Order Code RL31963
CRS Report for Congress
Received through the CRS Web
Association Health Plans:
Legislation in the 109th Congress
Updated May 26, 2005
Jean Hearne
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Association Health Plans, Health Marts, and
the Small Group Market for Health Insurance
Summary
An estimated 45 million people were without health insurance in 2003. The
number of uninsured has risen in almost every year since 1989 and is expected to
continue its rise in the near term. 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 considered by the 109th 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 2005, introduced in the House as H.R. 525 and in
the Senate as S. 406, include provisions that would create new groups called
Association Health Plans (AHPs) for small firms to join into to offer coverage to
their employees.
Association health plans would build on existing groups already available to
some small employers — many trade and professional associations offer health
insurance to their members. The bills would create incentives for association-based
coverage while also establishing a set of rules and requirements for associations
wanting to take advantage of the benefits the legislation offers. The goals of AHPs
include reducing the administrative challenges for small employers in seeking out,
contracting with, and administering health benefits. AHPs are hoped to provide
small employers with the bargaining power that larger employers have in negotiating
contracts with insurers. In addition, AHPs 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.
Opponents of the AHP approach raise concerns 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.
While the proposed AHPs are not likely to immediately undermine the small
group market, they are likely to require additional features to significantly expand
insurance coverage among the uninsured. Some policy advocates propose combining
legislation intended to improve pooling for small groups with cash subsidies or tax
credits or with seed money for states to improve the effectiveness of such entities in
helping small employers access health insurance. Bills offering such alternative
approaches are briefly summarized. This report will be updated periodically.


Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Employer Purchasing Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Association-based plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Legislative Proposals for AHPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
AHPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Impact of AHPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Risk Segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Ensuring Financially Secure Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Regulatory Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Workers in Small Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Small Employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Insurance Carriers, Agents and Brokers . . . . . . . . . . . . . . . . . . . . . . . . 13
Regulators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Other Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Tables
Table 1. Comparison and Association based plans under Current Law with
Proposed AHPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Association Health Plans, Health Marts,
and the Small Group Market for
Health Insurance
Introduction
An estimated 45 million people were without health insurance in 2003.1 The
number of uninsured has risen in almost every year since 1989 and is expected to
continue its rise in the near term. 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 under consideration by the 109th Congress is intended to assist small
employers in offering health insurance as a benefit to their workers. The 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) would build on existing groups that are
already available to some small employers today. Many trade and professional
associations offer health insurance to their membership. Based on the most recent
data available, about one-third of small firms are believed to purchase health
1 CRS Report 96-891 EPW, Health Insurance Coverage: Characteristics of the Insured
and Uninsured Populations in 2003
, by Chris L. Peterson.
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.

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insurance through some type of pooled arrangement.3 This report examines the track
record of the existing pooled purchasing arrangements that are most parallel to
AHPs; evaluates the potential impact of AHPs, as defined in bills considered during
the 109th Congress, on small employers’ access to health insurance; identifies the
stakeholders in the small group market for insurance that could have been impacted
by such legislation; and discusses alternative approaches that could improve the
potential impact of pooled purchasing arrangements in reducing the number of
uninsured.
The reader may find the following definitions helpful.
Association-sponsored or association-based plans — This phrase is used to
describe the universe of plans sponsored by trade and professional associations, and
business coalitions under existing law. Bills considered by the 109th (H.R. 525 and
S. 406, the Small Business Health Fairness Act of 2005) and earlier Congresses
would establish incentives for new association-based plans and create some market
advantages for new and existing association-based plans that become certified under
a process described in the bill. Such plans would be called Association Health Plans
(AHPs)
. Not all association-based plans that exist today would qualify as AHPs as
defined in H.R. 525 and S. 406. A more detailed description of the plans described
by those bills and the differences between proposed AHPs and existing association-
based plans is below.
Under current law, association-based plans are regulated by states, even when
those associations self-fund (see definition below) the health coverage. This
authority for states 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.)
Multiple Employer Welfare Arrangement (MEWA) — This is a legal term
established in 1983 within the Employee Retirement and Income Security Act of
1974 (ERISA)4 for all group purchasing arrangements through which two or more
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 based
plans are considered MEWAs and thus, are 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 set 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 or employers directly establish contracts with providers and
3 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?
)
4 P.L. 93-406, Sec. 514(b)(6).

