Order Code RL31963
CRS Report for Congress
Received through the CRS Web
Association Health Plans, Health Marts and the
Small Group Market for Health Insurance
Updated July 31, 2003
Jean Hearne
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Association Health Plans, Health Marts, and
the Small Group Market for Health Insurance
Summary
An estimated 41.2 million people were without health insurance in 2001. The
number of uninsured has risen in almost every year since 1989 and is expected to
continue its rise in 2002 and 2003. Most people in the U.S. who have health
insurance obtain it through their own, or a family member’s, employer as a workplace
benefit. Small employers, however, are far less likely than larger employers to
provide health insurance to their workers and almost half of the uninsured work for,
or are family members of employees who work for, small employers.
Legislation under consideration by the 108th and earlier Congresses is intended
to assist small employers in offering health insurance as a benefit to their workers.
The Small Business Health Fairness Act of 2003 (H.R. 660/S. 545) and a number of
bills from the earlier Congresses include provisions creating new groups for small
firms to join or encouraging the growth of existing groups so that small employers
can band together to offer coverage to their employees.
Association Health Plans (AHPs) and Health Marts (HMs) are two of the groups
that would be established by these bills. Both types of entities would build on
existing groups already available to some small employers; many trade and
professional associations offer health insurance to their members, and health
insurance purchasing cooperatives (HIPCs) established by a few state governments
as well as other groups exist in a number of states and metropolitan areas.
The goals that are offered for establishing such groups include reducing the
administrative challenges for small employers in seeking out, contracting with, and
administering health benefits and providing them with the bargaining power that
larger employers have in negotiating contracts with insurers. In addition, some of
those groups may be able to offer reduced priced plans, thereby enabling more
employers to afford to offer such coverage. Reducing the number of small firm
workers without access to health insurance is another goal that has often been offered
for pursuing expanded group purchasing options. Evidence based on existing group
purchasing mechanisms suggests that some of these goals are more likely to be
achieved by the proposals than others.
Opponents of the legislation posit that
unintended negative consequences would arise, negating the benefits that the new
groups would create. This concern largely relates to fears that AHPs would increase
risk segmentation in the small group market for insurance by covering mostly healthy
groups, leading to increased instability and higher premiums for other small groups.
Still other groups have taken the position that the proposed small employer
groups, while not undermining the small group market, would require additional
features to significantly expand insurance coverage among the uninsured. New
proposals recommend combining pooling mechanisms with cash subsidies or tax
credits or providing seed money to states to improve the effectiveness of such entities
in helping small employers access health insurance. This report will be updated
periodically.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Employer Purchasing Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Association-Sponsored Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Health Insurance Purchasing Cooperatives (HIPCs) . . . . . . . . . . . . . . . 5
Legislative Proposals for AHPs and Health Marts . . . . . . . . . . . . . . . . . . . . . . . . 6
AHPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Health Marts (HMs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Impact of AHPs and HMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Risk Segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Ensuring Financially Secure Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Regulatory Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Workers in Small Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Small Employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Insurance Carriers, Agents and Brokers . . . . . . . . . . . . . . . . . . . . . . . . 16
Regulators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Other Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
List of Tables
Table 1. Comparison of HIPCs and Association-Sponsored Plans under
Current Law with Proposed AHPs and HMs . . . . . . . . . . . . . . . . . . . . . . . . . 9

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Association Health Plans, Health Marts,
and the Small Group Market for
Health Insurance
Introduction
An estimated 41.2 million people were without health insurance in 2001.1 The
number of uninsured has risen in almost every year since 1989 and is expected to
continue its rise in 2002 and 2003. Most people in the U.S. who have health
insurance obtain it through their own, or a family member’s, employer as a workplace
benefit. Small employers, however, are far less likely than larger employers to
provide health insurance to their workers and almost half of the uninsured work for,
or are family members of employees who work for, small employers. For some small
employers, especially those with young and transient workforces, providing health
insurance may not be a high priority. Other small employers would like to offer
employees health insurance, but face a number of difficulties. While the cost of
insurance is cited as the primary reason for not offering the benefit, there are other
significant reasons for not offering coverage, such as the complexity of offering
insurance to a job force with high turnover, and the belief that coverage is not
necessary to attract workers.2
Legislation considered by the 108th and earlier Congresses is intended to assist
small employers in offering health insurance as a benefit to their workers. These bills
include provisions creating new groups for small firms to join or encouraging the
growth of existing groups so that small employers can band together to offer
coverage to their employees. These groups are intended to reduce the administrative
challenges for small employers in seeking out, contracting with, and administering
health benefits and to provide them with the bargaining power that larger employers
have in negotiating contracts with insurers. In addition, some of those groups may
be able to offer reduced priced plans, thereby enabling more employers to afford to
offer such coverage.
Association Health Plans (AHPs) and Health Marts (HMs)3 are two of the
groups that would be established by the bills that have been and are under
1 CRS Report 96-891 EPW, Health Insurance Coverage: Characteristics of the Insured
and Uninsured Populations in 2001, by Chris L. Peterson, Jan. 7, 2003.
2 Kaiser Family Foundation: 1998 Health Benefits Survey of Small Employers, February,
1999, by Jon Gabel, Kimberly Hurst, Heidi Whitmore, Samantha Hawkins, Catherine
Hoffman, and Gail Jensen, Feb. 1999.
3 At least one bill (H.R. 2563 considered during the 107th Congress) called these entities
Qualified Health Benefits Purchasing Cooperatives (HBPCs).

