The U.S. Department of Labor (DOL) has released a proposed rule that would rescind a Trump-era regulation designed to expand the formation and use of Association Health Plans (AHPs). DOL is also seeking comment on whether to formalize, through rulemaking, pre-existing criteria for the formation of a “bona fide” employee welfare benefit plan. Comments on this proposed rule are due 60 days after it is published in the federal register.

Background

AHPs are governed by state and federal laws and have historically varied significantly in size and membership. Some are formed to offer health insurance to individuals, others serve small or large employers, and still others serve a mix of individuals and employers. AHPs that offer benefits to employers generally qualify as multiple employer welfare arrangements (MEWA) under the Employee Retirement Income Security Act (ERISA). MEWAs, particularly those that are self-insured, have a long history of insolvency and even fraud.

Indeed, in the preamble to its proposed rule, DOL describes its “extensive experience” with unscrupulous promoters and operators of MEWAs. Compared to traditional health insurers, MEWAs have disproportionately suffered from financial mismanagement and abuse, leaving enrollees and providers with significant financial liabilities.

Under ERISA, an association can only sponsor an employee health benefit plan when it is acting as an employer. Such plans can only be offered through genuine employment-based arrangements. Longstanding DOL guidance prior to 2018 therefore allowed an association of employers to sponsor a single “multiple employer” plan only if certain criteria are met. Once the criteria were met, the group would be considered a bona fide single employer group under federal law. On the other hand, if an AHP did not meet these criteria, federal regulators would disregard the existence of the association in determining whether the coverage offered was considered individual, small-group, or large-group market coverage.

Under the Affordable Care Act (ACA), individual and small-group market insurers must meet federal standards to which large-group market insurers are not subject. These standards include requirements to cover a set of essential health benefits and participate in a single risk pool and risk adjustment programs, as well as limits on using health and age to set premiums. If an association could be considered a bona fide single employer group plan under ERISA, and the size of its membership qualified it as a large-group plan, it would be exempt from these ACA standards.

In 2018, the Trump administration sought to expand the number of AHPs that could qualify as single employer plans (and thus become exempt from ACA individual and small-group market standards). The 2018 federal rule loosened the criteria for the circumstances under which a group or association would be considered an “employer” under ERISA. However, in 2019 the U.S. District Court for the District of Columbia in New York v. Department of Labor set aside much of the 2018 rule and remanded it to DOL. Although the Trump administration appealed that ruling, the appellate court has stayed action in the case while the DOL reassessed its rulemaking.

Over four and a half years later, DOL is now seeking to rescind the 2018 regulation in its entirety.

Pre-2018 Policy On AHPs

Before publishing its 2018 regulations, DOL had, largely through sub-regulatory guidance, distinguished between bona fide single employer groups under ERISA and arrangements that would be considered state-regulated private health coverage subject to state and federal insurance rules. The Department had three criteria that had to be met for a group or association of employers to be considered a single employer group:

• Whether the group or association has business or organizational purposes and functions unrelated to the provision of benefits (the “business purpose” standard);
• Whether the employers share some commonality of interest and genuine organizational relationship unrelated to the provision of benefits (the “commonality” standard); and
• Whether the employers that participate in a benefit program, either directly or indirectly, exercise control over the program, both in form and substance (the “control” standard).

To determine whether an arrangement met these three criteria, DOL would examine, through a “facts and circumstances” analysis, how the association solicited members, its eligibility criteria, the process and purposes behind the association’s formation, the powers and rights of employer-members, who actually controlled the benefit program, and the extent of any employment-based nexus or genuine organizational relationship unrelated to the provision of benefits. DOL notes that its pre-2018 guidance on these issues, largely issued in the form of Department Advisory Opinions, has been universally upheld by the courts.

The 2018 AHP Regulation

On June 19, 2018 DOL released a final regulation loosening the criteria under which associations could obtain status as a single employer group. As noted above, such AHPs would be regulated under federal law as large-group coverage, making them exempt from ACA and other federal and state requirements that apply to the individual and small-group insurance markets.

The 2018 regulation diverged from longstanding DOL policies in three key areas.

The “Business Purpose” Standard

DOL had long required that, to qualify as a single employer plan, the group or association must have a purpose other than providing health benefits. This was to help ensure that the AHP would actually act in the member-employer interests and to differentiate an employee health benefit program from a commercial insurance venture.

The 2018 rule loosened this standard to state that the group or association must have at least one business purpose unrelated to providing health benefits, but it did not need to be the primary business purpose of the group or association. The regulations thus allowed associations to form for the primary purpose of offering health benefits, so long as they had at least one other business purpose.

