Association Health Plans and the Sale of Group Health Insurance “Across State Lines”
In advance of issuing the Executive Order that culminated in the promulgation by the Department of Labor of proposed regulations expanding the availability of Association Health Plans, President Trump announced that one of the purposes of the order was to allow people to buy health insurance “across state lines.” This post examines the consequences of, the obstacles to, and the inevitable clashes occasioned by, the interstate insurance sales of group health insurance.
Conservative lawmakers have long urged the adoption of rules permitting the interstate sale of health insurance to lower costs and stimulate competition in the national marketplace for health insurance. Before the President’s executive order, however, references to the sale of health insurance across state lines generally referred to the sale of policies in the individual market. In the group market, which is synonymous with employer-provided coverage, insurance has been sold “across state lines” for as long as multi-state employers have offered group health plans. This is not new. In the context of the Executive Order, therefore, it appears that the President had in mind the sale of group health insurance that is subject to the laws in one state but is sold to an employer domiciled in another and that might cover employees who reside in still another. Should this be allowed, an insurer would be able to sell in other states coverage that is approved in the least-restrictive state. This may not be possible even assuming the adoption of the Department of Labor’s proposed regulation.
Regulating Health Insurance in Multiple States
Employers have long offered group health coverage that covers employees in multiple states. Many multi-state plans are self-funded, which means that they are not subject to state benefit mandates and other requirements. (The Employee Retirement Income Security Act (ERISA), which governs employer health and welfare benefit plans, expressly preempts state law, but it saves from preemption state laws regulating insurance.) Multi-state plans that are fully-insured typically rely on carriers that are licensed in, and comply with, the separate state benefit mandates and other requirements of all 50 states and the District of Columbia. While this regulation is most visible in the form of benefit mandates, states also impose rules on carrier formation and financial matters, insurance contract and rate regulation, consumer protections, and unfair insurance practices. Effectively, there are under current law 51 separate insurance regulatory jurisdictions.
The run-up to the President’s Executive Order seems to contemplate a Federal regulatory regime that allows for uniformity of plan design from jurisdiction-to-jurisdiction. This is certainly possible if “uniformity” means regulating AHPs as large groups, which are free from the following federal requirements:
· Only individual and small group market health insurance coverage is subject to the requirement to cover essential health benefits;
· The Affordable Care Act’s (ACA’s) risk adjustment program, which transfers funds from plans with lower-risk enrollees to plans with higher-risk enrollees, applies only to health insurance issuers offering coverage in the individual and small group markets, not the large group market;
· The single risk pool requirement, which requires each health insurance issuer to consider the claims experience of all individuals enrolled in plans offered by the issuer in the individual market to be in a single risk pool, and all its individuals in the small group market to be members of a single risk pool, applies only in the individual and small group markets, not the large group market; and
· The modified community rating rules that prohibit issuers from varying premiums except with respect to location, age (within certain limits), family size, and tobacco-use (within certain limits), apply only in the individual and small group markets.
(It is worth nothing that self-insured group health plans are exempt from each of these obligations regardless of the size of the employer that establishes or maintains the plan. For a discussion of the effect of the Department of Labor’s proposal on self-funding, please see last week’s post.)
The promise of a uniform regulatory regime that allows for uniform plan design free from state regulation is not something that the Department of Labor—or any other Federal agency—has the power to enable. This is a matter for Congress, which has the power to fully preempt state laws regulating insurance but chose not to in ERISA. Any attempt by Congress to expand the scope of ERISA preemption to the regulation of health insurance would face stiff resistance from state regulators and the NAIC, among others. It would also represent a major shift in the federal/state balance of power, upending more than 70 years of precedent.
Ground Zero—Benefits Mandates
By enabling the regulation of Association Health Plans (AHPs) as large groups, the proposed regulations permit and even encourage alternative plan designs, including plans with skimpier levels of benefits. Although such a design might be approved in one state, there is no guarantee that the design will be permitted in another. There is nothing in the Executive Order of the proposed regulations that will change this result.
In last week’s post, we explained that ERISA limits a state’s ability to regulate fully-insured AHPs to establish reserve requirements and contributions and funding rules. States are also free, under long-standing rules governing the preemption of state law by ERISA, to regulate the underlying insurance contact, which include imposing benefit mandates. But this power is over the contract, not the AHP—provided that the AHP qualifies as a multiple employer welfare arrangement that is a single employee welfare plan.
Some states look to the law of the state where the group insurance policy is delivered or issued for delivery to determine whether to assert regulatory jurisdiction. But a preponderance of the states expand the reach of their insurance mandates to any fully-insured health plans that cover residents of the state, irrespective of the domicile of the employer. When a state other than the state in which the contract has been delivered or issued for delivery imposes its separate regulatory requirements that application is referred to as the extraterritorial application of that state’s regulatory authority.
The extraterritorial application of a state’s insurance laws forces carriers to comply with differing and sometimes conflicting benefit mandates across the country. The NAIC, in a whitepaper on the subject, recommends against this practice. The NAIC whitepaper reports that “of the 39 states that responded to the survey, fourteen reported considering only where the policy was delivered or issued for delivery when determining the application of state mandated benefit laws.” The whitepaper continues:
“The remaining 25 states indicated that they would consider other factors, such as whether the certificate is issued in the state, [one or more insureds reside] in the state, the employer’s principal place of business is in the state or there is a branch office in the state when determining the application of mandated benefits.”
The NAIC therefore urges state insurance regulators to forgo the extraterritorial application of their insurance law in the absence of a clear and unambiguous legislation to the contrary. This is not what happens in practice, however. States that wish to deploy their insurance mandates to bar alternative plan designs with skimpier levels of benefits will remain free to do so despite any provision of any final Department of Labor regulation on the subject.
Other State-based Rules Regulating AHPs
A more difficult question is the extent to which states might be able to impose on fully-insured AHPs the above-cited ACA individual and small group rules, among others. States are free to require that AHPs cover, at a minimum, all or some ACA essential health benefits through the state’s benefit mandates. The requirement is imposed in this case directly on the insurance contract. The fact that the policy is sold in the context of an AHP is irrelevant. The result is the same in the case of state insurance laws governing carrier formation and financial matters, insurance contract and rate regulation, consumer protection, and unfair insurance practices.
Less clear is whether a state could impose a separate assessment on AHPs to fund a risk adjustment program. Such a rule would need to qualify under the relevant provision of ERISA as a law establishing “standards, requiring the maintenance of specified levels of reserves and specified levels of contributions.” The same is true of rules requiring that the AHP be part of a single risk pool and those imposing modified community rating standards. In each case, what is regulated is not the insurance contact, but the collection of contracts in relation to the AHP (which could be construed as regulating the plan). Neither is an easy call. On the one hand, rules like these appear to fit squarely within the meaning of the “regulation of insurance” based on the plain text of ERISA and years of judicial precedent. On the other hand, it seems that these rules are directed at the AHP in its capacity as an ERISA-covered plan. And, if it’s the latter, do these rules govern the maintenance of specified levels of reserves and specified levels of contributions, or do they do something else?
While the Department of Labor’s proposed AHP regulation seeks to expand the reach of AHPs by encouraging small groups to band together to form larger, homogeneous risk pools, there is no shortage of state laws that seek to require small groups to remain a part of a single, state-wide, heterogeneous risk pool. There is no middle ground. If the Department of Labor’s regulation is adopted as a final rule—and there is no reason to think that it will not be—this issue will likely have to be resolved by the courts.