The Association Health Plan Proposed Rule: What It Says And What It Would Do

Author’s Note

There is little more I can say about Tim Jost that hasn’t already been said by Don Berwick and Chris Fleming. Tim is truly a national treasure with an unrivaled work ethic and generosity of spirit. Beyond his health policy expertise, speed, and accuracy, he is one of the most patient, humble, and kind colleagues I’ve ever known. I, alongside many others, am incredibly fortunate to count him as a mentor and a friend. In addition, millions of consumers across the country, especially low-income consumers and underserved populations, have unknowingly benefited from his years of advocacy at the NAIC and beyond. Tim is, simply put, irreplaceable.

And so it is a great professional and personal honor to (try to) fill his very big shoes. I promise to do my best to provide you with the Jostian level of review you’ve come to expect and to carry forward Tim’s vision of comprehensive, accessible analysis. Beyond our apparent shared love for reading federal regulations at all hours, we both care deeply about how decisions that seem like technical, wonky policy changes affect real people in every community. I hope to continue to bring that perspective in the coming weeks and months. Thanks to Tim, Health Affairs, and all of you for the opportunity to continue this health policy journey together.

On January 4th, 2018, the U.S. Department of Labor (Department) released a highly anticipated proposed rule that would significantly alter the way that association health plans (AHPs) are regulated. The proposed rule was developed in response to President Trump’s recent executive order that directed the federal government to expand access to AHPs and other types of insurance products or arrangements, such as short-term limited duration insurance and health reimbursement arrangements.

In his executive order, President Trump directed the Secretary of Labor to issue regulations to allow more employers to form AHPs. In particular, the Department was asked to reconsider its definition of “employer” under the Employee Retirement Income Security Act of 1974 (ERISA) and identify ways to promote AHP formation on the basis of common geography or industry. President Trump has highlighted these efforts in recent interviews, anticipating that such changes will affect “millions and millions of people.”

The Department’s proposed rule outlines a framework to try to make this vision a reality. This post describes the legal background of the proposed rule, summarizes the rule, and highlights some of its implications. Comments on the proposal are due within 60 days. This post concludes by describing a request for information on barriers to choice and competition in health coverage, which was issued by the Department of Health and Human Services late last month.

Brief Legal Background

Many business and employer trade associations—such as chambers of commerce or farm bureaus—have long offered health insurance to their members, which often include self-employed individuals, small businesses, and large businesses. These associations often claimed ERISA preemption from state insurance regulation, identifying themselves as employers or employee organizations under ERISA. A number of these associations defrauded their members and left millions in unpaid claims when they became insolvent.

In 1983, Congress amended ERISA to give states regulatory authority over self-insured multiple employer welfare arrangements (MEWAs) and some regulatory authority over fully insured MEWAs to ensure solvency, require state licensure, and require financial reporting. AHPs are one type of MEWA. Although states have had a far better track record of addressing fraudulent association plans than the federal government, fraud and abuse by association plans has continued.

The Affordable Care Act (ACA) did not outlaw AHPs but took steps to limit their abuses. It imposed reporting requirements on MEWAs, imposed criminal penalties on MEWA fraud, and authorized the Department to take immediate action to address fraudulent MEWAs. It also dropped an exception from the “guaranteed availability” provision of the Public Health Service Act that had existed for bona fide association plans. Thus, an insurer that offers coverage through an association must offer the same plan to non-members who want it (and are aware of it). Associations themselves are not subject to guaranteed availability requirements.

The ACA did not, however, recognize associations as having special status. Distinctions under prior law for “bona fide” associations more or less disappeared. The ACA simply defined large group, small group, and individual plans, without reference to how they were offered. Association plans continued under the ACA, but largely under existing ACA rules. For individuals and small employers that obtain coverage through an insured association, this coverage is regulated under the same standards that apply to the individual market or the small group market, respectively. Thus, current association coverage must comply with the ACA’s protections for people with preexisting conditions, cover the essential health benefits package, comply with new rating rules, and meet other benefit standards.

The exception to this rule is when the coverage sponsored by the association constitutes a single ERISA-covered multi-employer plan. By treating the association itself as an employer who is sponsoring a single health plan for its members, the AHP is regulated as a group health plan under ERISA. Group health plans are subject to various reporting, disclosure, and fiduciary requirements imposed by ERISA, requirements imposed by the Health Insurance Portability and Accountability Act of 1996 (HIPAA), and some, but not all, of the Affordable Care Act’s market reforms.