The “Commonality Of Interest” Standard

Prior to 2018, DOL required employer-members of an association to have a commonality of interest and organizational relationship beyond obtaining health benefits. The 2018 regulations relaxed this standard by allowing employer-members that are in geographic proximity to one another (which the rule defined as being within the same state or metropolitan area) to meet the commonality of interest standard. Such employers could be in unrelated trades, lines of business, or professions. However, the 2018 regulations did not address how geographic proximity alone would create a commonality of interest.

The Definition Of “Working Owners”

In general, ERISA applies only when there is an employer-employee nexus. DOL’s longstanding interpretation of ERISA held that the employer-employee nexus is the “heart” of what makes an entity a bona fide group plan. Prior to 2018, working owners without common law employees were thus not considered employers, and could not be part of a bona fide single employer group. Similarly, such working owners could not be considered “employees” able to participate in an ERISA-covered plan. The 2018 regulations represented a dramatic shift, allowing working owners without any employees to participate in AHPs, stating that such working owners could be considered an employer and employee at the same time.

In addition to the above three policy changes, the 2018 regulations also incorporated health nondiscrimination protections already applicable to group health plans under the Health Insurance Portability and Accountability Act (HIPAA) to AHPs. These include requirements that associations cannot discriminate in eligibility, benefits, or premiums against individuals employed by a member-employer based on a health factor.

Federal Court Decision On The 2018 Regulations

Shortly after the 2018 regulations were finalized, eleven states and the District of Columbia sued DOL in federal district court, arguing that the administration had violated the Administrative Procedures Act (APA) because the rules exceeded the agency’s statutory authority and were arbitrary and capricious. In March of 2019, the US District Court for the District of Columbia granted summary judgment to the state plaintiffs. In particular, the court vacated the 2018 rule’s relaxation of the “business purpose” and “commonality of interest” standards as well as the provisions allowing working owners without common law employees to be treated as both employers and employees when participating in an AHP. Although the court did not vacate the entire regulation, its ruling effectively gutted the Trump administration’s intended policy towards AHPs. DOL appealed the ruling and also issued a temporary enforcement policy, alerting AHPs that had formed under the 2018 regulations that they would not pursue actions against them. In its current proposed rule, DOL notes that this temporary enforcement policy expired long ago, and it does not believe any AHPs relying on the 2018 rule are in existence today.

Proposed 2023 AHP Rule

In its proposed rule, DOL would fully rescind the 2018 AHP rule. In its proposal, DOL notes that it is concerned about the expansion of fraudulent and mismanaged MEWAs that could occur if the 2018 rule is allowed to stand, particularly at a time when over 90 million low-income children and adults are losing Medicaid or CHIP coverage, and may need to transition to new forms of coverage. DOL notes that the 2018 regulations do not sufficiently distinguish between a genuine employment-based relationship and commercial insurance-type arrangements. The 2018 rules could result in a proliferation of AHPs that are marketed as employee benefit plans but are primarily created with the intent to sidestep Affordable Care Act and state-level insurance regulations and consumer protections.

Legal Basis For Rescinding The 2018 Regulations

Under Supreme Court precedent, federal agencies may reverse prior policy positions so long as they acknowledge the change in position, the new policy is permissible under the statute, there are good reasons for the new position, the agency believes the new policy is better, and the agency considers those who rely on the prior policy.

In its proposed rule, DOL argues that the 2018 regulations loosening the business purpose, commonality of interest, and working owner standards do not align with the text and intent of ERISA. The agency also notes that the 2018 rule would have increased adverse selection in the individual and small-group insurance markets. (Indeed, the Trump administration acknowledged at the time that its rules would increase premiums in those markets by between 0.5 and 3.5 percent.) DOL further notes that the 2018 rules would have enabled AHPs to offer coverage not subject to the ACA’s essential health benefit standard, enabling them to offer only “skinny” plans that leave workers underinsured.

Alternatives To Complete Rescission Of The 2018 AHP Regulations

DOL considered, but decided against, proposing a rescission of just those provisions vacated by the federal district court. The Department argues that leaving portions of the 2018 regulations standing would result in an inadequate definition of “employer” under ERISA and a lack of distinction between single employer plans and the ordinary commercial provision of insurance outside an employment context.

DOL is also considering, in addition to rescinding the 2018 AHP regulations, codifying into federal regulations its pre-2018 guidance. It asks for public comment on whether it should do so, or whether it should issue additional guidance clarifying the application of its pre-2018 guidance as it relates to group health plans (including the application of HIPAA’s nondiscrimination rules to AHPs); propose revised alternative criteria for MEWAs; or pursue some combination of the above.

Author’s Note

The Robert Wood Johnson Foundation provided grant support for the author’s time researching and writing this post.

Sabrina Corlette, “Proposed Rule Would Roll Back Expansion Of Association Health Plans,” Health Affairs Forefront, December 20, 2023, https://www.healthaffairs.org/content/forefront/proposed-rule-would-roll-back-expansion-association-health-plans. Copyright © 2023 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.