Association Health Plans: Legislation in the 109th Congress

Association Sponsored Health Plans:
Legislation in the 109th Congress
Updated March 29, 2006
Jean Hearne
Specialist in Social Legislation
Domestic Social Policy Division

Association Sponsored Health Plans:
Legislation in the 109th Congress
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 uninsured people 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. Two bills,
H.R. 525/S. 406 and S. 1955 offer alternative approaches to encouraging trade and
professional associations to offer coverage to small employers who are members of
those groups. The Small Business Health Fairness Act of 2005, introduced in the
House as H.R. 525 and in the Senate as S. 406, would create new groups called
Association Health Plans (AHPs) for small firms to join into to offer coverage to
their employees. H.R. 525 was passed by the House of Representatives on July 26,
2005. S. 1955, the Health Insurance Marketplace Modernization and Affordability
Act of 2005, as approved by the Senate Committee on Health, Education, Labor, and
Pensions on March 15, 2006, offers an alternative approach. S. 1955 would create
association-based health coverage groups called Small Business Health Plans
(SBHPs) and would “harmonize” states’ insurance laws to achieve a more universal
regulatory environment for SBHPs and traditional insurers.
The association-based coverage approaches described by H.R. 525/S. 406 and
S. 1955 would build on existing groups already available to some small employers
and individual professionals — many trade and professional associations offer health
insurance to their members. The bills would create incentives for association-based
coverage and establish rules for the coverage offered through the associations. The
goal of AHP and SBHP legislation is to reduce the administrative challenges for
small employers in seeking out, contracting with, and administering health benefits.
AHPs and SBHPs are hoped to provide small employers with the bargaining power
that larger employers have in negotiating contracts with insurers. In addition, AHPs
and SBHPs 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 and SBHPs 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 and SBHPs would increase
risk segmentation in the small group market for insurance by covering mostly healthy
groups, leading to increased instability and higher premiums for the remaining small
employers who offer coverage outside of the associations. This report will be
updated periodically.

In troduction ......................................................1
Employer Purchasing Groups........................................3
Association-Based Plans....................................4
Legislative Proposals...............................................5
AHPs ...................................................5
SBHPs ..................................................6
The Impact of AHPs and SHBPs.................................10
Risk Segmentation........................................10
Ensuring Financially Secure Plans............................11
Regulatory Authority......................................12
The Stakeholders.............................................13
Workers in Small Firms....................................13
Small Employers.........................................14
Insurance Carriers, Agents and Brokers........................15
Regulators ..............................................16
Other Proposals..............................................16
List of Tables
Table 1. Comparison and Association-Based Plans Under Current Law
with Proposed AHPs...........................................8

Association Sponsored Health Plans:
Legislation in the 109th Congress
An estimated 45.8 million people were without health insurance in 2004.1 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 force2
with high turnover, and the belief that coverage is not necessary to attract workers.
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
Association Health Plans (AHPs) and Small Business Health Plans (SBHPs)
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

1 CRS Report 96-891 EPW, Health Insurance Coverage: Characteristics of the Insured
and Uninsured Populations in 2004, 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.

are believed to purchase health insurance through some type of pooled arrangement.3
This report examines the track record of the existing pooled purchasing
arrangements; evaluates the potential impact of AHPs, and SBHPs 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 Congress (H.R.
525/S. 406, the Small Business Health Fairness Act of 2005 and S. 1955, the Health
Insurance Marketplace Modernization and Affordability Act of 2005) and earlier
Congresses would establish incentives for new association-based health coverage 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 — in H.R. 525/S. 406) or Small Business Health
Plans (SBHBs — in S. 1955). Not all association-based plans that exist today would
qualify as AHPs or SBHPs as defined in the bills under consideration. A more
detailed description of the plans described by those bills and the differences between
proposed AHPs, SBHPs, 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

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).

a traditional insurance company or a health maintenance organization (HMO).
Sometimes the employer or employers directly establish contracts with providers and
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, the latest year for which we have data, 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 about6
14% for firms with 500 or more employees. The distribution of firms and
employees between association-based plans versus other types of pooled7
arrangements is not available.

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 small 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 few of the differences between HIPCs and proposed AHPs
are that HIPCs usually offer a choice of insured plans and are not exempt from state laws.

Association-Based 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-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 today10
as demonstrated by recent announcements of association-based plan failures. 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

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.

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.
Legislative Proposals
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 passed by
the House of Representatives on July 26, 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 establish 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).