Group health plans are, however, exempt from most state regulation. Although insurers that insure group health plans are subject to state laws and regulations (such as benefit mandates or fair marketing practices), states cannot regulate the underlying employer-health plan that is insured or self-insured plans. As a large group health plan, an AHP would not have to comply with many of the ACA’s most significant consumer protections (such as coverage of the essential health benefits package or rating rules) that apply in the individual and small group markets or many state requirements.

To date the Department has interpreted this exception quite narrowly to apply only when a “bona fide” group of employers is bound together by a commonality of interest (other than simply providing a health plan) with vested control of the association so that they effectively operate as a single employer.  Thus, under current rules, eligible association members must share a common interest (generally, operate in the same industry), join together for purposes other than providing health insurance, exercise control over the AHP, and have one or more employees in addition to the business owner and spouse. Association plans offered by general business groups or that include individual members do not qualify, a position that the Department has reaffirmed as recently as 2017. In a few states, preexisting association plans reorganized as single trade or occupation plans to qualify for this exception and continued to operate.

This exception—where an AHP can be treated as a group health plan under ERISA—is the target of the Department’s proposed rule. In particular, the proposed rule would make it easier for an association to be considered a single multi-employer plan under ERISA. Although existing associations could continue to offer AHPs, the changes outlined would likely enable more AHPs to be regulated under ERISA and large group health plan rules, resulting in more coverage that is exempt from many of the ACA’s standards.

Summary Of The Proposed Rule

To increase the availability of AHPs, the Department proposes to adopt a new definition of “employer” for purposes of determining when employers can join together to offer or enroll in an AHP that is treated as a group health plan under ERISA. In doing so, the Department broadens the current definition, codifies this definition in regulations, and supersedes previous subregulatory guidance on AHPs.

One repeated consideration that characterizes the rule is the Department’s effort to ensure that a group or association has a “sufficiently close economic or representational nexus to the employers and employees that participate in the plan.” Where an employment relationship to the association does not exist, the only connection between a member employer and the association is the health coverage itself. When that is the case, courts have held that the relationship is more similar to a relationship between an employer and a state-regulated private insurer, which would be subject to many more consumer protections. The Department asserts throughout the rule that it has adequately addressed concerns about these types of arrangements masquerading as AHPs.

Relaxing The Requirement Of A Bona Fide Purpose Other Than Offering Health Insurance

In spite of this, the rule would first relax the requirement that associations must exist for a reason other than offering health insurance. This requirement—that a group or association must exist for a bona fide purpose other than offering health coverage to be an employer under ERISA—had been outlined in previous Department advisory opinions. It was intended to distinguish between associations offering AHPs and those offering private health insurance (which the rule refers to as “commercial-insurance-type arrangements”) where, as noted above, where there is no employment relationship between the plan and enrollees.

Under the proposed rule, an association could show commonality of interest among its members by either 1) being in the same trade, industry, or profession; or 2) being in the same principal place of business within the same state or a common metropolitan area (even if the metro area extends across state lines). These criteria are separate: associations whose members operate in the same industry can sponsor AHPs, regardless of geographic distribution, while members in the same geographic area may work in entirely different industries.

AHPs could also satisfy the commonality requirement by limiting themselves to a smaller geographic region, such as a city or county. As examples of metro areas, the rule cites the Greater New York City Area/Tri-State region, the Kansas City metro area, and the DC metro area, all of which extend into at least two states. The Department requests comments on whether more clarification would be helpful regarding the definition of a metro area, whether associations could manipulate geographic classifications to avoid employers with unhealthy risk, and whether the Department should establish a special process to confirm that all of an association’s members have a principal place of business in a metro area.

By relaxing the “commonality of interest” requirement, the Department would make it easier for employers—tied only by being in the same industry or geographic area—to band together and form an association for the sole purpose of offering health coverage. Employers could, in fact, do so: the rule would not require a group or association to be a preexisting organization. Rather, employers could form a new organization whose sole purpose is to provide group health coverage to member employers and sidestep many of the ACA’s consumer protections.

Organization Structure

Second, the rule would require an association offering a group health AHP to have an organizational structure and be functionally controlled by its members. The association would need to have a governing body, by-laws, and maintain other legal formalities based on the type of entity the association is. The association’s employer members would be required to oversee its activities, either directly or by electing a board or other representatives.

These requirements largely duplicate existing Department guidance under ERISA section 3(5) but are being codified to ensure that associations are “genuine organizations with the organizational structure necessary to act ‘in the interest’ of participating employers.” Here, the Department again notes the possibility that commercial entities could form what they claim are AHPs but then operate as traditional insurers. The Department asserts that its control requirement will help keep away these bad actors who do not have an employment relationship and thus would not be acting in members’ best interests.