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administer 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.5
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 risk 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,
employees of those firms may be able to select from a larger number of plans than
if their employers were to obtain insurance independently.
Association-based plans have been the subject of a great deal of bipartisan
interest in the 109th and past Congresses. Many hope that association-based
coverage, with the right legislative encouragement, could reduce the administrative
costs and burden for small employers 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.6 The distribution of firms and employees between association-based
plans versus other types of pooled arrangements7 is not available.
Association-based plans. Under current state law, many trade and business
associations offer health insurance plans for their members to purchase. Associations
5 Derived, in part, from Glossary of Terms Commonly Used in Health Care, Alpha Center.
6 Long and Marquis, Pooled Purchasing: Who Are the Players?, 1999.
7 A limited number of health insurance purchasing cooperatives (HIPCs) exist under current
law. Like the proposed AHPs they allow small employer groups to combine their risk and
purchase coverage together. A major difference between HIPCs and proposed AHPs

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usually offer one health plan to their membership and often self-fund those plans.8
While the primary purpose of most association-based 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
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 long history
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-based 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 based plans suffer from
fundamental instability, despite the states’ regulations intended to strengthen those
entities against such risk. 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,
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.
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.

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in turn, triggers more exits among the healthier members left in the pool, and an
increase in premiums, with the cycle repeating itself.
Legislative Proposals for AHPs
The group purchasing provisions considered by the 109th Congress 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; and to increase the number of workers in small
firms who have health insurance.
AHPs. H.R. 525, introduced by Representative Sam Johnson, was reported by
the Committee on Education and the Workforce on April 13, 2005.11 Its companion
bill, S. 406, was introduced in the Senate on April 21, 2005 by Senator Snowe. H.R.
525/S. 406 would have established Association Health Plans as generally defined
above.
Associations offering health coverage that seek certification as AHPs under the
authority established by H.R. 525/S. 406, would be required to undergo a certification
process established by the Department of Labor (DOL). A class certification process,
however, would apply to AHPs that offer only insured coverage options, while a
separate process would apply to those offering one or more self-funded options.
The bill would establish a number of features that plans must have to become
certified as AHPs. In addition, it would exempt many such plans from state
insurance law and regulatory oversight and would remove certified AHPs from
states’ authority to apply a large body of insurance laws and regulations regarding
benefits, consumer protections, grievance and appeals procedures, premium taxation,
prohibitions on discrimination and fair marketing practices. It would exempt
certified AHPs offering one or more self-funded coverage options from states’
solvency and funding laws and would establish the federal government as having the
sole regulatory authority over these entities except in the case of state laws that
prohibit the exclusion of a specific disease from coverage, relate to newborn and
maternal minimum hospital stays and mental health parity, or require prompt
payment of claims.12
The bill would establish non-discrimination provisions prohibiting all certified
AHPs from rejecting less healthy applicants from coverage or targeting those
individuals for higher premiums. AHPs offering one or more self-funded options
would be subject to federal reserve and solvency requirements that would replace
those in state statutes. Those provisions and the other requirements of the bills 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.
11 There is a committee report available; H.Rept. 109-41.
12 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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To be certified as AHPs, association-based coverage would be required to
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 three years and be operated by a board of trustees with
complete fiscal control and responsibility for all operations.
! AHPs offering one or more self-funded coverage option 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 of the association 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 would be 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 was engaged.
The bill would establish requirements regarding who may participate on the
board of trustees for qualified AHPs offering one or more self-funded options. The
board would have to 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 could 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
continued benefits on behalf of AHPs in distress. The fund’s activities would be
financed by annual payments made by AHPs.