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.
SBHPs. S. 1955, introduced in the Senate by Senators Enzi, Nelson, and Burns
on November 2, 2005, and reported out of the Senate Health Education Labor and
Pensions (SHELP) Committee on March 15, 2006, would establish health plans for
small employers that are similar to AHPs, but with a number of important
differences. Under S. 1955, only associations offering insured health benefits
coverage could seek certification as SBHPs. As with AHPs, they would be required
to undergo a certification process established by the Department of Labor (DOL), and
a class certification process would be available to SBHPs so long as only insured
coverage options are offered.

Like H.R. 525/S. 406, S. 1955 would exempt coverage offered through SBHPs
from some state insurance laws, and would replace some of those laws with a new
regulatory scheme intended to achieve consistent insurance rules across states. With
respect to establishing premium rates, rates for SBHPs could not vary based on the
health status of employees, nor the type of business or industry of employers. On the
other hand, rates would be allowed to vary based on the claims experience of the
plan, so long as the rates comply with a more liberalized version of the harmonized
rating rules as established in Title II of the bill. The harmonized rating rules in Title
II generally follow, after a transitional implementation period, the recommendations
of the National Association of Insurance Commissioners (NAIC) as specified in the
Small Employer Health Insurance Availability Model Act adopted in 1993. SBHPs
would be subject to a more liberal version of those rules — the NAIC-recommended
variation for index rates for different classes of business and the limitation on the
number of classes of businesses for rating purposes would not apply to SBHPs.
With respect to benefits, SBHPs would be allowed to offer a basic benefit plan
that would be exempt from all states’ benefits requirements as long as the SBHP also
offers an enhanced benefit option to participating employers. The enhanced benefit
option must include at least those covered benefits, services, and categories of
providers as are covered by a state employee health benefit plan in one of the five
most populous states (California, Texas, New York, Florida, and Illinois). The bill
provides the SBHPs with the “sole discretion” to determine the benefit plans, except
that the plans must be consistent with the basic benefit and enhanced benefit rules.
States’ laws in the other areas would be retained so long as they do not interfere
with the plans’ “sole discretion” to determine the benefits provided. Those retained
states’ laws could include consumer protections, grievance and appeals procedures,
premium taxation, prohibitions on discrimination, fair marketing practices, and
solvency and funding standards. Coverage offered through SBHPs would continue
to be subject to the states’ regulatory oversight related to such items.
To be certified as SBHPs, association-based coverage would be required to
include the following features:
!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.
!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.
The bill would establish requirements regarding who may participate on the
board of trustees for qualified SBHPs that are the same as those for AHPs. In
addition, the bill includes provisions that would deem existing health benefits
programs to be SBHPs so long as, as of the date of enactment, the arrangement
provides health care benefits for at least 200 participating employers, has been in
existence for at least 10 years, and is licensed under the laws of the state.

Finally, S. 1955 includes provisions that go beyond SBHPs and that are intended
to simplify the regulatory environment for all health insurers, especially those that
make their products available across state lines. S. 1955 includes a plan to create
national standards regarding pricing of health plans, required benefits, rate form and
filing, market conduct, prompt payment of claims, and internal review requirements.
Under these provisions, states would choose to either adopt the national standards or
retain their own laws. For insurers that choose to become certified under the
provisions of the bill and that sell plans in states that do not adopt the national
standards, the states’ laws in those three areas would be pre-empted and the national
standards would apply.
Table 1. Comparison and Association-Based Plans Under
Current Law with Proposed AHPs
Current law or
current practiceProposals
Feature orAssociation-
condi t i on based AH P s SB H P s
Type of entity,Private — subjectPrivate — if self-Private — cannot
governanceto federal andinsured, subject toself-insure
state lawfederal law only
Interests representedSponsoringIf new, sponsoringSame as AHPs
on governing boardinstitution andinstitution and
membersmembers; may
include vendors,
subject to restrictions
Must accept allNoNoNo
willing insurers
Able to negotiateYesYesYes
with plans over
premiums, etc.
Who selects plan?Employers (NotSameSame
required to allow
employee choice)
StandardizedNot requiredSameSame
Subject to state-YesNo, except forNot in “basic”
mandated benefitscoverage of specificplan, but must
lawsdiseases, maternalalso offer
and newborn“enhanced
hospitalization andoption” plan.

