With breathtaking speed, Association Health Plans (AHPs) burst upon the health coverage landscape. Championing the plight of small employers regarding the cost of coverage, AHPs were to be “about more choice, more access and more coverage.” And so, the President issued Executive Order 13813 in October 2017 to advance them. The federal Department of Labor issued proposed rules in January 2018 to enable them. Wading through 900 public comments, final regulations were issued June 21 (the “Final Rule”), and went into effect August 20. Supplemental guidance was issued October 3. So what’s new? A change for the better? Few can agree.

Benefits Aplenty(?)

The biggest gain is for employers of all sizes (including solo proprietors) not previously tied together by common ownership or through an established association. These same employers can now qualify to form an AHP to obtain health benefits on a group basis. Breaking through these historic barriers, the Final Rule crafted additional advantages for AHPs. First, coverage through an AHP does not have to offer all 10 essential health benefits (a small group and individual coverage requirement), on the logic that when participating members are aggregated, the AHP qualifies as a large group. Next, The AHP does not need to satisfy the minimum value test for large groups, on the logic that while aggregated as a large group, all underlying members are small group and exempt.

Finally, the Final Rule greatly relaxes underwriting policies applicable to AHPs. Specifically, each member employer group can be separately underwritten, as long as not based on health factor. But underwriting on the basis of occupation/industry, location, size, age and gender are all permitted for AHPs.

These provisions are designed to make AHP coverage more accessible, affordable and flexible to the risk undertaken by the AHP. The Congressional Budget Office seems to agree; opining up to 4 million persons will obtain AHP based coverage by 2023, with up to 400,000 who would have previously had no coverage at all. Nevertheless, critics are concerned that while AHP coverage may prove to be more affordable, it is likely to not be as comprehensive, exposing enrollees to less or no care when they need it most.

Come on in, the AHP Water Is Fine

Formation and qualification as an AHP must meet three relaxed tests:

  • Commonality of Interest. Membership can be met either by AHP members being in the same trade, industry or profession throughout the United States (trade rule), or by its members simply being in the same metropolitan area, even if it crosses state lines (location rule).
  • An AHP can exist for any reason, even if for the main purpose of offering health benefits. The only caveat is the AHP must have at least one “substantial purpose unrelated to the provision of benefits” that would make it a viable entity otherwise. Such additional activities do not have to be for-profit and can merely be to promote the common interests of its members, whether constituted by trade or location.
  • Structure and Control. AHPs are to observe all formal requirements of incorporation, by-laws and governance. They are not to pop up for the purpose of providing benefits and outsource operations. Rather, member employers are to maintain control “in form and in substance,” although day-to-day involvement may not be required. A “facts and circumstances” test will be used to ensure that employer members remain engaged with the power to nominate/elect/remove directors of the AHP, and have authority over benefit offerings, their terms, modifications and premiums.

Associations and a Regulatory Void

The Employee Retirement Income and Security Act (ERISA) of 1974 regulates “employee welfare benefit plans” (aka employer sponsored health plans). Under ERISA, section 3(5) defines an “employer” as “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee welfare benefit plan; and includes a group or association of employers acting for an employer in such capacity.” A critical definition, it specifies who can sponsor such plans and, by extension, what plans ERISA can regulate.

However, the phrase “association … acting for an employer” was never defined. This void left only the DOL’s Advisory Opinion process for those seeking approved status. From 1980 through 2017, approvals were rare, akin to threading a regulatory needle. Those not awarded “Bona Fide Association” status were deemed to be Multiple Employer Welfare Arrangements (MEWA). The implications were considerable. If the MEWA was fully insured, it was less onerous, subject only to state insurance laws. But if self insured, both federal and state laws would apply. Accordingly, the MEWA landscape has been marked by a patchwork of state oversight, often hostile.

Health Care Doppelganger

Against this background, the Final Rule’s phrasing of “Association Health Plans” and of “bona fide associations” will likely cause confusion. The preamble to the Final Rule emphasizes that entities meeting the prior standard as a “bona fide association” and the existing jurisprudence remain valid—stating that new entities will have the option whether to qualify under the old schema or the new rule. However, the same nomenclature will apply to both pre- and post-AHP entities. As a result, future discussions of AHPs will need to carefully parse whether pre- or post-guidance is being followed.