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CRS-2
consideration. Both types of entities would build on existing groups that are already
available to some small employers today. Many trade and professional associations
offer health insurance to their members, and health insurance purchasing
cooperatives (HIPCs) established by a few state governments as well as other groups
exist in a number of states and metropolitan areas. Based on the most recent data
available, about one-third of small firms are believed to purchase health insurance
through such pooled arrangements.4 This report examines the track record of the
existing pooled purchasing arrangements that are most parallel to AHPs and HMs;
evaluates the potential impact of AHPs and HMs, as defined in bills considered
during the 108th and earlier Congresses, on small employers’ access to health
insurance; identifies the stakeholders in the small group market for insurance that
could be impacted by such legislation; and discusses alternative approaches that some
analysts believe would improve the potential impact of AHPs and HMs in reducing
the number of uninsured.
The reader may find the following definitions helpful.
Association-Sponsored Plans — This phrase is used to describe the universe
of plans sponsored by trade and professional associations, and business coalitions.
A bill being considered by the 108th Congress (H.R. 660, the Small Business Health
Fairness Act of 2003) would establish incentives for new association-sponsored plans
and create some market advantages for new and existing association-sponsored plans
that become certified under a process described in the bill. Such plans would be
called Association Health Plans (AHPs). Not all association-sponsored plans would
qualify as AHPs as defined in H.R. 660. A more detailed description of H.R. 660
and the differences between proposed AHPs and existing association plans is below.
Under current law, association-sponsored plans are regulated by states, even
when those associations self-fund the health coverage. This authority to regulate
such plans was clarified in 1983 by the “MEWA” (multiple employer welfare
arrangement) amendment to federal pension and benefits statute. (See definition
below.)
Health Insurance Purchasing Cooperatives (HIPC) — This denotes a second
broad category of purchasing groups for small employers that currently exist in a
number of states. Often established by states or Chambers of Commerce, these
groups allow small employers within a geographic area to purchase health insurance
through the group. The HIPC negotiates with insurers to specify the features of the
plans to be offered through the HIPC and the prices of those plans. Unlike most
association-sponsored plans, small employers of any trade may purchase coverage
through HIPCs. Bills considered during the 106th Congress would have established
incentives for the formation of new HIPCs, and would have required these entities
to have certain characteristics. Those entities were to be certified as Health Marts.
Under current law, states regulate the health plans offered by HIPCs.
4 S.H. Long, and S.M. Marquis, Pooled Purchasing: Who Are the Players?, Health Affairs,
July/Aug. 1999, vol. 18, no. 4. (Hereafter cited as Long and Marquis, Pooled Purchasing:
Who Are the Players?)

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CRS-3
Sometimes the distinction between HIPCs and association-sponsored plans is
blurred, under both current law and the proposed bills. The insurance marketplace
is diverse and dynamic, making perfect categorization of types of plans sometimes
difficult. For example, sometimes local chambers of commerce offer health coverage
to small employers within a geographic area. Health coverage offered by that group
may look very similar to that which is offered by HIPCs. A primary difference
between association-sponsored plans and HIPCs under current law is that HIPCs
offer only insured plans, never funding their own risk while associations often offer
coverage to its members that is self-insured.
Multiple Employer Welfare Arrangement (MEWA) — This is a legal term
established in 1983 within the Employee Retirement and Income Security Act of
1974 (ERISA)5 for all group purchasing arrangements through which employers
purchase insurance or benefits together. The purpose of the ERISA provision is to
clarify that states have regulatory authority over such plans, whether the coverage
offered by those groups of employers consists of insurance products or self-funded
health plans (see definition below.) Under current law, association-sponsored plans
and HIPCs are considered MEWAs and thus, may be subject to state regulatory
authority.
Self-Insurance/Self-Funding — A health care benefit offered by an employer
or group of employers (an association or trade group) is “self-insured” or “self-
funded” when that employer or group of employers sets aside funds to cover the cost
of health benefits for their employees instead of purchasing an insurance plan from
a traditional insurance company or a health maintenance organization (HMO).
Sometimes the employer directly establishes contracts with providers and
administers the plan but most often it is handled through an administration service-
only agreement with an insurance carrier or a third-party administrator. Many self-
insured employers or associations purchase stop-loss insurance that covers
expenditures above a certain aggregate claim level and/or catastrophic illness or
injury when individual claims reach a certain dollar threshold.6
Employer Purchasing Groups
The concept of employers coming together to purchase health insurance is not
new. Many health insurance purchasing groups for employers, both large and small,
exist today and have a wide range of features. There are publicly sponsored
purchasing groups and private purchasing groups; some that self-insure and others
that bargain with carriers to offer a single or multiple insured products. There are a
number of possible advantages for employers that purchase insurance through a
well-designed group. By pooling their insurance risks together, the employers in the
group may be able to increase their bargaining power with carriers and share
administrative functions, theoretically resulting in lower premium costs. Further,
5 P.L. 93-406, Sec. 514(b)(6).
6 Derived, in part, from Glossary of Terms Commonly Used in Health Care, Alpha Center.

