The Truth About Association Health Plans
In the summer of 2018, new regulation was finalized for association health plans, a form of group health insurance for employers. This rule allows small businesses to band together and offer the same type of insurance already used by large companies. To be clear, no new variety of health insurance was created by the regulation. Instead, access to large group health insurance was expanded. This category of health insurance covers almost 100 million Americans. For some, this market expansion is quite controversial due to the perceived threat it represents for Affordable Care Act (ACA) plans and this perception has produced some criticisms that are misleading at best.
While every form of health coverage embodies advantages and limitations, evaluation should be free from politicized distortions. This standard should apply to association health plans (AHPs) no less than it should apply to the Affordable Care Act (ACA) or Medicare, though admittedly our country has a disappointing record with respect to the latter two. Regardless, inaccurate critiques not only obscure the true challenges attendant to any insurance instrument but also engender remedies that range from inadequate to harmful.
One AHP critique suggested that the lower prices and generous benefits of new AHPs are not promising because the AHPs may be offering “teaser rates.” Even the most sympathetic reading would find this claim intellectually curious, if not baffling. What insurance carrier would risk financial losses on a teaser rate when later rate increase needed for business continuation would produce enrollment erosion? Additionally, how would a teaser rate pass a carrier’s internal actuarial analysis and then state department of insurance’s approval process? Where has a teaser rate worked in the health insurance market? Consider that for businesses, health insurance is a commodity. Brand loyalty is no defense against the same benefits offered elsewhere at a lower price. There are strong corporate pressures to obtain employee health benefits at the lowest possible cost. Thus, if an AHP were to obtain market share by a so-called teaser rate, would the AHP not only incur financial losses but also risk losing the incremental clients whose enrollment was specifically predicated on a teaser rate. In other words, there would be no long-term revenue model whose value could offset the losses created by a teaser rate. The accusation of teaser rate defies business logic as much as it does actuarial obligations and even a rudimentary academic analysis. However, if certain politically compromised circles, such observations would not even be understood as a reason for professional embarrassment.
The dismissal of teaser rates as a rationale explanation of lower AHP prices does not mean that AHP prices will never change. Premiums will adjust upward or downward as an insurer has increased experience with a given pool of enrollees as was the case for ACA plans. We saw ACA rates significantly change since the public release of Obamacare plans because insurance carriers gathered more and more data regarding the typology and velocity of medical claims among their plan participants.
While not as egregious as the “teaser rate” allegation from critics, equally problematic is the contention that association insurance premiums would be lower than ACA-compliant plans not due to any administrative efficiencies but because of the plans’ ability to offer reduced benefits that amount to “skinny” coverage. Part of this criticism is a willful ignorance regarding the areas AHPs can introduce efficiencies and savings, and part of this stems likely from a desire to try to categorize anything other than ACA plans as “junk insurance” (just a reminder – non-ACA large group health insurance covers almost 100 million Americans and has not historically been categorized as “junk insurance”).
An analysis of several dozen AHPs launched under the new regulation did not support the claim that AHPs were “skinny” health plans or junk insurance. Instead, the analysis found broad benefit packages with double-digit savings. This finding is not surprising for several reasons. First, the ability of a fully-insured AHP to function as a single large group health plan legally requires the insurer providing coverage to spend a smaller percentage of premiums on profit and overhead than is the case for existing ACA small group insurance. Even without introducing any other efficiency, a large group AHP has a price advantage due to this requirement for reduced overhead costs. Second, AHPs seek to maximize their total membership in order to leverage scale in price negotiations with insurers. Scale is the foundation of the group health insurance market and is one of the reasons why a large company can pay less than a small company for the same health benefits. For a small company getting insurance alone without an AHP, the lack of scale can increase premiums eight to eighteen percent on average compared to what would be paid by large companies for the same benefits.
AHPs like other large group health plans have the option of self-funding where the association assumes the responsibility for paying medical claims and not an insurance company. Self-funding can bring a higher risk of insolvency. However, the risks related to self-funded AHPs have been exaggerated by AHP critics to the same degree as the prospects for widespread narrow benefits. Any self-funded plan (which, by the way, includes health benefits provided to 61 percent of covered American workers) does have increased insolvency risk but a rational appraisal of self-funded AHPs should be contextualized in their use of both stop-loss insurance (protecting against catastrophic medical expenses) and cash reserve levels. Moreover, the one-sided criticism of self-funding ignores the fact that not only does self-funding eliminate profit paid to a primary insurer but it also provides access to an AHP’s medical claims data that, in turn, can be used to reduce insurance costs by identifying healthcare provider overcharges and excessive variation in costs for the same medical service. Fully-insured health plans, in contrast, typically restrict medical claim data from the employers they insure.
Last, and least convincing, of unfair assertions against AHPs is that their presence as an option for businesses will destabilize the ACA’s individual and small group markets. The January report from the Congressional Budget Office (CBO) on the subject projects the new AHPs will have a minor effect on ACA premiums and “premiums for the small-group market as a whole are projected to decline as a result of the rule.” In fact, CBO report estimated “400,000 people will have new AHP coverage who otherwise would be uninsured.” In fact, the vast majority of Americans who use a government exchange to enroll in ACA insurance receive substantial premium subsidies provided by taxpayers. It is exceptionally unlikely that AHP premiums could ever compete with ACA premiums that are heavily subsidized. For unsubsidized Americans buying ACA health insurance off-exchange, analysis has observed a pre-existing erosion in participation when looking at ACA enrollment data from 2015 to 2017. That time period, by the way, predates the new AHP regulation. As Kaiser Family Foundation has noted, “Declining off-exchange enrollment accounts for much of the drop in individual market enrollment since 2016.”
Association health plans are not a “magic bullet” for American health insurance costs but, as a voluntary option within the market, they can lessen costs and the amount of money flowing from small businesses into insurers. Moreover, AHPs can offer these savings while co-existing with other coverage options such as ACA insurance, grandfathered small group plans, health care sharing ministries, etc. Accepted as such, a more meaningful dialogue on AHPs would be welcome with respect to best practices promoting sound plan governance alongside their reduced costs. If, on the other hand, critics of AHPs ignore the opportunity for honest dialogue and cling to their current rhetoric, Americans may eventually turn their attention away from AHP arguments and ask how the ACA itself will materially improve if its principal advocates’ major ideas boil down to no more than increased federal funding and decreased market competition.