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Table 1. Comparison and Association based plans under
Current Law with Proposed AHPs
Current law or current
practice
Proposals
Feature or condition
Association-based
AHPs
Type of entity, governance
Private, subject to
Private. If self-insured,
federal and state law
subject to federal law only
Interests represented on
Sponsoring institution
Sponsoring institution and
governing board
and members
members. May include
vendors, subject to
restrictions
Must accept all willing
No
No
insurers
Able to negotiate with plans
Yes
Yes
over premiums, etc.
Who selects plan?
Employers (Not required
Employers (Not required
to allow employee
to allow employee choice)
choice)
Standardized benefits
Not required
Not required
Subject to state-mandated
Yes
No, except for coverage of
benefits laws
specific diseases, maternal
and newborn
hospitalization and mental
health.
Group size limits
None
No limits to size of
participating employers.
To offer self-insured AHP
coverage, the plan must
have at least 1,000
participants and
beneficiaries at the
beginning of the year
Must take all small groups
Within association
Within association
that apply, regardless of
membership only; non-
membership only; non-
health status
members excluded
members excluded
Subject to state rating
Yes
No, but proposals would
requirements
establish some federal
limits on rating factors to
apply within association
Subject to other small-group
Yes
Only HIPAA, not state
insurance reforms
laws (with some
exceptions)

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Current law or current
practice
Proposals
Feature or condition
Association-based
AHPs
Geographic service area
Same as association
Presumably the same as
membership, often
association membership,
multistate
often multistate
Allowed to assume
Yes, subject to state
Yes, but self-insered
insurance risk (self-insure)
reserve and solvency
AHPs subject to federal
requirements
reserve and solvency
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
Opinions about the potential impact of AHPs on the small group market for
insurance span the continuum of possibilities. Advocates of AHPs 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 from 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 because of provisions exempting AHPs 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 would attract
healthier firms since firms with sicker employees would not want plans that exclude
the state-mandated benefits and protections. If AHPs 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

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activated, to the detriment of those left outside of the AHPs, and firms with sick
employees (or employees with sick family members) would be especially at risk.
The AHP bills under consideration have taken concerns about adverse risk
selection into consideration. H.R. 525/S. 406 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 have been eligible for
coverage under the AHP.
! 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 have raised the concern that
those provisions are not enough to prevent risk segmentation problems over time.
The provisions, they claim, 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 have raised
alarms about the risk of plan failures that could leave plan beneficiaries uncovered
when they seek health benefits — the situation Congress addressed in 1984 when the
MEWA provisions were added to ERISA. They claim that more insolvencies would
arise if these plans are not subject to states’ laws regarding plan funding and
solvency. The AHP legislation took these concerns into consideration. H.R. 525/S.
406 include the following provisions related to plan funding. The bill

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! would require self-insured AHPs to establish and maintain reserves
in amounts recommended by a qualified actuary;
! would require AHPs to establish and maintain aggregate and specific
excess/stop loss insurance and solvency indemnification;
! would require AHPs to establish and maintain a minimum surplus
in addition to claims reserves;
! would authorize the applicable authority (the DOL or the state) to
provide such additional requirements related to reserves and
excess/stop loss insurance as considered appropriate;
! would establish an Association Health Plan Fund for making
payments to continue excess/stop loss insurance coverage and would
require AHPs to make annual payments of $5,000 to this account;
and
! would establish a Solvency Standards Working Group to make
recommendations in this area.
Detractors, however, do not feel these provisions go far enough. They claim
that the bills should explicitly provide for surplus/reserves, and indemnification/stop
loss insurance that grow 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. 525/S. 406 would establish federal laws
regarding the practices, structure, 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 for
these plans that would be enforced by DOL. The pros include:
! Creating a single set of federal standards to apply to AHPs 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,13 although a recent report raises significant concerns.
Researchers analyzing MEWA registration filings, requested by
Congress in 1996 to understand the current market for pooled
13 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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employer purchasing arrangements, suggest that DOL’s enforcement
and oversight has been inadequate.14
Concerns with this regulatory approach include:
! States as traditional regulator of insurance: 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.
! Extensive body of law: 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. 525/S. 406 and in earlier proposals, but they
are very few compared to the typical set of state laws.
! Equity: 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 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? 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 109th and earlier Congresses. The
considerations important to each of those stakeholders and how they could be
impacted by the AHP 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
14 M. Kofman, E. Bangit, K. Lucia; Multiple Employer Arrangements: Another Piece of a
Puzzle, Analysis of M-1 Filings
; Journal of Insurance Regulation; V. 23, Issue No. 1; Fall
2004