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CRS-4
employees of those firms may be able to select from a larger number of plans than
if their employers were to obtain insurance independently.
Two types of purchasing groups, association-sponsored plans and HIPCs have
been the subject of a great deal of bipartisan interest. Many hope that these
purchasing groups, with the right legislative encouragement, could further reduce, for
small employers, the administrative costs and burden of providing health insurance
as a workplace benefit. If very effective, some hope that the group purchasing
arrangements could even reduce the number of uninsured workers by raising small
firms’ coverage overall or by making the choices available through small firms more
attractive to workers. Advocates also propose that such groups could, if enough
small firms in a geographic area were to join, provide a portable form of health
insurance coverage for workers who switch jobs.
In 1997, about 26% of all businesses participated in some form of pooled
purchasing. For smaller firms, as many as one-third purchased through a pooled
arrangement, but this percentage drops to about 14% for firms with 500 or more
employees.7 The distribution of firms and employees between association-sponsored
plans versus other types of pooled arrangements is not available.
Association-Sponsored Plans. Under current state law, many trade and
business associations offer health insurance plans for their members to purchase.
Associations usually offer one health plan to their membership and often self-fund
those plans.8 While the primary purpose of most association-sponsored plans is to
create economies of scale for small firms that band together, for those groups with
below-average risk, another important goal is to buy lower-priced coverage reflecting
their groups’ lower risk.
Since 19839, states have the authority to regulate health coverage sold by
associations even when the coverage is self-funded. For associations with members
in multiple states, this sometimes means that the benefits offered must comply with
the insurance laws and regulations in all of the states in which their plans are sold,
including solvency and funding requirements and consumer protections.
Little information exists on the variety and types of coverage offered through
associations or on consumer satisfaction with that coverage. It is reasonable to
7 Long and Marquis, Pooled Purchasing: Who Are the Players?, 1999.
8 Long and Marquis found that 80% of businesses participating in a purchasing coalition had
a choice of two or more plans, while only 15% of businesses participating in other
purchasing groups had a choice of plans.
9 Before the 1983 addition of the MEWA provision to ERISA, self-funded association-
sponsored plans were exempt from state regulation of insurance. The MEWA provision
clarified states’ regulatory authority over association-sponsored plans, even when the
coverage offered is self-funded. This ERISA modification was Congress’s response to a
large number of highly publicized association plan failures. Many states responded to the
ERISA change by establishing laws to regulate such plans, and by requiring those plans to
abide by insurance laws already on the books including solvency and funding standards.
Some states even prohibited the ability of association-sponsored plans to self-insure.

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CRS-5
assume, based on the large numbers of people enrolled in such plans, that
associations are an important contributor to the insurance coverage of the population.
Associations, on the other hand, suffer from a bad reputation, based on a number of
highly publicized plan failures, failures that drove the 1983 statutory change
clarifying states’ rights to regulate such plans.
Despite the 1983 statutory change providing states with regulatory authority
over association plans, some of the problems with those plans continue to exist today
as demonstrated by recent announcements of association-sponsored plan failures.10
These plans seem to have fallen through the regulatory cracks — some states’ laws
do not apply to out-of-state associations. Other association-sponsored plans suffer
from fundamental instability, despite the states’ regulations intended to strengthen
those entities against such risk. Those plans that are unable to attract a large
enrollment with a broad risk profile face a risk selection spiral — a phenomenon in
which, year after year, annual premiums, which may begin at a low level, spiral
upward. Once a few high cost claims are filed, premiums rise to reflect the cost of
the now higher-risk group. The healthiest enrollees have an incentive to exit the
group to seek lower premiums reflecting their healthy status. This prompts an
additional increase in premiums due to the increasingly less healthy group left within
the pool — which, in turn, triggers more exits among the healthier members left in
the pool, and an increase in premiums, with the cycle repeating itself.
Health Insurance Purchasing Cooperatives (HIPCs). HIPCs are similar
to association-sponsored plans in that small employers band together to purchase
insurance in larger groups. But they are different from those plans in a number of
important ways. HIPCs generally offer coverage to all small employers within a
defined geographic area. The employers do not need to belong to a certain industry
or be members of, or affiliated with, a professional association. Another difference
between association-sponsored plans and HIPCs is that the cost of coverage offered
by HIPCs is usually community-rated instead of at rates based on each individual
employer’s group (experience-rated). Finally, HIPCs tend to offer a choice of insured
plans whereas associations usually offer one plan.
HIPCs are relatively uncommon. A number of HIPCs have been established
privately by Chambers of Commerce or other similar entities. Others have been
established by state or local governments. The largest of these is the California’s
Pacific Health Advantage (PacAdvantage) which, at last count, had enrollment of
11,000 small businesses through which almost 150,000 individuals received
coverage.11 It was established by the state but its authorizing legislation provided for
its administration to be taken over by a private entity after 3 full years of operations.
It is currently operated by the Pacific Business Group on Health, a coalition of large
employers.
10 “More Patients Get Stuck with the Bills,” USA Today, May 5, 2001; “Insurance Fraud
Rises with Health-Care Costs,” Chicago Tribune, Feb. 19, 2002; “Car Dealers’ Health
Insurance Trust Goes Under,” Newark Star Ledger, Feb. 24, 2002.
11 [http://www.pacadvantage.org]

