Some small employers have relied on association health plans (AHPs) to buy employee health insurance, rather than buying a small group plan. That’s because it usually costs less for large organizations to provide health insurance than for small ones. This happens for several reasons:
- Workers in small firms, on average, have lower wages than workers in large firms. As a result, small-firm employees are less able to afford comprehensive health insurance, and less of a tax incentive exists for providing health insurance through their employer.
- Small firms pay more for a given benefit package than do larger firms because of higher administrative expenses per enrollee and less purchasing power.
- Small firms generally purchase insurance that is subject to state benefit mandates and other regulations, which tend to increase average premiums. Firms that self-insure—mostly large firms—are exempted from those state insurance rules by the Employee Retirement Income Security Act (ERISA). This means they do not have to provide certain benefits that states require plans sold within their borders to provide.
The Affordable Care Act and AHPs
The Patient Protection and Affordable Care Act (ACA) requires plans sold through an association to individuals and small employers to meet the same rating and benefit requirements that other individual and small group plans must meet. This includes the requirement that health plans cover certain “essential health benefits.” This makes AHPs less competitive than some had been in the past. However, the ACA created a loophole for an “ERISA bona fide group or association of employers,” which allows these groups to be treated as a single large-group health plan. This exempts a “bona fide group” from meeting the ACA’s small-group health plan requirements.
Business Insurance recently reported on a study of association health plans by the Robert Wood Johnson Foundation. Researchers found that some states (particularly Oregon), are turning a blind eye on the requirement that AHPs be bona fide associations. “State regulators [in Oregon] indicated that the authority to determine whether or not health coverage through an association qualified for ERISA large-group coverage rests with the U.S. Department of Labor [instead of with the state regulators].” To meet the requirement, “Most insurers have simply asked the association to produce a legal opinion that it meets the criteria for ‘ERISA bona fide’ status, allowing the insurer to provide a single large-group health plan.”
Legitimate association plans can help smaller businesses get quality coverage. If you are approached by someone offering an association plan for small businesses, you will want to ensure it is a bona fide association. Otherwise, you might not be complying with the requirements of the ACA. In addition, your plan will have appropriate state oversight. Past abuses by so-called ERISA plans have left some businesses without the coverage they paid for. State regulation of insurance helps consumers by licensing and overseeing insurers and agents and by giving consumers somewhere to turn in cases of disputes with their insurer.