mental health

Current law or
current practiceProposals
Feature orAssociation-
condi t i on based AH P s SB H P s
Group size limitsNoneNo limits to size ofNone
employers. To offer
self-insured AHP
coverage, the plan
must have at least
1,000 participants
and beneficiaries at
the beginning of the
Must take all smallWithinWithin associationSimilar to AHPs,
groups that apply,associationmembership only;but are not
regardless of healthmembership only;non-membersrequired to
statusnon-membersexcludedguarantee issue
excludedto self-employed
if state otherwise
does not require
Subject to stateYesNo, but proposalsNo.
rating requirementswould establish some
federal limits on
rating factors to
apply within
Subject to otherYesOnly HIPAA, notYes, except those
small-groupstate laws (with somerelated to
insurance reformsexceptions)benefits (see
Geographic serviceSame asPresumably the sameSame as AHPs
areaassociationas association
membership,membership, often
often multi-statemulti-state
Allowed to assumeYes, subject toYes, but self-inseredNo
insurance risk (self-state reserve andAHPs subject to
insure)solvencyfederal reserve and
requirements solvency
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 SHBPs
Opinions about the potential impact of AHPs and SBHPs on the small group
market for insurance span the continuum of possibilities. Advocates of the
association-based plans view removing some or all of the state regulatory control 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 SBHPs 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 and SBHPs because of provisions exempting those
entities from state laws mandating that certain benefits be covered. AHPs are further
exempted from laws 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 to a lesser extent, SBHPs, would attract
healthier firms since firms with sicker employees would not want plans that exclude
the state-mandated benefits and protections. If AHPs/SBHPs 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/SBHPs, and firms with
sick employees (or employees with sick family members) would be especially at risk.
The AHP and SBHP bills under consideration have taken concerns about
adverse risk selection into consideration. H.R. 525/S. 406 and S. 1955 include the
following provisions intended to reduce these incentives.
!To discourage AHPs and SBHPs from actively pursuing healthier
employee groups and rejecting or discouraging higher risk groups
from joining, the bills would prohibit discriminatory membership
policies and plan pricing based on health status of employees or their
dependents. It also would prohibit AHPs and SBHPs from requiring
that member employers purchase health coverage through the AHP.
!The bills would prohibit a participating employer from providing
health insurance coverage in the individual market for any employee

excluded from the AHP or SBHP, which is similar to the coverage
provided under the AHP or SBHP, if such exclusion is based on a
health status-related factor and such employee would otherwise have
been eligible for coverage under the AHP.
!AHPs would be required 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. SBHPs requirements are
similar, except that they apply only to employers of more than one
Further, H.R. 525/S. 406 would
!require AHPs to abide by any state laws mandating coverage of
specific diseases, maternal and newborn hospitalization and mental
health services; and
!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.)
Some consumer advocates and state regulators have raised the concern that
those provisions may not be enough to prevent risk segmentation problems over time,
particularly under the provisions of H.R. 525/S. 406. That bill does not provide for
the fair marketing rules and other patient protections as established by the states.
(Those laws are retained by S. 1955.) Moreover, concerns about both bills relate to
the incentives that they create for small firms with healthier or younger workforces
to sort themselves into the AHPs/SBHP mandate-free plans, leaving employers with
older or higher risk groups to purchase the plans that include mandated benefits.
Without the benefit of a broad distribution of risk, those plans could quickly become
Ensuring Financially Secure Plans. The alternative solvency and funding
rules established under H.R. 525/S. 406 for self-insured AHPs 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
!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;
!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 bill 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.
Because S. 1955 retains states’ solvency and funding standards, the same issues
are not likely to be raised with respect to SBHPs.
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.

employer purchasing arrangements, suggest that DOL’s enforcement
and oversight has been inadequate.14
Concerns with this regulatory approach:
!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 and SBHPs? 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

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 ($33,200 for a family of three in 2006) 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 and
SBHPs could 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

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. CBO has not
issued a cost estimate for S. 1955 yet.
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.


paying premiums — especially on behalf of a workforce with high
!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
!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 SBHPs could offer a significant advantage to small employers who
are inclined to provide health insurance to their workers. 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.
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 association-based
proposals because they fear that providing associations that offer health plans with
increased risk segmenting opportunities will leave the insurers 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
market reforms were passed to reduce competition based on risk selection as a
method for reducing costs.
The issue of creating an uneven playing field between association-sponsored
insurance and traditional health care carriers is very different under the provisions of

S. 1955. The bill includes “harmonization” provisions, provisions that would, once
implemented, subject all SBHPs as well as other qualified insurers to a somewhat
standardized set of laws related to rating and benefits rules. In addition, the bill
would authorize a commission tasked with making recommendations on
standardizing other areas of insurance law as well. Once implemented, all SBHPs
and insurers seeking qualification could be regulated under this standardized set of
provisions that would apply across all states.
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. At this time, the Commissioners’ position on the
harmonization plan under S. 1955 is not clear.
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

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.

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.
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.