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CRS-6
As with association-sponsored plans, HIPCs have had a mixed history of
success. Advocates hope that cooperatives, in addition to easing small firms’
administrative burden, would also reduce the price that small employers face, and
would enroll large enough numbers of employers to create a significant market
presence. But reductions in the cost of plans sold through HIPCs have not been
achieved.12
Some HIPCs have encountered indifference on the part of health
insurance brokers (most insurance sold in the small employer market is sold through
insurance brokers) and insurers while others have had to close their doors for lack of
enrollment.
Still others, like PacAdvantage, on the other hand, have stable enrollment and
are considered to be a success. They have been able to provide small firm workers
with a choice of plans and their advocates offer them as an efficient way to
administer public subsidies — from existing programs like Medicaid and the State
Children’s Health Insurance Program (SCHIP) or proposed subsidies for
employer-based health insurance coverage.
Legislative Proposals for AHPs and Health Marts
The group purchasing provisions considered by the 108th and earlier Congresses
have at their foundation a number of goals: to improve the ease with which small
employers purchase insurance for their employees; to reduce the cost of health
insurance plans offered in the small group market; to increase the number of workers
in small firms who have health insurance; and sometimes, to increase the number of
health coverage choices available to workers in small firms.
AHPs. H.R. 660, introduced by Representative Fletcher, was passed by the
House of Representatives on June 19, 2003 and referred to the Senate Committee on
Health, Education, Labor, and Pensions. Its companion bill, S. 545, was introduced
in the Senate on March 6, 2003 by Senator Snowe. HR.660/S. 545 would establish
Association Health Plans as generally defined above. Association-sponsored plans
interested in attaining certification as AHPs as under this bill, would undergo a
certification process to be established by the Department of Labor (DOL).
The bill would establish a number of features that plans must have to become
certified as AHPs, and exempt such plans from state insurance law and regulatory
oversight. The provision would remove AHPs from states’ authority to apply a large
body of insurance laws and regulations including consumer protections, solvency and
fair marketing practices, grievance and appeals procedures, premium taxation and
prohibitions on discrimination.
Instead, the bill would establish the federal
government as having the sole regulatory authority over these entities except in the
12 GAO/HEHS-00-40, Private Health Insurance: Cooperatives Offer Small Employers Plan
Choice and Market Prices, Mar. 2000; J.M. Yegian, T.C. Buchmueller, J.C. Robinson, A.F.
Monroe, Health Insurance Purchasing Alliances for Small Firms: Lessons from the
California Experience, May 1998; S.H. Long, and M.S. Marquis, Have Small-Group Health
Insurance Purchasing Alliances Increased Coverage?, Health Affairs, vol. 20, no. 1,
Jan./Feb. 2001.

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CRS-7
case of state laws that prohibit the exclusion of a specific disease from coverage, or
relate to newborn and maternal minimum hospital stays and mental health parity.13
The bill would establish non-discrimination provisions that would prohibit
AHPs from rejecting less healthy applicants from coverage or targeting those
individuals for higher premiums. Reserve and solvency requirements would replace
those states’ laws that would no longer apply. Those provisions and the other
requirements of the bill would be enforced by the “applicable authority” —
sometimes the Secretary of the Labor and at other times, the states’ agencies
responsible for the regulation of insurance.
Certified plans would also include the following features:
! AHPs must offer at least one insured health coverage option unless:
(1) the self-insured plan existed before the date of enactment of the
bill; (2) membership is not restricted to one or more trades; instead,
employers representing a broad cross section of trades and
businesses or industries are eligible; or (3) the plan covers eligible
participating employees in one or more high risk trades (as listed in
the bill).
! The association sponsoring the plan must have been in existence for
at least 3 years and be operated by a board of trustees with complete
fiscal control and responsibility for all operations.
! AHPs must have at least 1,000 participants and beneficiaries, and
have offered coverage on the date of enactment or represent a broad
cross-section of trades, or represent one or more trades with average
or above average health insurance risk.
! All employers who are members must be eligible to enroll, all
geographically available coverage options must be made available
upon request to eligible employers, and eligible individuals cannot
be excluded because of health status.
! Premiums for any particular small employer are prohibited from
being based on the health status or claims experience of its plan
participants or on the type of business or industry in which the
employer is engaged.
The bill would establish requirements regarding who may participate on the
board of trustees for qualified AHPs. The board may include owners, officers,
directors, or employees of the participating employers or partners with the
participating employer who actively participate in the business. Service providers to
the plan may also be members of the board if they constitute not more than 25% of
the membership of the board and do not provide services to the plan other than those
on behalf of the sponsor.
The bill would establish an “Association Health Plan Fund” from which the
Secretary of Labor (or applicable authority) would make payments to ensure
13 And are not pre-empted by federal laws regarding minimum hospitals stays for newborn
delivery and mental health parity (Sections 711 and 712 of ERISA Title I, Part 7).

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CRS-8
continued benefits on behalf of AHPs in distress. The fund’s activities would be
financed by annual payments made by AHPs.
Health Marts (HMs). Health Marts were included in a number of bills
considered by previous Congresses. While HMs have not been deliberated on
recently, the concept continues to generate interest. HMs,14 would be cooperatives
like the existing HIPCs. Health Marts were generally defined in previous bills to be
private, nonprofit entities that make health benefits coverage available and provide
related administrative services to all small employers and eligible employees in a
specified geographic area no smaller than a county. Health Marts would have been
exempted from state laws related to benefits (except for laws requiring coverage of
specific diseases, maternal and newborn hospitalization, and mental health) and from
states’ grouping requirements (which bar employers from joining together for the
sole purpose of purchasing health insurance), and any other requirement that directly
or indirectly impedes offering coverage through an HM. Other characteristics of HMs
were to include the following:
! Health Marts would have operated under the direction of a board
that includes representatives from small employers, employees,
health care providers, and entities that underwrite or administer
health benefits coverage.
! They would have been required to offer at least two coverage
options and have had at least 10 purchasers and 100 members by the
end of the first year of operation.
! They would not have been allowed to self-insure.
! Premiums for benefits offered through HMs would have been
allowed to vary only as permissible under state law and would not
have been allowed to vary among similarly situated individuals on
the basis of health status.
! Health Marts would be prohibited from denying enrollment or
renewal of coverage on the basis of health status-related factors.
The following table compares some of the features of proposed AHPs, and HMs
with the most common features of existing purchasing cooperatives.
14 In this document HMs are described based on the provisions of H.R. 2990, the Quality
Care for the Uninsured Act of 1999 as passed by the House of Representatives in October
of 1999.