And yet, through this haze, the Final Rule clarifies a critical issue: although created by federal law, AHPs will be considered MEWAs subject to state law. In practical terms, states inherit the discretion to regulate AHPs through existing MEWA laws, or new authority specific to AHPs, or not at all. Requirements of registration, licensing, reserves, reporting, oversight (audits, filings), etc. all could be possible.

This was a potential regulatory “miss” as ERISA was amended in 1983 to, among other items, grant the DOL discretion under ERISA 514(6)(B) to issue regulations to exempt classes or categories of self funded MEWAs from dual federal/state regulation. Arguably, the DOL could have simply exercised this authority to define qualified AHPs as a MEWA, but exempt. Instead, the DOL defined AHPs under the narrower definition of “employer,” but then called it a MEWA anyway. The net effect places AHP’s oversight on a nearly identical grounding that has existed for MEWAs for decades.

As a result, multiple employers seeking health coverage can do so through three options: Bona Fide Association Plans (unchanged by the Final Rule); Association Health Plans (created by the Final Rule); and MEWAs.

Of Course, There Was a Lawsuit

Thirty-eight days after the Final Rule was released, 11 states plus the District of Columbia filed suit challenging the rule. Before delving into the arguments, it translates that the following jurisdictions are likely adverse to AHPs. They include: California, Delaware, Kentucky, Maryland, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Virginia, Washington and the District of Columbia.

Everything-but-the-kitchen-sink, the complaint raises a myriad of grievances. Foremost, the complaint points to the comprehensive set of reforms under the Affordable Care Act (ACA), opining that the Final Rule is not designed to enact ERISA, but to circumvent the ACA. As such, the complaint alleges the DOL exceeded its authority under the Administrative Procedure Act (APA) both in interpreting ERISA, and in reaching beyond its bounds to interfere with the ACA.

The complaint reasons that because Congress has considered, but failed to pass AHP legislation 11 times since 1995, the DOL should be foreclosed from regulating into existence what Congress could not.

Further, the Final Rule is alleged to be arbitrary and excessive by the DOL’s failure to explain its radical departure from prior agency interpretations of “employer” and “associations.” Decades of DOL Advisory Opinions, as well as DOL’s 2013 advisory brochure on MEWAs, are presented as contradicting the Final Rule’s interpretations. The up-ending effect of the Final Rule upon the nearly universal federal jurisprudence dating back to 1985 is also cited in support by the complaint.

Substantial harm to the states is also alleged, noting lost tax revenues and exchange contributions (both categories now paid by carriers would shift to AHPs, who may not have an equal obligation, if any); in addition to the increased regulatory burden of overseeing the influx of AHPs in their state(s). Further, as the Final Rule anticipates people will leave exchanges in favor of the assumed-to-be-less-expensive AHP coverage, the disenrollment may destabilize state health exchanges.

Finally, the rule allegedly violates the APA due to the failure to create adequate safeguards against fraud. The complaint notes the extensive history of unregulated entities masquerading as “associations” and “MEWAs,” and the amendment of ERISA twice to curtail such abuses. The admission that the rule will “increase[d] opportunities for mismanagement or abuse, in turn increasing oversight demands …” without offering deterrent measures, is highlighted as capricious and cause to be stricken.

Answer Under our Nose?

Tossed to the states, this is where reform will likely occur. To the extent a state decides to favorably treat a MEWA or AHP (as has Iowa, Nevada and Nebraska), whether the federal AHP rule survives could become largely irrelevant.

Thus far, New Jersey has been silent. No legislation addressing AHPs has been introduced, nor has there been a regulatory proposal. While New Jersey joined the lawsuit challenging the Final Rule, it did not negate the fact of New Jersey’s MEWA statute that has been in effect since 2001. Detailed, but tolerant, it employs risk-based capital rules, reserves, organizational requirements and reporting obligations. Ironically, if New Jersey chooses not to address AHPs (and the rule survives), the MEWA statute becomes the governing standard (although conflict with the Final Rule may exist); if the rule does not survive, the same statute will remain, hidden in plain sight, available since 2001.


Daniel W. Roslokken is general counsel of Insurance Design Administrators (IDA) in Oakland.