The problem with association health plans

Editor’s Note: The Trump Administration finalized the new rules for Association Health Plans in June 2018. But in March 2019, a federal judge overturned the new AHP rules, noting that the Trump Administration’s approach to AHPs “stretches the definition of ’employer’ beyond what ERISA’s text and purpose will bear” and calling the AHP rule “absurd” and “clearly an end-run around the ACA.” The Trump administration had until May 28 to file an appeal, and they did so on April 26.

On April 11, a group of GOP Senators introduced legislation that would “ensure the pathway remains available for small businesses to offer Association Health Plans.” A statement from sponsor Chuck Grassley (R-Iowa) about the legislation indicated that “thousands” of people had already obtained AHP coverage under the terms of the rules that the Trump Administration finalized in 2018.

The judge’s ruling came just days before the new AHP rules were set to take effect for new self-insured AHPs, but they had already taken effect for fully-insured AHPs and existing self-insured AHPs. The Trump administration’s Department of Labor clarified that it would not take enforcement action against any AHPs that formed prior to the court ruling under the terms of the Trump administration’s 2018 AHP guidance, and noted that people participating in already-formed AHPs would be able to maintain their coverage until at least the end of the plan/contract year. But AHPs operating under the Trump administration’s 2018 guidelines were no longer allowed to enroll new members or market to sole proprietors. And after the end of the 2019 plan year, changes had to be made (for example, a farming-related AHP offered via Farm Bureau in Nebraska transitioned to a short-term plan instead as of 2020).

Oral arguments were heard in the appeal in November 2019 by the D.C. Circuit Court, but a ruling had not been issued by the time the Biden administration took office more than a year later. Soon after taking office, the Biden administration’s Department of Justice asked the court to stay the appeal. That request was granted in February 2021, putting the long-awaited appeal on hold while the new leadership at the Department of Labor reviewed the case. At that point, the Trump administration’s AHP rules were still vacated, so sole proprietors were no longer eligible for AHP coverage, and neither were small businesses that didn’t have a commonality of interest. These individuals and businesses had to instead seek coverage in the individual or small group markets, rather than the large group market via an AHP.

In 2024, the Department of Labor officially rescinded the 2018 AHP rule. As noted above, it had long since been vacated at that point. So it continues to be the case that sole proprietors are not eligible for AHP coverage, nor are small businesses that don’t have a commonality of interest. 

In the weeks ahead, President Donald Trump will make good on a promise to deliver expanded access to association health plans (AHPs). Under a proposed rule scheduled to be finalized by the Labor Department this summer, more small businesses and self-employed individuals will be able to join together and purchase coverage as part of an association.

President Trump has promised the deregulation of AHPs will deliver “tremendous insurance at a very low cost” – echoing claims made for decades by association health plan proponents.

But the plans aren’t without controversy. Here’s a closer look at AHPs and what these changes might mean to consumers and the health insurance marketplace.

Association health plans aren’t new

From the sounds of Trump’s rhetoric, association health plans are a new and exciting coverage solution for Americans. AHPs aren’t in fact, new. Since the mid-1970s, millions have been enrolled in association health plans, which promised more purchasing power and less expensive premiums made possible by a large pool of  group members.

But the plans have been controversial since the beginning – due in part to concerns about the plans being “vehicles for fraud” or financially unstable. As a result, the plans received great scrutiny in the early 1980s and Congress responded to concerns by giving states broad authority to regulate the plans.

ACA made them more consumer friendly

Because that regulation varied greatly by state, the Affordable Care Act enacted provisions that held AHPs to an even higher, more consistent standard nationally – including increased consumer protections. The ACA required that association health plans sold to individuals and small employers must meet the same standards that the ACA applied to the individual market and small-group market.

Plans in those markets are required to cover the essential health benefits, cannot reject applicants or set premiums based on medical history, cannot charge older applicants more than three times as much as younger applicants, and must cover at least 60 percent of average medical costs. Individual and small-group plans are also subject to the ACA’s risk adjustment program, which means that plans with healthier enrollees end up subsidizing plans with sicker enrollees.

Those rules protect individuals and small groups from a host of problems that used to arise before the ACA, but they also mean that premiums are higher than they used to be, particularly for healthy people.

What’s the hype about AHPs now?

Those higher premiums – and the fact that they’re associated with ACA’s consumer-friendly regulations – are at the heart of the Trump Administration’s passionate embrace of and hype for expanded access to AHPs.

Under the new rule, small businesses and sole proprietors would be able to join together to create an AHP, either purchasing large-group coverage or self-insuring. This is important because the rules that apply to large-group plans are much less restrictive than the rules that apply to small-group and individual plans. This means the plans could be less comprehensive in terms of the benefits they offer.

And many AHPs would choose to self-insure, which is an option that further reduces regulatory burden and generally isn’t feasible for small groups. (Self-insured plans are not subject to state insurance regulations, or to some of the ACA’s regulations that do apply to other large group plans, such as the rule that requires insurers to spend the majority of premiums on medical claims.)

The bottom line, then, is that under an AHP, coverage could be less robust, which would mean that the plans would be more likely to attract healthier people. The combination of reduced benefits, healthier enrollment, and administrative costs being spread across a larger group would generally result in lower premiums for an AHP versus ACA-compliant individual or small group coverage.