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CRS-9
Table 1. Comparison of HIPCs and Association-Sponsored
Plans under Current Law with Proposed AHPs and HMs
Current Law/Current
Proposals
Feature or
Practice
condition
HIPCs
Association-
AHPs
HMs
Sponsored
Type of entity,
Governmental
Private,
Private, subject
Private,
governance
or nonprofit,
subject to
to federal law
nonprofit,
subject to
federal and
only
subject to
federal and
state law
federal and
state law
some state
law
Interests
Employers,
Sponsoring
Sponsoring
Employers,
represented on
community
institution and
institution and
employees,
governing board
members
members. May
providers, and
include
insurers
vendors,
subject to
restrictions
Must accept all
Generally not
No
No
No
willing insurers
Able to
Typically
Yes
Yes
Yes, but
negotiate with
only over
seems
plans over
administrative
unlikely given
premiums, etc.
component
board
structure
Who selects
Employee
Employers
Employers
Employers
plan?
(Not required
(Not required
(Not required
to allow
to allow
to allow
employee
employee
employee
choice)
choice)
choice)
Standardized
Normally
Not required
Not required
Not required
benefits
Subject to state-
Generally yes
No
No, except for
Same as
mandated
coverage of
AHPs.
benefits laws
specific
diseases,
maternal and
newborn
hospitalization
and mental
health.
Group size
Usually 2-50
None
None
2-50
limits
employees
employees

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CRS-10
Current Law/Current
Proposals
Feature or
Practice
condition
HIPCs
Association-
AHPs
HMs
Sponsored
Must take all
Yes
Within
Within
Yes
small groups
association
association
that apply,
membership
membership
regardless of
only; non-
only; non-
health status
members
members
excluded
excluded
Subject to state
Yes, but can
Yes
No, but
Ambiguous
rating
sometimes
establishes
requirements
offer
some federal
discounts
limits on rating
factors to apply
within
association
Subject to other
Yes
Yes
Only HIPAA,
Yes
small-group
not state laws
insurance
(with some
reforms
exceptions)
Geographic
Usually whole
Same as
Presumably the
County-
service area
state
association
same as
specific, and
membership,
association
counties need
often
membership,
not be
multistate
often
contiguous
multistate
Allowed to
No
Yes
Yes, subject to
No
assume
reserve and
insurance risk
solvency
(self-insure)
requirements
Source: Adapted from Hall, Wicks, and Lawlor, Health Affairs; Jan./Feb. 2001, p. 144.
Note: HIPAA is Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191).
The Impact of AHPs and HMs
Opinions about the potential impact of AHPs and HMs on the small group
market for insurance span the continuum of possibilities. Advocates of AHPs and
HMs view removing the state regulatory barriers and creating federal standards as
ways to encourage the growth of pooling options. By releasing multi-state pools
from the regulatory burdens of each state in which enrollees reside, these provisions
would increase the options available to small employers who want to offer insurance
as a benefit but cannot. In addition, some argue that the increased risk of small firm
coverage could become spread across larger groups of employers (through the pools)
making health insurance as accessible to workers in small firms as to those in large
firms. Most importantly, their supporters say that releasing AHPs and HMs from

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CRS-11
most state benefit mandates will allow those groups to offer more affordable,
slimmed down benefit packages that may be desirable to workers who are now
uninsured.
Opponents raise concerns about the impact the legislation would have on
adverse risk selection in the small group markets and the solvency of plans, and about
the DOL’s ability to ensure that enrollees are protected from enrolling in fraudulent
or inept plans. These issues are examined in more detail below.
Risk Segmentation. Insurers naturally have incentives to select the most
favorable risks among the individuals or groups that are seeking coverage, while
rejecting others. While the goal of insurance is to spread risk, policies or practices
that allow beneficial risk selection have the opposite effect. This risk selection
concern is raised regarding AHPs and HMs because of provisions exempting AHPs
and HMs from state laws mandating that certain benefits be covered in plans, limiting
and defining how policies are to be priced, and defining fair marketing and business
practices. All 50 states have such laws, many of which are intended to maintain well-
spread risk in the small employer markets for insurance. Opponents fear that AHPs
and HMs would attract healthier firms since firms with sicker employees would not
want plans that exclude the state-mandated benefits and protections. If AHPs and
HMs attract predominantly healthy small firms out of the traditional small group
market, firms with less healthy employees could face even higher premiums. A risk
selection spiral could become activated, to the detriment of those left outside of the
AHPs or HMs, and firms with sick employees (or employees with sick family
members) would be especially at risk.
Current AHP legislation takes concerns about adverse risk selection into
consideration. H.R. 660 includes the following provisions intended to reduce these
incentives.
! To discourage AHPs from actively pursuing healthier employee
groups and rejecting or discouraging higher risk groups from joining,
the bill would prohibit discriminatory membership policies and plan
pricing based on health status of employees or their dependents. It
also would prohibit AHPs from requiring that member employers
purchase health coverage through the AHP.
! It would restrict the ability of self-insured health plans to become
qualified as AHPs. If an association establishes a new self-funded
health coverage plan after enactment of the bill, then it would be
required to either offer membership to a broad cross-section of
trades and businesses or to employers representing one or more of
a listed set of higher risk occupations. (Self-insured plans that exist
on the date of enactment would be grandfathered in and therefore
would not have to meet these rules.)
! It would prohibit a participating employer from providing health
insurance coverage in the individual market for any employee
excluded from the AHP which is similar to the coverage provided
under the AHP, if such exclusion is based on a health status-related
factor and such employee would otherwise be eligible for coverage
under the AHP.