A Broad Definition Of ‘Working Owners’ And A ‘Dual Treatment’ Approach

Third, enrollment in a group health AHP is limited to the association members’ employees, former employees, and their families or beneficiaries. This is largely dictated by the ERISA statute and helps ensure that AHP coverage is not available to just anyone off the street, emphasizing again that there has to be an employer relationship to obtain AHP coverage and that groups or associations sponsoring an AHP must be bona fide employment-based associations (not simply general membership organizations offering health coverage).

This would conceivably prevent individuals from enrolling in group health AHP. However, the proposed rule goes on to expand the availability of AHP group coverage to self-employed individuals referred to as “working owners.” Under the rule, a working owner would be considered both an employer and an employee for purposes of enrollment in a group health AHP. This “dual treatment” would allow a self-employed individual to be an employer (to participate in the AHP and offer group coverage) and an employee (of their own business to qualify for the health coverage offered by the AHP).

The Department proposes a definition of “working owner” that is quite broad. A working owner is a person who has any ownership right in a trade or business (whether that business is incorporated or not), earns wages from self-employment income, is ineligible to participate in a subsidized group health plan for another employer, and works at least 30 hours/week (or 120 hours/month) or has earned income that equals the cost of coverage in the AHP. The group or association would not be required to verify the working owner’s eligibility. Rather, the AHP sponsor could “reasonably rely” on written representations from the individual, such as an attestation, so long as the association has no knowledge to the contrary.

The proposed rule includes these criteria “to ensure that a legitimate trade or business exists” and that AHP coverage is being offered in the context of an employment relationship. Without these criteria, the Department notes the concern that the rule could “effectively eliminate the statutory distinction between offering and maintaining employment-based ERISA-covered plans, on the one hand, and the mere marketing of insurance to individuals outside the employment context, on the other.” The Department goes on to state that an association would not qualify under this rule if it offered coverage to individuals not genuinely engaged in a trade or business (such as an individual who provided only a single Uber or Lyft ride or knit only a single scarf for sale online). The Department invites comment on whether to adopt additional or different criteria to help ensure that “working owners” who join an AHP are genuinely self-employed.

The proposed rule does nothing to disturb the ability of self-employed individuals to deduct the cost of health insurance under federal tax law (or any associated reporting requirements) even though the dual treatment approach would consider working owners as both employers and employees for purposes of the AHP. The Department request comments on the dual treatment approach, as well as on a provision that would exclude from AHP membership individuals who are offered other subsidized group health plan coverage.

In adopting this “dual treatment” approach, the Department acknowledges a shift from previous interpretations and notes conflicting advisory opinions and other guidance. In making this interpretive change, the Department asserts that the term “employer” under ERISA is ambiguous, leaving room for agency discretion in interpreting its meaning, and cites its authority to supersede previous interpretations in non-binding advisory opinions “to address marketplace developments and new policy and regulatory issues.”

The Department also goes to great lengths to distinguish its new rule from an existing regulation at 29 CFR 2510.3-3, which excludes “plans without employees” from the definition of ERISA-covered plans. The Department asserts that this language is limited to Section 2510.3-3, applies only in a limited context, and thus does not prevent self-employed individuals from participating in plan arrangements such as AHPs.


Fourth, the proposed rule adopts a series of nondiscrimination protections that groups and associations must comply with when offering group health AHP coverage. These build upon existing health nondiscrimination provisions applicable to group health plans under HIPAA, as amended by the ACA, but they are applied slightly differently.

Under the rule, associations would be prohibited from conditioning membership in the association based on any health factor (defined as health status, medical condition, claims experience, receipt of health care, medically history, genetic information, evidence of insurability, or disability) of an employee, former employee, or family member or beneficiary. The association must also comply with nondiscrimination rules that govern benefit eligibility (including enrollment, effective coverage dates, waiting periods, late or special enrollment, and eligibility for benefit packages) and premiums for group health plan coverage.

These rules generally prohibit health discrimination within groups of similarly situated individuals but do not prohibit discrimination acrossdifferent groups of similarly situated individuals. Thus, the definition of a “group of similarly situated individuals” is quite important. In determining what constitutes such a group under these HIPAA and ACA rules, plans may treat participants as distinct groups based on bona fide employment-based classifications (such as full-time versus part-time, different geographic location, the date of hire, and different occupations, among others). Plans can also treat participants and beneficiaries as distinct groups and make distinctions based on the relationship between the participant and beneficiary (such as marital or student status). Note, however, that plans cannot make these distinctions if doing so is directed at an individual or group based on health factors.

