certain state health plan requirements. To the extent that federal courts rule ERISA does not preempt certain state laws, self-insured SBHPs would also be required to comply with such state requirements.

Myth: Small business health plans or association health plans are just another name for Multiple employer welfare arrangements (MEWAs).

FACT: Snall business health plans are fundamentally different from MEWAs.

  • MEWAs are often "front" organizations for insurance companies or insurance agencies to sell insurance. Unscrupulous individuals or corporate entities can start them for the sole purpose of providing health insurance - leading to adverse selection and fraud. Often there is no certification process before MEWAs can begin providing health benefits to workers. There are no federal solvency standards for MEWAs, which has often led to fraud and abuse.
  • In contrast, the sponsor of an SBHP must be a bona fide professional or trade association organized and maintained in good faith, with a constitution and bylaws specifically stating its purpose and providing annual meetings, and must be in existence for a minimum of 3 years for purposes other than that of obtaining or providing health coverage.
  • Associations must set up a separate trust with Trustees who become fiduciaries under the plan and are subject to the same ERISA fiduciary responsibilities as fiduciaries of corporate and union health plans. The trustees must set up a financial and operational plan for the trust and plan. This assures the active and ongoing involvement of the trustees in the plan's operation. The Trust must file for certification with the Department of Labor.
  • The continued oversight of the association on behalf of its members is a key factor in assuring and maintaining the solvency and credibility of SBHPs in the long term. In order to be successful and retain participation in the plan, associations that offer SBHPs will have to offer benefits equal to or superior to traditionally regulated insurance products to attract employers and their employees.

Myth: SBHPs will have little, if any, oversight by state or federal regulators, which will hurt small employers and employees.

  • Just like other self-insured plans regulated under ERISA, self-insured SBHPs will be regulated by the Department of Labor. The DOL will only grant certification if all of the requirements set forth in the ERISA SBHP statute and implementing regulations are met.
  • Fully insured association health plans will be dually regulated by both the DOL and the state insurance commissioners, the same as large employers offering fully insured health plan options today under ERISA. The state insurance commissioner will continue to have oversight of the fully insured plans, as they will continue to require insurance companies that offer the SBHPs to meet all state regulations and requirements, such as prompt-pay laws, external review, solvency standards, etc. The DOL will consult with state insurance commissioners to ensure that issuers offering products to SBHPs meet the appropriate state standards.
  • Enrollees in SBHPs will have more oversight than people in large corporation and union plans. Moreover, they will have the association to go to bat for them should they encounter problems with the plan because the association has an enormous incentive to keep their members who are enrolled in the SBHP satisfied.
  • In addition, this legislation requires that an SBHP be offered by a bona fide association under a Trust with Trustees who are fiduciaries responsible for both the financial and operational integrity of the plan. This continued oversight of the association on behalf of its members is a key factor in assuring and maintain the solvency and credibility of SBHPs in the long-term.

Myth: The Department of Labor (DOL) is not capable of regulating SBHPs effectively.

FACT: The U.S. Department of Labor has effectively regulated tens of thousands of self-funded employers for almost 30 years.

  • The Department of Labor currently administers ERISA protections covering approximately 2.5 million private, job-based health plans and 131 million workers, retirees and their families. Of these, 275,000 plans covering 67 million individuals are self-insured, and therefore subject exclusively to DOL oversight. In addition, 5 million people are covered by self-insured multi-employer plans (established and operated jointly by a union and two or more employers) are overseen exclusively by the DOL under the Taft-Hartley Act. These self-insured and union plans cover more than 72 million participants. The Department has testified that it stands prepared to allocate the resources necessary to ensure proper SBHP certification and stringent oversight.
  • The Department of Labor has firsthand experience dealing with group health plan regulation, as well as combating insurance fraud. In fact, DOL benefit advisors assisted 114,000 individual workers, retirees and their families with their inquiries about their health benefits in FY02.
  • The DOL has a strong record of enforcement, protecting workers, retirees and their families in health plans. In FY02, the DOL recovered $140 million in assets restored to health and welfare plans.

Myth: Associations would receive significant benefits and revenues from offering health plans.

FACT: Under SBHPs, small business owners and their co-workers reap the benefits.

  • SBHPs must meet all of ERISA's fiduciary rules requiring that the assets of an employee benefit plan be held in trust for the exclusive benefit of plan participants and their beneficiaries, and for defraying reasonable expenses of administering the plan. In short, fiduciaries under ERISA are to act solely in the interest of participants and beneficiaries, and in both self-funded and fully insured SBHPs, all profits/savings must go to the plan participants.
  • In contrast, health insurance companies in the commercial small group market retain a significant percentage of premiums for administrative costs, marketing, and commissions, and in the case of publicly held companies, profit and investor return.