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CRS-12
! It would require AHPs to offer their plans to all employers who are
eligible to participate and also require upon request, that any
employer who is eligible to participate be furnished information
regarding all available coverage options.
! Finally, it would require AHPs to abide by any state laws mandating
coverage of specific diseases, maternal and newborn hospitalization
and mental health services.
Some consumer advocates and state regulators fear that those provisions may
not be enough. The provisions, they say do not provide for the fair marketing rules
and patient protections as established by the states. Moreover, their concerns relate
not only to the ability of AHPs to reject higher risks, but also to the incentives that
encourage certain small firms to sort themselves into AHPs versus insured plans,
such as the ability of AHPs to offer trimmed-down benefits.
Ensuring Financially Secure Plans. Consumer advocates raise alarm bells
about the risk of plan failures that could leave plan beneficiaries uncovered when
they seek health benefits — precisely the situation Congress addressed in 1984 when
the MEWA provisions were added to ERISA. They fear more insolvencies would
arise if these plans are not subject to states’ laws regarding plan funding and
solvency. Current AHP legislation takes these concerns into consideration. H.R. 660
includes the following provisions related to plan funding:
! requires self-insured AHPs to establish and maintain reserves in
amounts recommended by a qualified actuary;
! requires AHPs to establish and maintain aggregate and specific
excess/stop loss insurance and solvency indemnification;
! requires AHPs to establish and maintain a minimum surplus in
addition to claims reserves;
! authorizes the applicable authority (the DOL or the state) to provide
such additional requirements related to reserves and excess/stop loss
insurance as considered appropriate;
! establishes an Association Health Plan Fund for making payments
to continue excess/stop loss insurance coverage and requires AHPs
to make annual payments of $5,000 to this account; and
! establishes a Solvency Standards Working Group to make
recommendations in this area.
Detractors, however, do not feel these provisions go far enough. They say that
the bills should explicitly provide for surplus/reserves, and indemnification/stop loss
insurance that grows as the size of the plan grows even though the bill provides fairly
broad authority for the applicable authority to establish additional requirements.
Regulatory Authority. H.R. 660 would establish federal laws regarding the
practices, structures, quality and solvency of AHPs that would be enforced, for many
plans, by DOL. There are pros and cons for removing states’ regulatory authority
over qualified AHPs and establishing a federal body of law that would be enforced
by DOL. The pros include:

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CRS-13
! Creating a single set of federal standards to apply to these health
plans would reduce the cost of the benefits offered because multi-
state plans would not have to comply with multiple states’ insurance
laws, and they would not have to include the mandated benefits as
required by each of the states in which they operate.
! Very large employers that self-insure are exempt from state
insurance regulation. Instead they are regulated only under ERISA
as enforced by the DOL. Therefore, to treat self-insuring AHPs
equitably, advocates say they should also be exempt from state
insurance laws.
! Since 1996, DOL has added capacity for regulating and dealing with
extensive new health plan requirements, especially following the
enactment of the Health Insurance Portability and Accountability
Act of 1996 (HIPAA). The agency has testified that it will be able
to act in the role of regulating and enforcing AHP law if a bill should
pass.15
Concerns with this regulatory approach include:
! States have traditionally been in the role of regulating insurance. For
this job, each state has a department of insurance with enforcement
staff and procedures already in place. The DOL has not, until
recently, had experience in this capacity. While DOL has always
been responsible for enforcing ERISA’s health plan requirements for
self-insured plans, before 1996 there were few requirements to
enforce.
! The body of law that states have established has been developed
over the years to address market failures and to protect the
consumers who purchase health plans. For example, the patient
protection bills that were considered at the federal level over the last
few years were mostly modeled after the best of the states’ actions
in this area. By removing AHPs from the regulatory authority of
states and regulating those plans at the federal level, many of those
existing state protections would be lost.
There are federal
protections H.R. 660 and in earlier proposals, but they are very few
compared to the typical set of state laws.
! There is an equity argument here, as well. At least one of the groups
of opponents of AHP legislation — those insured plans in the small
group market that would remain subject to state insurance laws —
say that they would be put at a market disadvantage by being left as
the only group subject to state laws and patient protections. They
fear that patients in need of such protections (those with histories of
illness or sick family members) will flock to their plans and healthier
groups that view themselves as not needing such protection will
move to the AHPs, destabilizing an already unstable small group
market, and will cause loss of coverage as insured plans increase
15 See February 5, 2003 testimony of Elaine L. Chao, Secretary of Labor before the Senate
Committee on Small Business and Entrepreneurship.

