Association Health Plan Perspectives (Part 2): The Look-Through Rule And The Limits Of State Regulatory Power

In a summary of the recently issued Association Health Plan (AHP) final regulations, the U.S. Department of Labor (DOL) rightly observed that AHPs are a species of multi-employer welfare arrangements, or MEWAs, that are subject to regulation under both federal and state laws. The insurance regulators in a handful of states have recently issued guidance that, in most cases, purports to prohibit AHPs from operating as "large group" plans. (The attached table summarizes and provides links to the guidance, state-by-state.) A common, though not universal, theme is that in no case may a collection of small employers be combined to form a large group. Certain states address collateral issues. Pennsylvania, for example, makes the further claim that in no case may a self-employed individual with no employees participate in an AHP. We think that the states have overreached. This post explains why.

Background

Prior law and the purpose of the final AHP regulations

An AHP is a type of MEWA that is offered by employer "groups and associations" to provide health coverage for employees. According to the FAQ on the DOL's website:

AHPs allow small employers to band together to purchase the types of coverage that are available to large employers, which can be less expensive and better tailored to the needs of their employees. The rule allows more employer groups and associations to form AHPs, based on common geography or industry (emphasis added).

The debate over AHPs can be reduced to a simple question: under what circumstances may a collection of small employers and self-employed individuals - or "working owners" in the parlance of the final regulations - band together to form a "large group" for underwriting and other regulatory purposes? Under prior law, the ability of small employers to combine for these purposes was severely constrained, and self-employed individuals were entirely excluded. The purpose of the final regulations, as this above stated passage suggests, is to expand access to AHPs for small employers and, for the first time, permit self-employed individuals with no employees to participate in the AHP. (We described the prior law governing AHP and explain the details of the final regulations in an article published by Bloomberg Tax, available here.)

Advantages of large group status

Both at the federal and state levels, the regulation of health insurance is segmented among individual, small group, and large group markets. The Affordable Care Act (ACA) imposed essential health benefits, actuarial value, and modified community rating requirements on small groups and individuals but not on large groups. As a result, large group health plans enjoy materially greater design and underwriting flexibility when compared to their small group and individual market counterparts. The large group market can take advantage of administrative efficiencies that are unavailable to small groups and individuals. Individuals and small employers often drop in and out of the insurance markets at high rates. In addition, individuals and small groups routinely change insurance carriers, sometimes every year. This sort of volatility - which drives up administrative costs - is not present in the large group market.

The look-through rule and its exceptions

Under prior law (i.e., before the newly promulgated final AHP regulations), small groups generally retained their status as such even where coverage was purchased through an association. This is the case due to the application of the so-called look-through rule. According to a CMS Insurance Standards Bulletin issued on September 1, 2011, an insurance carrier underwriting an AHP must "look-through" the group sponsoring the fully-insured AHP to the underlying size of the AHP member. If the AHP member employs 50 or fewer employees, the insurance carrier must apply the ACA's small group market reforms to the AHP health coverage. In addition, if an individual is an AHP member, the insurance carrier is required to impose the ACA's individual market reforms to this individual's coverage.

The CMS Bulletin includes an...