In addition, large groups have negotiating power with insurers, whereas premiums for the small-group and individual market are set in stone by insurance regulators. So the self-employed individuals and small groups that join an AHP would benefit from the leveraging power of a large group.

How would the new rule expand access?

Under the new rule, more small businesses and self-employed individuals will be able to more easily join together as part of an association – instead of having to purchase ACA-compliant coverage in the small-group or individual market. The finalized rule would do this by:

• allowing sole proprietors to join AHPs instead of having to purchase individual-market coverage,
• allowing small businesses and self-employed individuals to join AHPs based on being in the same industry OR being located in the same area, and
• allowing small businesses to join together in an association with the sole purpose of obtaining health insurance.

Current rules require a business to have at least two employees (who aren’t married to each other) in order to join an AHP, and AHP member businesses generally have to be in the same industry, so that they have a “commonality of interest.” (A bakery and an auto body shop can’t currently form an AHP just because they’re both located in the same city.)

Current rules also require the association to have an overall purpose beyond securing health insurance for members, and require member businesses to have control over the AHP.

In addition, current regulations require AHP coverage to be issued based on small-group market regulations if the member businesses in the association are small enough that each would qualify as a small-group on its own. The combined size of all of the businesses in the association is irrelevant in terms of the type of coverage that’s available via the AHP. That rule would also change under the proposed AHP regulations, allowing the association to use its combined enrollment to gain access to the large group market.

Criticisms of association health plans

The problem with expanded AHPs is twofold:

• The coverage won’t be as good as current individual and small-group coverage, and
• The people who remain in the ACA-compliant individual and small-group markets will tend to be sicker and older, which will drive up premiums in those markets.

AHPs appeal to healthier consumers

In general, small businesses and self-employed individuals who join AHPs are expected to be those with lower-than-average health care costs.

To be clear, the AHPs would not be able to actively discriminate in terms of preventing a less healthy group from joining, and would not be able to charge specific employees or businesses higher premiums based on medical history.

But even without overt discrimination, the coverage offered by an AHP could be tailored such that the plan simply wouldn’t be attractive to a small business with employees in need of significant medical care. And member businesses could also be charged differing premiums based on non-health metrics like the type of industry or the age of the employees.

A drain on existing risk pools

The result? Those without significant health care needs would be attracted to the new AHP options, but individuals and small businesses with significant health care needs would tend to stay in the ACA-compliant market.
An analysis by The Actuary projects that between 3 and 10 percent of the people enrolled in ACA-compliant individual market coverage will switch to AHP coverage under the new rules. These individuals will be healthier than average, leaving a less healthy population in the ACA-compliant market. The AHP coverage would not be as robust, but that might go unnoticed – until enrollees end up needing care that isn’t covered.
>The proposal to expand access to short-term plans and the elimination of the individual mandate penalty at the end of 2018 will exacerbate the exodus of younger, healthier enrollees from the ACA-compliant market, driving premiums even higher, and further destabilizing the market.

AHPs’ bottom line for consumers?

In a nutshell, if you’ve got significant health conditions, expanded AHP coverage isn’t likely to be appealing. But if you’re healthy and not overly concerned with the details of your coverage, joining an AHP under the new rules might provide short-term premium relief.

You might find, however, that if and when you end up needing extensive medical care, the coverage isn’t as good as you thought it would be. At that point, you may find yourself wanting to transition back to the ACA-compliant market at the next available opportunity. But the ACA-compliant market will suffer as a result of the exodus of healthy people who switch to AHP coverage.

Overwhelming criticism from policy experts

HHS published the proposed rule in January 2018, and accepted public comments until early March. They received 723 comments, which voiced both support and opposition.

But the Los Angeles Times reviewed the comments, finding that 279 of them came from organizations in the health care or health care advocacy fields. These comments represent groups with an above-average understanding of health policy, and 266 of those 279 comments expressed opposition to proposed rule.

Sandy Praeger, a Republican, who was previously the Insurance Commissioner in Kansas and the president of the National Association of Insurance Commissioners, noted with regards to the comments on the proposed rule that “Basically anybody who knows anything about healthcare is opposed to these proposals.”

But there are also numerous comments from self-employed individuals and small business owners who are frustrated with the current cost of coverage, and welcome the chance to obtain lower-cost plans. Comment number 246, from L. Keith, is a good example.

So on one hand, you have people with significant expertise in health policy who are very concerned about the potential impact of the expansion of AHPs. But on the other hand, you have regular Americans who perhaps earn just a little too much to qualify for premium subsidies (or who are affected by the family glitch), and who are finding it challenging or impossible to afford coverage. These folks may not be health policy experts, but their health insurance woes are very real, and the promise of something — anything — that can alleviate their problem, at least in the short-term, is welcome news.

Health policy changes have to take a long view though, looking at the impact both now and several years down the road. Clearly, the expansion of AHPs will provide healthy self-employed people and small business owners with a new, more affordable coverage option.

But how will that coverage hold up when the enrollees are no longer healthy? And how will the rule changes affect the stability of the overall insurance market? These are the questions that led health policy experts to overwhelmingly oppose the AHP rules.

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org.