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CRS-14
their premiums to account for the increasingly less healthy groups
covered.
The Stakeholders
Who are the major stakeholders with interest in the debate over how to increase
access to health insurance through small employers and what are their views on
AHPs and HMs? Uninsured and insured workers and their families, small business
owners, insurance carriers, and state and federal insurance regulators could all be
impacted by the provisions considered during the 108th and earlier Congresses. The
considerations important to each of those stakeholders and how they could be
impacted by the AHP and HM proposals are examined below.
Workers in Small Firms. For workers whose employers do not offer health
insurance as a workplace benefit, there are often few other options available for
purchasing such coverage. Some workers could purchase insurance independently
in the “individual market for insurance.” Access to comprehensive and affordable
insurance similar to the policies available in the group market for insurance,
however, is limited unless the workers and their families are young and healthy. If
the workers (and their family members) become sick and impoverished, Medicaid
may become an option for some. Children in families with income that falls below
twice the poverty level ($34,000 in 2002) may be eligible for Medicaid or SCHIP, but
most adults in those families will not be able to meet the categorical requirements of
those programs — meaning they do not fall into the “categories” of eligibility such
as blind, aged, disabled, children or recipients of welfare program assistance.
AHPs and HMs would provide an insurance option for some workers where no
option may exist today. The Congressional Budget Office’s (CBO) analysis of H.R.
660,16 concluded that about 600,000 formerly uninsured workers and dependents
would obtain coverage by 2008 under the proposed AHPs. They determined that a
total of about 7.5 million people would become covered through the AHPs, but all
but the 600,000 would already have had employer-based coverage.
Some individuals may lose their coverage, as well. The CBO estimated that
about 10,000 workers and their dependents who are currently covered through small
employer-provided plans would lose that coverage if the AHP provisions were to
become law.17 This would happen because of the relative appeal of the AHPs and
HM to the better risk in the market. The effect on workers left in the traditional
market in which the healthier groups have exited is rising premiums, resulting in
individuals and/or their employers dropping the health coverage.
If there is a requirement that AHPs or HMs offer more than one plan, and if
workers, instead of employers, are able to choose among those plans, then the
16 Congressional Budget Office Cost Estimate of H.R. 660: Small Business Health Fairness
Act of 2003 as passed by the House on June 19, 2003, Congressional Budget Office, July
11, 2003.
17 Ibid., p. 5.

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CRS-15
proposed groups will be providing something that very few workers in the small
group market for insurance have today — the choice of plans.
Small Employers. Many small employers do not offer health insurance as a
benefit to their employees. This is due to a number of factors. The strongest factor
in the small business owner’s decision not to offer coverage is generally understood
to be the cost of health insurance.18 But there are other important factors, as well.
! Some small employers are not able to undertake the many complex
tasks required to offer health insurance as a benefit, such as
reviewing plans, negotiating the terms of the contract with health
insurers or HMOs, administering the benefit, and collecting and
paying premiums — especially on behalf of a workforce with high
turnover.
! The condition of the labor market may make health insurance
unnecessary for attracting a sufficient workforce for certain
employers. In a tight labor market where workers are scarce, the
desire to offer insurance tends to increase. On the other hand, when
labor is plentiful certain firms may have no incentive to offer
insurance because even without such a benefit, workers are
available.
! Demand for insurance among small-firm workers may be low
relative to workers in larger firms. Workers at small firms, on
average, earn less and have lower wages than workers in larger
firms. Having less income with which to purchase insurance may
suppress their demand for insurance.
! Some small employers cannot meet the minimum enrollment
requirements imposed by insurers. In the small group market many
insurers require small employers to enroll all or almost all workers
in the health plan. Without a significant employer contribution, these
minimum enrollment figures are often difficult to meet.
! Finally, the costs of the same benefits are likely to be higher for a
small firm than for a large firm. This is because small firms lack a
large group to spread risks among and because the administrative
costs of dealing with many small firms is high relative to the cost of
fewer larger firms.
AHPs and HMs could offer small employers inclined to provide health
insurance to their workers with a significant advantage. The small employer would
not have to independently seek coverage, to compare plans and prices, nor administer
the benefit. This is likely to make offering insurance as a benefit significantly easier
for those employers.
18 P. Fronstin, and R. Helman, Small Employers and Health Benefits: Findings from the
2000 Small Employer Health Benefits Survey, Employee Benefits Research Institute, Oct.
2000; M.S. Marquis, and S.H. Long, To Offer or Not to Offer: The Role of Price in
Employers’ Health Insurance Decisions, Health Services Research, vol. 36, no. 5, Oct.
2001.

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CRS-16
Exempting AHPs from state insurance laws would impact small employers’
ability to offer health insurance. But not all employers who are able to purchase
insurance through the AHPs would find that their cost of insurance is reduced. Some
of those left in the traditional market for insurance may find prices rising too high to
continue purchasing health insurance for their employees.
Insurance Carriers, Agents and Brokers. Traditional insurance carriers
are important stakeholders in this debate although their role and positions are
different for AHPs versus HMs. Insurance carriers have generally rejected AHP
proposals because they fear that providing AHPs with increased risk segmenting
opportunities will leave the insurer with a relatively more disadvantaged population.
They oppose legislation that creates competitive advantages for AHPs and are
concerned that sicker workers will be left to the traditional insurance market
increasing market instability.
State small group market reforms have successfully achieved some stability in
the small group market by establishing rating restrictions intended to spread the cost
of high risk groups more broadly across small employers, and by requiring insurers
that drop plans to offer other alternatives. Those laws would not apply to AHPs
(although they would apply to HMs), in effect turning back time to the days before
small group market reforms were passed to reduce competition based on risk
selection as a method for reducing costs.
While insurers do not object to HMs, traditional insurance carriers have been
largely disinterested in the existing HIPCs. This disinterest has contributed to the
instability and low enrollment of most of the existing HIPCs. Without participation
by major insurance carriers, HIPCs do not have an attractive product to offer. Even
those carriers that have participated have resisted offering lower prices through pools
than they offer to small employers outside of the pool and have little incentive to join
such groups where they will be forced to negotiate with one larger, more powerful
group instead of many small employers that they now serve through direct exclusive
contracts.
The good will of agents is critical to the success of purchasing groups, as well,
because they are small employers’ primary source of information on insurance
matters. But when pools are advanced as part of a mechanism to reduce costs by
eliminating administrative fees such as agents’ commission, brokers and agents have
seen them as a threat to their business and have refused to promote them.
Regulators. Regulating the business of insurance has largely been left to
states.19 The federal government, until 1996, had very few laws or regulations that
directly addressed the requirements of health insurance. In 1996, Congress passed
the Health Insurance Portability and Accountability Act (HIPAA) which significantly
expanded the federal role in the regulation of insurance.
19 See the following CRS products for further discussion of the regulation of the business
of insurance: CRS Report RL31631, Patient Protection and Managed Care, Oct. 25, 2002,
by Jean Hearne and Hinda Chaikind, and CRS Fact Sheet RS20315, ERISA Regulation of
Health Plans: Fact Sheet, updated June 18, 2001, by Hinda Chaikind.

