On January 1, 2019, portions of the U.S. Department of Labor’s (DOL) Final Rule expanding the availability of Association Health Plans (AHPs) went into effect. AHPs allow small businesses to band together and negotiate better deals when buying insurance for their members.

The partial government shutdown hasn’t slowed the raging debate over how states are to implement the DOL’s final rule. On December 28, 2018, a federal judge ordered litigation concerning the rule to continue despite the shutdown.

States have reacted to the final rule in dramatically divergent ways. Some states believe that AHPs will make it finally possible for small employers to offer affordable healthcare options for their employees. Other states worry that AHPs will destabilize the individual insurance marketplace. They predict that healthy people will join AHPs because they are less expensive than other insurance options, and this shift will leave sicker people in a smaller pool with higher premiums.  

AHPs Possible Because of a Broader Definition of “Employer”

To increase the availability of AHPs, the Final Rule adopts a new definition of “employer” under the Employee Retirement Income Security Act of 1974 (ERISA), for purposes of determining when employers can join together to form an AHP that is treated as a group health plan under ERISA. The new definition of employer now includes sole proprietors with no employees.

As previously noted, in order to be considered an employer under ERISA traditionally, an association was required to have a bona fide economic or other common purpose other than offering health coverage. The Final Rule now provides that an association need only share a “commonality of interest” which can be satisfied on the basis of common geography or industry or line of business or profession. Further, the principal purpose of the association may be to provide members with insurance.

An association must additionally have at least one “substantial business purpose,” such as holding conferences, offering classes or educational materials, or promoting common business or economic interests to qualify. When an association is treated as an employer under ERISA, it can be regulated as a large group health plan. As a large group health plan, an AHP does not have to comply with many of the ACA’s most significant consumer protections, such as the law’s rating rules and essential health benefits.

Some States Enthusiastic About AHPs

Proponents of AHPs argue that their flexibility is necessary for organizations to provide meaningful health coverage to small employer and self-employed individuals.

On August 31, 2018, the New Hampshire Insurance Department announced plans to convene a working group of stakeholders to develop legislation that will set clear standards for AHPs sold in the state. New Hampshire also released guidance clarifying that insurance coverage issued to small employer association members cannot be treated as large employer coverage for ERISA purposes.

Iowa has also proactively embraced AHPs. In anticipation of the federal rule, the Iowa Legislature granted the Iowa Insurance Commissioner emergency rule-making authority over AHPs. This authority allows rules to become effective prior to public participation in the rulemaking process. On September 6, 2018, the Iowa Insurance Division used this power to adopt Rule 4040C which allows AHPs to form in the state. Rule 4040C builds upon a state law passed in April 2, 2018 to allow small groups and agricultural associations to create AHPs.

AHPs are already forming in these and several other states such as Wisconsin, and Nevada. Many states have issued non-binding guidance documents to clarify their understanding of when state law is and is not preempted by the federal rule including ConnecticutIdahoLouisiana, Maryland, Illinois, and Michigan.

Other States Move to Tightly Regulate AHPs

Critics of AHPs argue that the DOL’s final rule will result in a vast expansion of associations that qualify as single, large employers capable of evading core ACA protections. For example, while AHPs that cover employers with at least 15 employees have to offer essential health benefits like maternity coverage, now smaller businesses that buy AHPs will be exempt from that requirement. Whether or not states have the power to mandate that AHPs comply with stricter state laws is an open question. Several states have asserted their power to regulate AHPs, and intend to do so until the federal government forces them to stop.

Pennsylvania has taken the position that AHPs must comply with state laws and the ACA. During the federal rulemaking process, the Pennsylvania Insurance Department expressed concern that AHPs will be used to skirt the ACA’s coverage requirements for essential health benefits and prescription drugs, and will destabilize the individual marketplace. Businesses with just one employee are not eligible for AHPs in Pennsylvania and must instead buy insurance on the individual market. Additionally, the Commonwealth requires that an association be active for two years before offering a plan.

Like Iowa, the Vermont Legislature gave the Department of Financial Regulation the power to enact emergency rules to regulate AHPs. On August 1, 2018, the state used this power to file an emergency rule to require associations to be licensed annually by the state. The rule, effective immediately, prohibits AHPs from restricting coverage based on pre-existing conditions or demographic information and requires AHPs to offer coverage of essential health benefits to all people and dependents in the association. Vermont (and Connecticut) also increased their minimum coverage requirements for association health plans.

On September 22, 2018, California’s Governor signed into law legislation that prohibits sole proprietors, partners, and spouses of sole proprietors and partners from participating in AHPs. Other states may soon follow.

Eleven states and the District of Columbia challenge AHPs in Court

Last summer, state attorneys general from eleven states and the District of Columbia filed a lawsuit against the Department of Labor challenging the Final Rule on the grounds that expanding the definition of employer is inconsistent with the ACA and ERISA, a violation of the Administrative Procedure Act. (State of New York et al. v. United States Department of Labor et al.) The suit, led by New York, alleges that the final rule was an arbitrary and capricious effort to override the market structure established by the Affordable Care Act. New York is joined by Massachusetts, the District of Columbia, California, Delaware, Kentucky, Maryland, New Jersey, Oregon, Pennsylvania, Virginia, and Washington.

The suit has attracted significant outside support and opposition. The American Medical Association and a group of Democratic lawmakers submitted comments in support of the lawsuit and in opposition to the DOL’s rule. The U.S. Chamber of Commerce, attorneys general for Texas, Nebraska, Georgia and Louisiana, the Restaurant Law Center, and a coalition of 23 organizations that represent over one million small employers have submitted amici briefs in support of DOL’s rule.

The lawsuit makes four claims. First, the states claim that treating self-employed individuals with no other employees as an employer capable of being in an association of employers creating an AHP is contrary to ERISA’s statutory definition of an employer, which is an entity “with two or more employees.” 42 U.S.C. § 300gg-91(g)(6). Second, the states argue that the final rule’s loose standard of what constitutes a “commonality of interest” (which may be satisfied where the main purpose of the association is merely to sell insurance), is insufficient to meet the established commonality test under ERISA. Third, the states allege that treating AHPs comprised of small employers as “large employers,” but not necessitating that they meet the coverage requirements mandated of large employers through the shared responsibility protection – which requires any company that has at least 50 full-time employees to offer full-time employees the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan – violates the ACA. Lastly, the states’ argue that the DOL failed to take into account the stark history of fraud and abuse when drafting the Final Rule and exceeded their statutory authority in changing the definition of AHPs. The DOL has since filed its answer, and has been ordered by Judge Castel to produce discovery material requested by the States. A joint appendix highlighting documents relevant to the litigation is due January 2, 2019.

Time will soon tell which state strategies result in more affordable health care for state residents. For recent Crowell & Moring client alerts on AHPs see: Running with Scissors – and Association Health Plans and The New Wave of ACA Waivers.