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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 ($32,180 for a family of three in 2005) 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.
Encouraging the growth of association based coverage through AHPs would
provide an insurance option for some workers who do not purchase coverage today.
The Congressional Budget Office’s (CBO) analysis of H.R. 525,15 concluded that
about 620,000 formerly uninsured workers and dependents would obtain coverage
by 2010 under the proposed AHPs. They determined that a total of about 8.5 million
people would become covered through the AHPs, but all but the 620,000 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.16 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.
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.17 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.
15 U.S. Congressional Budget Office, Congressional Budget Office Cost Estimate of H.R.
525: Small Business Health Fairness Act of 2005 as ordered reported by the House
Committee on Education and the Workforce on March 16, 2005
, Apr. 8, 2005.
16 Ibid., p. 5.
17 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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! 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 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.
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 the debate over the impact of encouraging association
based health coverage. 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
offering self-funded plans, in effect turning back time to the days before small group

CRS-14
market reforms were passed to reduce competition based on risk selection as a
method for reducing costs.
The good will of agents is critical to the success of any purchasing group
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.18 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.
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 proposals that would exempt those
entities from some or most 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
Other bills have been advanced that build on the idea of creating larger
purchasing pools for small employers. The following approaches differ from the
AHP legislation in that they create incentives for employers to take advantage of
pooling options but rely largely on insured plans subject to state law. Both bills
summarized below are based on the Federal Health Employees Benefit Program
(FEHBP) model for providing health insurance. Both proposals combine tax credits
with pooling incentives to address the high cost of insurance as a factor in the low
coverage rates among small employers. Finally, both proposals make available
federal funds to assist with start-up costs of the pooling arrangements.
The Small Employees Health Benefits Program Act of 2005, introduced in the
Senate by Senator Durbin as S. 874 and in the House of Representatives by
Representative Kind as H.R. 1955, would establish a set of plans, modeled after the
Federal Employees Health Benefits Program (FEHBP) to be offered nationwide.
18 See the following CRS products for further discussion of the regulation of the business
of insurance: CRS Report RL31631, Patient Protection and Managed Care, by Jean Hearne
and Hinda Chaikind, and CRS Report RS20315, ERISA Regulation of Health Plans: Fact
Sheet
, by Hinda Chaikind.

CRS-15
Employers with 100 or fewer employees could buy insurance through these federally-
sponsored offerings. The plans would be preempted from some state regulation,
although how extensive the preemption is intended to be is unclear. Specifically,
states laws regarding the “nature, provision, or extent of coverage or benefits” would
not apply.19 In addition, the bill would establish a refundable tax credit for
participating employers who did not previously offer health insurance and who pay
at least 60% of the health insurance premium for employees.
H.R. 2073, The Small Business Health Insurance Promotion Act of 2005, was
introduced in the House of Representatives by Representative Barrow. It would
provide for temporary tax credits for employers of 50 or fewer employees offering
health coverage through qualified health pooling arrangements. Half of the amount
paid for health insurance premiums through the purchasing pools would be eligible
for the credit as long as those employers pay half of the premiums for employees.
The credit would only be available for four years after the employer begins to
participate in the pooling arrangement. Qualified pooling arrangements could be of
two types; state or federal. Qualified state health pooling arrangements would be
comprised of at least two plans offered via states that are substantially similar to
health benefits coverage in any of the four largest health benefits plans offered under
the FEHBP program. Plans offered under these arrangements would not be pre-
empted from the application of states’ insurance laws. In addition, a national health
pooling arrangement, modeled after the FEHBP program, would be established
jointly by the Secretaries of HHS, and Labor, in consultation with the Director of the
Office of Personnel Management.
These approaches recognize 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.
19 S. 874, p. 13.