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CRS-17
All states, on the other hand, have an extensive body of law establishing the
rules for those who sell insurance products. Those rules include benefit mandates,
or rules about what insurance carriers must include in their coverage, patient
protections, financial solvency standards, fair marketing practices, non-
discrimination requirements, and rating (or pricing) rules.
State regulators, as represented by the National Association of Insurance
Commissioners, object to provisions in AHP and HM proposals that would exempt
those entities from some (HIPCs) or most (AHPs) state regulatory requirements.
They raise concerns that the states’ patient protections, developed in response to
consumer complaints about insurance practices and unstable plans, will be
undermined without federal protections to replace them.
Other Proposals
Several new ideas have been advanced that build on the purchasing pool concept
as well as the experience of purchasing coalitions in California and other locations.
These ideas largely focus on creating incentives for employers to take advantage of
the pooling options without exempting a portion of the small group market from
states’ laws. Some of those ideas include:
! Establish a tax credit or premium subsidy that can be redeemed only
for health insurance coverage offered through purchasing
cooperatives.
The 107th and 108th Congresses have considered a number of new or expanded
tax benefits for health insurance. A proposal presented at a seminar exploring ways
to reduced the number of people who are uninsured, called for combining tax credits
with purchasing pools. Under this approach, individual recipients of the tax credits
would be required to use them toward insurance purchased through a purchasing
cooperative.20
The Progressive Policy Institute, a think tank affiliated with the Democratic
Leadership Council, devised a similar approach. Under the plan, tax credit recipients
would be able to purchase their health insurance through purchasing groups. The
plan would provide for federal grants to help states set up purchasing groups that
would let workers pool their buying power and choose among competing health
plans. As a condition for receiving the federal grants, states would make sure all
employers and individuals could choose among competing group insurance plans
through at least one, but preferably several private purchasing groups.21
20 Rick Curtis of the Institute for Health Policy Solutions, presented this proposal on
December 11, 2000 at “Strategies to Expand Health Insurance for Working Americans”, a
seminar sponsored by The Commonwealth Fund’s Task Force on the Future of Health
Insurance.
21 Jeff Lemieux, David Kendall, and S. Robert Levine, M.D., A Progressive Path Toward
Universal Health Coverage, PPI Policy Report, Dec. 20, 2000.

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CRS-18
Purchasing groups are included as a key element in the tax credit proposal
developed by the Heritage Foundation, a think tank representing conservative views.
The plan’s details are not yet available, so it is not clear if funding would be made
available only for establishing purchasing groups or would include continued
operations, if they would be made available throughout the country, or if the credits
could be redeemed only through the purchasing groups.22
Each of these approaches recognizes that combining tax credits with expanded
purchasing groups would address two of the problems faced by uninsured workers
in small firms and their employers. The credits could reduce the cost of the plans for
workers while the purchasing groups would make attaining plans easier for
employers. Proposals requiring that credits be used only for coverage purchased
through purchasing groups, are aimed at providing those groups with an enrollment
boost, increasing their ability to become a significant market presence, allowing them
to negotiate more aggressively with insurers, and appearing to be more appealing to
insurers who are asked to offer plans through the HIPC.
! Provide start-up and ongoing administrative funding to establish
nationwide access to purchasing groups.
The AHP and HM approaches, as proposed by the 108th and earlier Congresses
would define the entities, establish board membership and other structural
requirements, and provide access to lower cost plans by allowing them to forego
certain state regulation. None of the proposals, however, would have provided
funding for the new groups. Without set-up or administration funds, observers say
it is unlikely that purchasing groups will expand much beyond current law. While
providing subsidies or credits through purchasing groups would have a larger
potential to boost their impact in the small group market, the costliness of such an
approach may make it considerably more challenging to pass, especially considering
the recent tightening of federal, state and local government budgets. Some suggest
a more modest approach may be to provide start-up funds, feasibility studies, ongoing
administrative support or demonstration projects. Wicks and Meyer, in a report
analyzing the potential impact of AHPs and HMs, recommended such activities —
similar to those used by earlier Congresses to encourage the growth of HMOs, to
encourage the growth of purchasing cooperatives.23
22 Stuart M. Butler, Ph.D. Health Care: Time for Bipartisan Action to Help Families
Without Health Insurance , no. 1528, Mar. 20, 2002.
[http://www.heritage.org/Research/HealthCare/BG1528.cfm]
23
E.K. Wicks, and J.A. Meyer, Small Employer Health Insurance Purchasing
Arrangements: Can They Expand Coverage? New Directions for Policy, National Coalition
on Health Care, May 1999.

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