On June 19, the Department of Labor (DOL) released a final regulation in response to President Trump’s executive order calling for the expansion of association health plans (AHPs). Among other things, the rule loosens existing AHP requirements to allow self-employed individuals and small employers to join together to qualify as a single, large group under the Employee Retirement Income Security Act (ERISA). In doing so, these groups will be regulated as large-group coverage, exempt from many Affordable Care Act (ACA) requirements. For more information on the final rule, you can access our brief here.

Following release of the rule, state regulators and industry stakeholders expressed mixed reactions. For instance, regulators in states such as Tennessee and Oklahoma responded positively. Tennessee’s Insurance Commissioner reported that her agency is, “willing to work with anyone” interested in forming an AHP and is ready to help consumers, “get these plans up and going.” Similarly, Oklahoma’s Insurance Commissioner applauded the final rule for promoting “affordable” choice. On the other hand, America’s Health Insurance Plans (AHIP) stated that it remains concerned that expanding AHPs will lead to higher premiums for those in the individual and small-group markets. The majority of health insurers opposed AHP expansion when the regulation was proposed, but DOL declined to accept most of their recommendations in its final rule. State regulators in California, Pennsylvania, and Washington also pushed back on the rule, warning that it, “threatens the continued existence of comprehensive . . . coverage,” (California), could lead to deceptive marketing of AHPs (Pennsylvania), and calling the administration’s promise that expansion will lead to lower costs a “ruse” (Washington).

Wasting no time, New York Attorney General Barbara Underwood (D) and Massachusetts Attorney General Maura Healey (D) announced that they will sue the administration over the final rule, arguing that it is unlawful, will result in fewer consumer protections, and “invite[s] fraud, mismanagement and deception.” In March, the AGs from 16 states and DC warned that expanding AHPs would increase fraud and misconduct, and expose consumers to mismanagement and deception. The DOL acknowledges the risk of increased fraud and abuse, but asserts that it “anticipates close cooperation” with states to guard against the risks.

Unfortunately, the long track record of fraud and insolvency involving AHPs suggests that the DOL may be overly optimistic that it has sufficient guardrails in place. There are several reasons why AHPs are especially susceptible to fraud. First, they can take advantage of what one former DOL official calls a “regulatory never-never land” between DOL and state insurance departments. Second, to the extent AHPs cross state lines, which the final rule would encourage, it increases uncertainty over which jurisdiction has oversight over the plans. Third, when AHPs are allowed to form for the primary purpose of selling insurance (as the DOL rule would permit), it can be an invitation to scammers. A look back at the history of AHPs demonstrates how easy it can be for AHPs to leave consumers and providers with millions of dollars in unpaid medical claims, even in states that did their best to provide oversight.

AHPs Have Long Been Associated With Insolvency, Deception, and Embezzlement

After Congress enacted ERISA in 1974, entities known as multiple employer welfare arrangements (MEWAs) began to enter the market and promote sham health and welfare benefits to employers. MEWAs are defined as any arrangement through which two or more employers (including one or more self-employed individuals) obtain health coverage, and AHPs are generally considered to be one type of MEWA. As these organizations grew, they quickly became a source of widespread fraud, as bad actors collected premiums for non-existing coverage, leaving businesses without medical insurance and providers with millions of dollars in unpaid bills. States had a difficult time regulating MEWAs, because they were largely unable to identify which entities were participating in their market and, when they did, the MEWAs often argued they were exempt from state regulation. In response, Congress amended ERISA to clarify that both state and federal governments have the ability to regulate associations and MEWAs.

Still, many of these entities took advantage of the regulatory ambiguity and were able to skirt state oversight. The same 1992 report by the Government Accountability Office (GAO) found that between 1988 and 1991, at least 398,000 MEWA participants and their beneficiaries were left with $123 million in unpaid medical claims and over 600 MEWAs had failed to comply with state laws. Some MEWAs had violated criminal statutes and of the 34 states that attempted to recover money for their consumers, only half were successful. Moreover, MEWAs frequently did not comply with state laws relating to reporting and disclosure, funding, and licensure requirements, and despite state efforts to shut down the entities—some continued to operate out of compliance. More than a decade later, a 2004 GAO report showed no change. Between 2000 and 2002, GAO identified 144 unauthorized entities “covering” over 200,000 policyholders, which had not paid at least $252 million in medical claims. At the time of the study, states had recovered only 21 percent of the unpaid claim amounts for consumers.

AHP Fraud and Abuse Still Persists Today

Today, DOL’s own website reveals that little has changed—MEWA fraud and abuse remains an ongoing issue. In 2014, DOL brought action against a New Jersey-based MEWA that professed to cover medical benefits, but rather operated as an illegal moneymaking scheme allowing its fiduciaries to pocket nearly $5 million. In November 2017, DOL secured a restraining order over a MEWA operated by AEU Holdings, AEU Benefits, and Black Wolf Consulting after they failed to pay over $26 million in medical claims. The MEWA covered roughly 14,000 beneficiaries, across 560 employers in 36 states. While DOL has identified and prosecuted some of these offenders, the potential for MEWA abuse is widespread.

Other examples include a Florida resident who embezzled $700,000 in premiums from a plan he marketed to small businesses and a South Carolina resident who took $970,000 in premiums from a plan for churches and small businesses. These instances show how easy it is for bad actors to manipulate the MEWA market and weaknesses in state regulation; these types of fraud will only become easier with the expansion of AHPs under the final rule.

Take-Away: In its final rule, DOL acknowledged that AHP expansion “increase[s] opportunities for mismanagement and abuse,” but it is largely relying on the states to combat that danger. There are a number of measures states can take to protect consumers from potential abuse, including holding AHPs to the same solvency and licensure standards as commercial insurers and asserting jurisdiction over out-of-state MEWAs. As states navigate implementation of the final rule, there is much to learn from the fraught history of AHPs and much work to do to safeguard their markets.