Federal Judge Blocks Expanded Access to Association Health Plans

Updated April 29, 2019

It could now be harder for small businesses to band together to buy health insurance without some of the regulatory requirements that individual states and the Affordable Care Act (ACA) impose.

On March 28, 2019, a federal judge struck down a Department of Labor (DOL) final rule that had relaxed restrictions on multiemployer association health plans (AHPs). The rule has staggered implementation dates, the last of which is April 1 of that year. 

The DOL can seek a stay and appeal the decision, or revisit the rule.

In State of New York v. U.S. Department of Labor, District Judge John Bates of the District Court in Washington, D.C., ruled that the DOL's 2018 final rule stretched the definition of "employer"—as the entity that can sponsor an employee benefits plan—beyond what the Employee Retirement Income Security Act (ERISA) would bear. He characterized the rule as "clearly an end run around the ACA," designed to let employers "avoid the most stringent requirements of the ACA."

Ten states and Washington, D.C., had challenged the AHP rule, saying it let employers evade the ACA's consumer protections.

"This victory will help ensure better health care for millions nationwide," said New York Attorney General Letitia James.

Business groups, however, had welcomed the rule. Thomas Donohue, president and CEO of the U.S. Chamber of Commerce, called its enactment "a major step in the right direction for small businesses and the millions of Americans who will now be able to buy lower-cost health insurance plans."

The Society for Human Resource Management joined an amicus brief in support of the AHP rule. The brief argued that the rule "promotes economies of scale and administrative efficiency for small businesses" that are seeking to offer health care coverage to their employees.

"Thousands of employees and family members within the small business community have already enrolled in association health plans" since they became available under the AHP rule last fall, said Kev Coleman, president of AssociationHealthPlans.com, an online resource for AHPs. "While I do not believe [the court's] ruling will survive appeal, I believe Judge Bates' decision is an unnecessary detour on small businesses' path toward more affordable health coverage," he said.

Large Group Treatment for Small Employers

The ACA requires that nongrandfathered insured health plans offered in the individual and small group markets provide a core package of health care services, known as essential health benefits. Large employer group plans and self-funded plans are not required to comply with the essential benefit requirements and so have greater flexibility in plan design.

The AHP rule let employers that could previously only purchase group coverage in their state's small group market join together to purchase insurance in the less-regulated large group market. Most of the 50 states limit the large group market to employers with 50 or more employees, while a handful of states limit this market to employers with 100 or more employees.

By joining together, the DOL said, employers could:

• Avoid regulatory restrictions that pertain only to the small group market.
  

• Reduce administrative costs through economies of scale.
  

• Strengthen their bargaining position to obtain more favorable deals.
  

• Enhance their ability to self-insure.
  

• Offer a wider array of insurance options.
  

'Commonality of Interests' Required

Prior to the rule, AHPs could be sponsored only by employer associations whose members shared a "commonality of interest" that was unrelated to providing multiemployer benefits. That restriction tended to limit the availability of AHPs to members of large trade associations.

The rule, overseen by the DOL's Employee Benefits Security Administration, modified the definition of "employer" under ERISA in a way that allowed an association to be formed for the sole purpose of offering an AHP to its members. An association could show a commonality of interest among its members on the basis of geography or industry, if the members were either:

• In the same trade, industry or profession throughout the United States.
  

• 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.

The rule did not affect previously existing AHPs, which were allowed—but with stricter geographic and commonality restrictions—under prior guidance. Those more-limited AHPs were likewise not affected by the court's ruling.

"The court ruling leaves intact prior DOL guidance allowing industry-centric AHPs to exist, provided the association members participating in the AHP control the health plan, membership excludes sole proprietors and the AHP satisfies existing regulatory requirements," said Edward Fensholt, director of compliance service at Lockton, a benefits brokerage and consultancy based in Kansas City, Mo.

[SHRM members-only toolkit: Managing Health Care Costs]

States Undercut Rule's Intent

The AHP rule "had reserved to the states the right to restrict formation of these new AHPs," Fensholt wrote in a response to the court ruling. "Several, particularly in the northeast, issued guidance saying insured coverage of small-group employers, even under an AHP, had to comply with the state's small-group insurance rules. This guidance effectively eviscerated the intended impact of the new AHP rules in those states. They then joined forces to sue the DOL, alleging that the rules unlawfully and unreasonably expanded association coverage rules."

Associations in jurisdictions that brought the lawsuit—New York, Massachusetts, California, Delaware, Kentucky, Maryland, New Jersey, Oregon, Pennsylvania, Virginia, Washington and the District of Columbia—"should pause on the development of any new state or local AHPs and wait for further guidance from the courts or the Department of Labor," advised Danielle Capilla, director of employee benefits compliance at Alera Group, an insurance and financial services firm. "Associations in these states that are eager to move forward with a plan for small businesses should look to join forces with an existing national AHP based on trade, industry or profession."

Legislation Introduced

Independent of the AHP lawsuit, House Democratic leaders introduced legislation on March 26—the Protecting Preexisting Conditions and Making Health Care More Affordable Care Act—that would bar the DOL from enforcing the AHP rule. The bill would also halt the administration's go-ahead for short-term plans that don't comply with all of the ACA's consumer protections, such as coverage for pre-existing conditions. Any similar future guidance by the administration that would allow insurers or employers to provide coverage that is not fully compliant with the ACA would be barred, as well.

Even if the measure were to pass the House, it is unlikely that the Senate—where Republicans have a majority—would allow it to be enacted or that President Donald Trump would sign it into law. Thus, opponents of the rule are relying on the courts to strike it down.

Meanwhile, on April 12 House Republicans introduced the Association Health Plans Act, which they said would expand health care options and lower costs for small businesses through association health plans. The Democratic leadership of the House is expected to block this GOP measure from advancing, although a companion bill in the Republican-controlled Senate, introduced a day earlier, may fare better.

The Republican legislation would “prevent thousands of people from losing their health care coverage” and “ensure the new pathway remains available for small businesses to offer Association Health Plans under the Department of Labor’s final rule,” according to the bill’s sponsors. 

Related SHRM Articles:

DOL's Final Rule on Association Health Plans Expands Options, SHRM Online, June 2018

SHRM Supports Association Health Plan Rule, Opposes Lawsuit, SHRM Online, November 2019