In applying these existing rules to AHPs, the Department prohibits associations from treating different employer members as distinct groups of similarly situated individuals. This limits the ability of associations to engage in employer-by-employer risk rating (by, for instance doing health status underwriting for one employer in the association but not another). If an association could treat different employer-members as different groups, the nondiscrimination protections would be of little use, allowing AHPs to charge higher premiums to specific employers based on health status. The Department requests comment on whether the nondiscrimination protections appropriately balances risk selection issues and the ability of employers to innovate. The regulatory language also includes a series of examples to illustrate how the nondiscrimination rules would apply.

The Department maintains its existing reporting requirements under ERISA but requests comments on whether it should adopt notice requirements to ensure that members of associations as well as participants and beneficiaries are adequately informed of their rights or responsibilities with respect to AHP coverage. Comments are also solicited on the impact of these proposals on the risk pools of the individual and small group markets as well as any data, studies, or other information that would help estimate the benefits or costs of the rule.


Although President Trump has presented AHPs as a panacea to our health care woes, AHPs are neither new nor innovative. Many have left a legacy of insolvency and fraud, with millions in unpaid claims for policyholders and providers. These concerns, coupled with federal preemption of state regulation of AHPs, are among the reasons why stakeholders such as the National Association of Insurance Commissioners, the National Governors Association, the National Conference of Insurance Legislators, and over 1,000 state government, business, labor, consumer, and provider groupshave expressed concerns about AHPs and opposed federal legislation that would exempt AHPs from state law and oversight.

The proposed rule itself acknowledges that some AHPs have “failed to pay promised health benefits to sick and injured workers while diverting, to the pockets of fraudsters, employer and employee contributions from their intended purpose of funding benefits” and that Congress enacted reforms to address AHP abuse in the past. Yet, by broadening the availability of AHPs and relaxing commonality of interest standards, the proposed rule likely opens the door to additional fraudulent AHP behavior and the insolvency and unpaid claims that accompany it. The rule acknowledges that the Department would need to commit additional resources to AHP oversight if the proposal is finalized to address AHP mismanagement and abuse.

The proposed rule, if finalized, could also have a significant impact on the individual and small group markets. Although the Department is largely dismissive of concerns about an uneven playing field and risk selection raised by the American Academy of Actuaries and the National Association of Insurance Commissioners, AHPs have the potential to siphon healthy risk away from the traditional individual and small group markets through lower premiums and skimpier benefits. Because group health AHPs would be regulated as group health plans, they would have significantly more flexibility in designing benefits and setting premiums. The rule’s nondiscrimination protections notwithstanding, AHPs would be exempt from many of the ACA’s consumer protections and free to, for instance, rate on factors like age, group size, and the type of industry in which an employer works.

Associations could also design their products in a way that makes them unattractive to and thus discourages those with health needs from enrolling. Doing so would not run afoul of the proposed rule’s nondiscrimination provisions. AHPs may opt not to, for instance, cover prescription drugs or mental health coverage as a way of keeping premiums low and discouraging enrollment of sicker employers or self-employed individuals. The rule opens the door to benefit packages that existed before the ACA’s market reforms went into effect in 2014.

The Department acknowledges that AHPs “may contribute to some Exchanges’ instability” to the extent that they prove particularly attractive to younger or lower cost individuals. By enrolling the healthiest self-employed individuals and small groups, AHPs would leave less healthy individuals and groups with ever more costly coverage in the traditional markets. The rule could also affect individuals who currently qualify for and receive marketplace subsidies while working for a small employer who does not offer health coverage. Under the ACA, individuals with an offer of “affordable” employer-sponsored coverage that meets minimum value standards are prohibited from receiving subsidies to purchase coverage through the marketplace.

If more small employers opt to obtain AHP coverage under the rule, individuals (and their families) who previously qualified for subsidized marketplace coverage could lose access to that option. In addressing this issue, the Department notes only that “AHPs will also affect tax subsidies and revenue and the Medicaid program. While the impacts of this proposed rule, and of AHPs themselves, are intended to be positive on net, the incidence, nature and magnitude of both positive and negative effects are uncertain.” The Department also notes that some Medicaid-eligible workers may become eligible to enroll in AHPs given that 2 million individuals enrolled in Medicaid or CHIP in 2015 were working owners or dependents and 6 million were employees of small businesses that did not offer coverage.

The proposed rule also leaves some significant unanswered questions regarding issues such as the preemption of state law and regulatory authority and other ERISA-related issues. The Department asserts that the proposed rule “would not change AHPs’ status as large group plans and MEWAs, under ERISA, the ACA, and state law” and that AHPs would continue to be generally subject to state insurance regulation. The rule also notes that state benefit mandates in the large group market would apply to fully insured and possibly self-insured AHPs.

However, it is unclear whether a state’s attempt to regulate AHPs in a way that exceeds the standards in the rule—by, for instance, restricting small group rating rules to such plans—would be preempted under ERISA or not. Although states would retain the ability to adopt solvency and other financial or licensure requirements for AHPs, states could be limited in their ability to adopt other regulatory standards. Clarity under ERISA, let alone its preemption standards, is already hard to come by; the proposed rule further muddies the waters about what states can and cannot do to regulate AHPs.

Exacerbating the question about state authority, the Department notes its authority under ERISA Section 514(b)(6)(B) to exempt self-insured MEWAs from most state regulation, either by granting individual exemptions or class exemptions. Thus, even if a state introduced new standards to regulate self-insured AHPs (beyond solvency), the Trump administration could grant an exemption from these requirements. The Department specifically requests comments on the relative merits of possible exemption approaches under ERISA.

It is also unclear how the proposed rule affects non-health coverage standards. Although the Department asserts that the definition of “employer” that it proposes is limited to the context of employer group or association sponsoring an AHP, could there be unforeseen tax implications or other consequences?

Request For Information On Barriers To Choice And Competition In Health Coverage

On December 26, 2017, the Office of the Assistant Secretary for Planning and Evaluation (ASPE)—within the U.S. Department of Health and Human Services (HHS)—issued a new request for information (RFI) regarding implementation of President Trump’s recent executive order on health insurance coverage.

In his executive order, President Trump directed HHS to produce a report identifying the extent to which current state and federal laws, regulations, and other standards limit choice and competition and, in particular, the availability of association health plans (AHPs), short-term limited duration insurance (STLDI), and health reimbursement arrangements (HRAs). In the report, HHS must also identify ways that states and federal officials can expand access to these products and pursue other policies outlined in the executive order. The report must be developed in consultation with the Secretaries of the Treasury, Labor, and the Federal Trade Commission and delivered to the President within 180 days (and every two years thereafter).

ASPE issued the RFI to inform this report and “lay the groundwork for future action.” ASPE asks stakeholders not to comment on barriers to AHPs, STLDI, or HRAs in response to the RFI even though President Trump’s executive order included an emphasis on these topics. Recognizing that additional rules and guidance on these issues (such as the AHP rule discussed above) are forthcoming and anticipating that stakeholders will comment on those specific proposed changes, ASPE asks for comment on state and federal barriers to choice and competition other than those attributable to AHPs, STLDI, and HRAs.

Comments on the RFI will be received through January 25, 2018.

RFI Questions for Stakeholders

ASPE requests public comment about state and federal laws, regulations, guidance, requirements, and policies that discourage or prevent the development and operation of a high-quality, affordable health care system, competitive health care markets, and excessive health care consolidation. The RFI highlights policy changes that the Trump administration has already made, such as the 2017 market stabilization rule. However, ASPE acknowledges that the effects of limited health care competition extend beyond health insurance to other areas of health care where “[e]xercise of market power may result in both higher prices and lower quality.” As a result, ASPE requests comment on a wide variety of federal and state programs through the questions below:

  • What state or federal laws, regulations, policies, grants, or other funding mechanisms (including Medicare, Medicaid, and other sources of payment) reduce or restrict competition and choice in healthcare markets?
  • What state or federal laws, regulations, policies, grants, or other funding mechanisms (including Medicare, Medicaid, and other sources of payment) may promote or encourage anticompetitive behavior in healthcare markets?
  • What suggestions do you have for policies or other solutions (including those pertaining to Medicare, Medicaid, and other sources of payment) to promote the development and operation of a more competitive healthcare system that provides high‐quality care at affordable prices for the American people?

It is worth noting that HHS previously issued and received comment on a June 2017 RFI on regulatory flexibility. This RFI was issued in response to President Trump’s first executive order on the Affordable Care Act issued in January 2017, which similarly directed HHS to undertake a review of federal regulations to empower patients, promote consumer choice, enhance affordability, and return regulatory authority to the states. The current RFI from ASPE is broader—it asks for comment on regulatory barriers beyond the Affordable Care Act and recommendations to address state-based barriers—but at least some overlap with previous RFI comments is anticipated.

ASPE also notes that the RFI is “informal,” and it has not been published in the Federal Register. HHS appears to have issued an informal RFI in at least one other recent instance. This could be a trend worth watching. Without formal publication of RFIs, HHS could limit awareness of these public comment opportunities and miss out on feedback from critical stakeholders. The use of an informal RFI also comes at a time when there has been controversy over the agency’s failure to immediately publish comments in response to other RFIs.

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